Palm-oil production in Indonesia, the world’s biggest supplier, is dropping for the first time in 15 years after heavy rains and drought. The decline is spurring a rebound in prices from the lowest level in 45 months.
The country’s output of the most-consumed edible oil will slide 1.9 percent to 26.5 million metric tons this year, according to the median of five grower estimates compiled by Bloomberg. That’s the first drop since 1998, according to data from the U.S. Department of Agriculture which predicts a crop of 28.5 million tons. Deutsche Bank AG says futures traded in Malaysia, a global benchmark, will average 2,800 ringgit ($867) a ton next year, 5.4 percent more than now.
Prices surged 12 percent in October, the most since 2010, and are up 23 percent from this year’s closing low in July. Plantations in Sumatra got almost twice the normal rainfall and a shortened dry season in Kalimantan curbed output after drought in the past two years weakened trees. The commodity is consumed in everything from Nestle SA (NESN) instant noodles to Unilever soaps. McDonald’s Corp. (MCD) uses it for cooking in Asia and South America.
“Bad weather disrupted crops almost all over,” said Asmar Arsjad, 74, a Sumatra farmer and secretary-general of the Indonesia Oil Palm Smallholders Association, which represents about 4 million producers across the 3,300 mile-wide (5,300 kilometers) archipelago. “People expected that production will increase in October. Because of the rain, floods, it dropped.”
Futures traded on Bursa Malaysia Derivatives in Kuala Lumpur rallied 8.9 percent this year to 2,656 ringgit, heading for the first annual gain since 2010. The Standard & Poor’s GSCI Index of 24 raw materials, which doesn’t include palm, slid 4 percent and the MSCI All-Country World Index of equities jumped 18 percent. The Bloomberg Treasury (BUSY) Bond Index lost 2.3 percent.
Indonesia boosted palm-oil output fivefold since the last drop in 1998, USDA data show. As recently as September, the Indonesia Palm Oil Board was expecting another record year, with a forecast of 28 million tons. On Sept. 30, the group estimated production at 26.7 million tons to 27 million tons, and Chairman Derom Bangun said a further reduction is possible.
Yields were curbed by excessive or untimely rains this year, said Evi Lutfiati, the head of climate information at the Meteorology, Climatology and Geophysics Agency in Jakarta. In North Sumatra, Riau and West Sumatra, rainfall in October was as much as 500 millimeters (19.7 inches), compared with 200 to 300 millimeters normally, and Kalimantan had rain in May and June that cut the four-month dry season by more than half.
Palm is grown year-round within 10 degrees of the equator, and producers crush the fruit to make the oil. Output is usually lowest in January or February and peaks in September or October. Indonesian production was lower than expected in the first half of 2013 and didn’t recover as anticipated in the second half, the Palm Oil Board’s Bangun said.
Supplies probably will be lower than expected, Deutsche Bank said in a Nov. 15 report by analyst Michelle Foong in Kuala Lumpur, raising its price forecast by 8 percent. Michael Greenall, a Singapore-based analyst at BNP Paribas SA, said prices may rise to 2,800 ringgit in the first quarter, citing lower growth in Indonesian supplies and less fertilizer use. Futures in Kuala Lumpur rose in December in nine of the past 10 years, according to data compiled by Bloomberg.
The unexpected supply drop will be short-lived because yields will surge next year, said Dorab Mistry, the director at Godrej International Ltd. Mistry, who predicted in September that prices may plunge to 2,000 ringgit by January, said he and other analysts underestimated the cyclical low in output and the impact of the weather. Futures may climb to 2,800 ringgit if production is poor in the first two months of next year, he said Nov. 14. He speaks tomorrow at a conference in Indonesia.
Supply will expand next year, according to the Indonesian Palm Oil Association in Jakarta, which represents suppliers of about 60 percent of the nation’s output. Singapore-based Golden Agri-Resources Ltd. (GGR), the second-largest plantation operator, expects output growth of as much as 10 percent in 2014, Chief Financial Officer Rafael Buhay Concepcion Jr. said Nov. 12.
Global production will exceed demand by the most ever in the year that began Oct. 1 as output surges to a record 58.3 million tons, including 31 million tons from Indonesia, the USDA estimates. World stockpiles will expand 18 percent to an all-time high of 9.2 million tons. Output in Indonesia may climb to 28 million tons this year from 25.7 million tons in 2012, agriculture minister Suswono said at a conference today.
This year’s rally may slow demand. Indonesia will boost the tariff on shipments to 12 percent next month from 9 percent, said the Industry Ministry. The tax on shipments from Malaysia will rise to 5 percent, from the 4.5 percent rate that has been in place since March, the government said. The two countries account for about 86 percent of global supply.
Prices may come under pressure from soybeans, a competing oilseed. Oil World, a Hamburg-based researcher, raised its forecast for global supply by 1.8 percent to 286.5 million tons on Nov. 19, citing the improved crops from Brazil to the U.S. Goldman Sachs Group Inc. listed soybeans among its most-bearish commodity forecasts for 2014, predicting year-end prices of $9.50 a bushel in Chicago, from $13.20 yesterday.
Palm oil futures still are up 24 percent since touching a 45-month low of 2,137 ringgit on July 26. Those predicting a return to lower prices may be underestimating the extent of the supply drop in Indonesia, said Greenall, the BNP analyst.
Inventories in Indonesia probably fell to 2.04 million tons in October from 2.6 million tons a year earlier, according to the median of estimates from five plantation executives, traders and refiners compiled by Bloomberg. Reserves in Malaysia, which discloses official data every month, stood at 1.85 million tons in October, 26 percent less than a year earlier.
While rain hurt yields this year, severe droughts in mid-2011 and mid-2012 had a delayed impact on production in the second and third quarters of this year, said Ling Ah Hong, director of Ganling Sdn., a Malaysian research and consulting company. The dry spell caused floral abortion, when cells die before they can mature, said Ling.
“It’s the impact from last year and two years ago,” said Tony Liwang, a senior researcher at PT Sinar Mas Agro Resources and Technology, a unit of Golden Agri. “We had a water deficit last year. That shocked the trees. Female flowers didn’t grow.”
Biodiesel demand in Indonesia may keep prices elevated. One third of palm output may be used in the fuel in one or two years if the government is consistent in applying the policy, Mahendra Siregar, the head of the Investment Coordinating Board, said Nov. 7. About 3 percent of the crop is used as fuel now, according to the Indonesian Biofuels Producers Association.
Golden Agri’s profit will rise 43 percent to $426.4 million in 2014, according to the mean of 19 analysts’ forecasts compiled by Bloomberg. Shares of the company surged 15 percent in October, the biggest gain since April 2009. Deutsche Bank raised its recommendation on the stock to “buy” from “sell.”
“The bottom line is that we’re facing higher prices coming through in the next few months,” said Greenall at BNP Paribas, who’s covered plantations for 25 years. “This year and next year, you’ll see a dip in production growth.”
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