El Nino Risk Dents World Palm Oil Supply Outlook: Southeast Asia

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Lee Yeow Chor, chief executive officer of IOI Corp. Close

Lee Yeow Chor, chief executive officer of IOI Corp.

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Photographer: Charles Pertwee/Bloomberg

Lee Yeow Chor, chief executive officer of IOI Corp.

A moderate El Nino weather pattern would reduce palm oil output by as much as 12 percent in Malaysia, the world’s second-largest producer, IOI Corp. (IOI) Chief Executive Officer Lee Yeow Chor said.

Prices may advance to a range of 2,650 ringgit ($827) a metric ton to 2,850 ringgit from August if the event occurs, Lee said in an interview in Kuala Lumpur. Futures ended at an eight-month low of 2,379 ringgit today. An El Nino pattern as severe as in 1997-1998 may cut production by as much as 15 percent, Lee said, without specifying a period for the decline.

Forecasters from the U.S. to the United Nations have warned such an event may happen this year, while Goldman Sachs Group Inc. says disruptions associated with El Ninos have been most important for cocoa, coffee, sugar and palm oil. An El Nino pattern, which can roil agricultural markets worldwide as farmers contend with drought or too much rain, may be established by August, according to just over half of the climate models surveyed by Australia’s Bureau of Meteorology.

“The effect of the dry weather accompanying El Nino will not be so quick, it will stretch on for a period of time,” Lee said yesterday, referring to the impact on output. “The effect of the reduced production will also be seen in a delayed manner” on prices, he said.

Photographer: Goh Seng Chong/Bloomberg

A worker walks through a palm oil plantation in Batu Pahat, Johor, Malaysia. Close

A worker walks through a palm oil plantation in Batu Pahat, Johor, Malaysia.

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Photographer: Goh Seng Chong/Bloomberg

A worker walks through a palm oil plantation in Batu Pahat, Johor, Malaysia.

There’s at least a 70 percent chance of an El Nino developing in 2014, Australia’s Bureau of Meteorology said on June 3. El Nino this year will probably be weak, according to Commodity Weather Group LLC and AccuWeather Inc.

Tropical Regions

Oil palms thrive in tropical regions near the equator with rain ranging from 1,500 millimeters (59 inches) to 4,000 millimeters a year without dry periods of more than a month, according to Barclays Plc. Studies show that less than 100 millimeters over two consecutive months can reduce output by 5 percent over the next three years, while droughts longer than six months cut production by 20 percent, analysts including Ephrem Ravi and Krishan Agarwal wrote in January.

“CPO should surge above 3,000 ringgit per ton if El Nino materializes,” Alan Lim, an analyst at Kenanga Investment Bank Bhd., wrote in a June 6 report, referring to crude palm oil.

A moderate El Nino may lead to output in Malaysia remaining flat at 19.2 million tons this year and declining 2.6 percent to 18.7 million tons in 2015, according to Ling Ah Hong, director of Ganling Sdn., a Malaysian plantation consulting company.

Inventories Expand

The last moderate El Nino occurred in 2009-2010, according to the Climate Prediction Centre. Malaysian output declined 3.4 percent to 17 million tons in 2010 from 17.6 million tons a year earlier, palm oil board data show.

While plantation owners are on guard for dry weather later this year that may hurt production, output this quarter has increased, boosting inventories. Futures retreated from an 18-month high in March as production recovered from a seasonal drop in the first quarter.

Lee expects IOI’s supply to increase even as El Nino looms. The company’s production of crude palm oil in the financial year ending June 2015 may rise 10 percent to 12 percent as planted areas mature, yields increase and output is added from an acquisition, he said. The company produced about 740,000 tons in the year ended June 2013, he said.

In 1997-1998, the strongest El Nino on record back to 1950 helped push the global mean temperature in 1998 up 1.2 degrees to what was then an all-time high of 58.1 degrees Fahrenheit (15 degrees Celsius), according to the U.S. National Oceanic and Atmospheric Administration. The event in 2006-2007 caused droughts in the Asia-Pacific region, more than halving Australia’s wheat output and hurting Indonesia’s coffee harvest.

To contact the reporters on this story: Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net; Chong Pooi Koon in Kuala Lumpur at pchong17@bloomberg.net

To contact the editors responsible for this story: James Poole at jpoole4@bloomberg.net Shamim Adam, Dick Schumacher

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