Three out of four El Nino incidents since 2000 have brought about lower CPO yields, said HLIB Research analyst Chye.
PETALING JAYA: The risk of a looming El Nino dry weather phenomenon could trigger crop productivity concerns among plantation players.
This will affect especially the palm oil industry due to the commodity’s relatively high demand and usage that would inevitably lead to fluctuations in the price of crude palm oil (CPO).
Of late, several international meteorological organisations are predicting the El Nino to hit by the second half of this year, mainly due to the exceptionally hot days in recent weeks.
This was despite the month of May routinely seeing the weather turning warmer due to the end of the rain-fetching northeast monsoon season.
El Nino is a phenomenon that affects countries in regions within the vicinity of the South Pacific Ocean – Australia, South America and South-East Asia – that usually brings lower-than-average rainfall as well as increasing the risk of forest fires and smoke haze.
According to Hong Leong Investment Bank (HLIB) Research, a handful of meteorological institutions, including the World Meteorological Organisation and the US-based National Oceanic and Atmospheric Administration (NOAA), have forecast a higher than 50% chance for the El Nino to hit starting from June, although the NOAA also predicted that the phenomenon could likely be a moderate one.
HLIB Research analyst Chye Wen Fei said the El Nino does have an impact on the productivity of oil palm plantations, whereby the severity is dependent on its intensity.
This is given that oil palm trees are also “moisture sensitive” plants that require 150mm to 200mm of rainfall each month.
“While the trees can withstand short drought periods – depending on the soil type and underlying water table – drought stress lasting more than two months usually results in reduced flowering and fruit production for the subsequent 12-month period,” she said in a report yesterday.
Chye said the outcome of the lower rainfall, higher temperatures and abnormally dry weather in South-East Asia caused by El Nino will be lower yields through fruit bunch failure, floral abortion as well as prolonged male flowering phase, depending on the intensity and timing of its occurrence.
“The impact of the phenomenon on CPO yield is also often multi-fold – the first one an immediate effect, followed by a lagged 12-month impact,” she added.
She noted that three out of four El Nino incidents since 2000 have brought about lower yields.
As such, she said the disruption of yields would naturally result in an upswing of CPO prices.
Chye also reiterated her CPO price assumptions at RM4,000 per tonne for 2023 and RM3,800 per tonne for now, pending further update on the El Nino development.
Separately, while acknowledging that nothing much can be done to alleviate the effects of El Nino, Malaysian Palm Oil Association chief executive Joseph Tek Choon Yee said oil palm planters would usually look into their water catchment by deepening their catchment ponds, desilting ponds and waterways as well as preparing to bund up to mitigate water shortage in line with good water management practices.
“Supply chains including palm oil mills will need to brace for sufficient water for their processing and have ready plans to send crops elsewhere with water sources, if necessary.
“They also need to be alert to potential fires at all times. These are anticipatory crisis management,” he told StarBiz.
Tek said the impact of a prolonged El Nino on crop production and productivity yields are exerted over three delayed phases, of which the first one can be anticipated around half a year later, and followed by a further two delayed periods.
“Assuming El Nino is to occur from June onwards, the more immediate effect in 2023 would be felt about half a year later, and two more lagged effects which will manifest a year later, with a third phase two years from the occurrence.
“Thus, significantly lower crop production can be anticipated in 2024 and 2025,” he said.
Tek also said the palm oil industry will look forward to corroborating with the relevant authorities to better prepare the mitigation efforts for El Nino, especially on fire hazard preparedness.
Meanwhile, Rakuten Trade head of equity sales Vincent Lau believes the El Nino will affect production for all crops, and as such, it is to be expected that CPO prices would escalate.
However, as CPO prices have fallen since January despite the reduction in productivity due to heavy rainfall in the earlier part of the year, together with the prices of other crops such as soybean, Lau said adverse news such as El Nino may have already been priced into the plantation sector.
“Overall, it should not have much of a major impact on the sector.
“We have a ‘hold’ call on plantation but it is a defensive sector that is worth a look if (plantation) stock prices were to become attractive again.”
