Heavy rains from La Nina to disrupt planters’ production
KUCHING: The potential return of the La Nina season could disrupt production in the plantation sector, leading to the possibility of higher crude palm oil (CPO) prices as vegetable oils tend to strengthen when this weather anomaly sets in.
According to the research team at Hong Leong Investment Bank Bhd (HLIB Research), several weather forecasters recently indicated that the odds of La Nina forming by end of the third quarter (3Q) to early 4Q are increasing.
It noted that La Nina is the positive phase of the El Nino Southern Oscillation (which is associated with cooler-thanaverage sea surface temperatures (SSTs) in the central and eastern tropical Pacific Ocean).
La Nina episodes typically induce heavier rains in Southern Hemisphere (including key palm oil producing countries, such as Malaysia and Indonesia) and drier weather in Northen Hemisphere (including key soybean producing countries, such as US, Brazil and Argentina).
“It remains to be seen if La Nina would develop by year end (and its impact on output varies according to timing and strength of such weather anomaly).
“Assuming La Nina sets in during late-3Q to early 4Q, it will disrupt harvesting and logistics of palm oil in Malaysia and Indonesia (as it coincides with seasonally higher production months).
“This is evidenced by the three La Nina episodes since 2006, which impacted fresh fruit bunches (FFB) yield in Malaysia,” HLIB Research explained.
“Historically, prices of CPO and soybean tend to strengthen as La Nina (as well as El Nino) sets in and weaken when the weather anomaly subsides.
“During the past three La Nina episodes since 2007, we note that CPO price advanced by more than 50 per cent,” it added.
As for the prices of soybeans, it believed the impact on soybean yield varies among countries, as planting schedules differ among countries. For Brazil and Argentina, lack of rain (should La Nina develop by 4Q) will likely result in delay in soybean planting, hence impacting soybean output.
Over in US, the lack of rain will likely help soybean harvest there, should La Nina arrive in late-3Q to early-4Q.
For now, HLIB Research retained its CPO price forecast of RM3,200 per metric tonne (for 2021) and RM2,800 per metric tonne (for 2022 to 2023) for now (compared with YTD average CPO price of RM4,046 per metric tonne), pending more convincing data that supports the potential La Nina episode.
It also maintained its ‘neutral’ rating on the sector.