The warm ocean water weather phenomenon El Nino is likely to affect major palm oil growing regions in the world impacting the yield of the commodity sometime in the second half of 2024. 

“Palm oil production in 2023-24 will rise only by 0.2 million tonnes (mt), much lower than the average annual growth of 2.5 million tonnes in the past ten seasons, as El Nino-related moisture deficits are reported in several parts of Indonesia between August and October,” said the World Bank Commodity Outlook. 

“We also highlight recent below-normal rainfall over Indonesia, with the southern parts of the islands of Sumatra and Kalimantan in particular receiving comparatively little rainfall over the past three months,” said research agency BMI, a unit of Fitch Solutions. 

Also read: Developing world more vulnerable to El Nino risks

The US Climate Prediction Centre’s (CPC) medium-term forecasts point to continued below-average rainfall over southern Sumatra, which accounts for 5-10 per cent of Indonesian palm oil production between December 2023 and February 2024, it said.

Output surplus

BV Mehta, Executive Director of Solvent Extractors’ Association of India (SEA), said El Nino impact is normally seen after 7-8 months. “Suppose September-October are El Nino months, the impact will be seen in April-June 2024. Definitely the production will go down. It is a normal phenomenon,” he said.

BMI said, “It remains our view that the global palm oil sector will generate production surpluses of 1.2 mt  in both 2022-23 and 2023-24, respectively, compared to an average surplus of the five most recent completed seasons of 3 mt.”   

Also read: El Nino likely to peak during Nov-Jan; Indian Ocean Dipole strengthens 

Sudhakar Desai, President, Indian Vegetable Oil Producers’ Association (IVPA) said, “I agree that at best 1.2 mt can be increased due to El Nino.”

El Nino is expected to be strong until March 2024 as per various global weather agency predictions with the event likely to extend to June 2024. 

Price forecast

In view of this, BMI said its 2023 forecast of 3,800 Malaysian ringgit (MYR) per tonne average price for third-month palm oil futures on Bursa Malaysia Derivatives exchange remains unchanged. 

As of November 21, palm oil futures traded at an average price level of MYR3,797 on a year-to-date basis. On Thursday, the January crude palm oil contract ended at MYR3,941. 

The World Bank outlook said palm oil prices declined 7 per cent in the third quarter due to higher production and exports from Indonesia and Malaysia, which together account for more than 85 percent of global palm oil exports. “Global palm oil exports in 2022-23 increased by almost 15 per cent compared to the previous year as the pandemic-induced labour shortages eased,” it said. 

BMI said it expects palm oil prices to follow a U-shaped trajectory through 2024 because of El Nino.  It raised its price forecast for 2024 from MYR3,400 to MYR3,515.

IVPA’s Desai said the price forecast for the month of palm oil futures was MYR3800-4200 for January-March 2024. “It’s a bit early to forecast for April-June 2024”, he said.

Biofuel demand

BMI said, “The principal risk to our palm oil price forecasts in 2024 and 2025 remains the now-active El Nino event, which is considered more likely than not to persist into second quarter of 2024, with a 35 per cent chance of developing into a ‘historically strong’ El Nino event towards the end of 2023.”

It said the weather phenomenon is associated with drier-than-usual conditions across much of South-East Asia, which poses a downside risk to palm oil cultivation in Indonesia and Malaysia, with the potential negative impact on yields set to become apparent during the second half of 2024.

Also read: El Nino’s impact on Indian agriculture raises concerns for rural economy 

The World Bank Commodity Outlook said growing demand for biofuel and ethanol in countries such as Brazil, Malaysia, and the United States supports prices for maize, palm oil, and soyabeans.

“Through the fourth quarter of 2023 to date, palm oil prices have followed a U-shaped pattern, initially easing from MYR4,040  to MYR3,551 before rebounding to test MYR4,000 per tonne,” BMI said.

In his presentation at the Global Economics and Marketing Conference of the International Palm Oil Congress and Exhibition (PIPOC) 2023 at Kuala Lumpur in Malaysia recently, Desai said Bursa Malaysia Derivatives will fluctuate within the range of MYR3600-3900 over the next three months. He hinted at the possibility of prices rising to MYR4200 by March.

The Commodity Outlook said demand for palm oil for biodiesel will increase in the world’s top two palm oil producers — Indonesia increased its biodiesel mandate from 30 per cent to 35 per cent earlier this year, while a 20 per cent biodiesel mandate in Malaysia started to take effect.  This could also push prices higher.