KUALA LUMPUR (Dow Jones)--The El Nino weather phenomenon is likely to hitMalaysia in 2005, potentially sapping palm oil output in the world'sbiggest producer, a top industry official has said.

M.R. Chandran, chief executive of the Malaysian Palm Oil Association, orMPOA, said there was a high chance of El Nino, which causes unusually dryweather, surfacing this year after failing to develop in the past twoyears.

"We didn't get it last year or the year before, so my prediction is thatwe're going to see El Nino this year," Chandran said in an interview onthe sidelines of the recent annual palm oil price outlook conference.

MPOA is a producer lobby group, whose members own close to half ofMalaysia's total oil palm planted area.

Malaysia has already been experiencing spells of hot and dry weather overthe past two months, fueling fears in industry circles that an El Nino maysoon hit.

Chandran said if the dry conditions continue through March and April, palmoil production in Malaysia is likely to be affected in the latter part ofthe year.

A prolonged lack of moisture puts stress on oil palm trees, causing theformation of more male flowers, which don't produce fruits, instead offemale flowers, which turn to fruits.

"The immediate impact (on production) will be felt within six months,"Chandran said.

In the absence of an El Nino, however, Chandran said he is projecting aslight rise in crude palm oil production to 14.4 million metric tons in2005, up about 3% from 13.98 million tons in 2004.

The projection, however, assumes normal weather conditions.

Production for the year may contract if El Nino hits the Southeast Asianregion.

"It happened in 1998. When the El Nino came, production went down andprices went up to MYR2,400 (a metric ton)," Chandran said. Malaysian CPOproduction shrank 8% in 1998.

The benchmark May CPO futures contract ended at MYR1,388/ton Friday.

Fears Of Worker Shortage

A recent crackdown by the Malaysian government on immigrants workingillegally in the country could also have an impact on palm oil productionthis year, Chandran said.

About 450,000 illegal workers, mostly from Indonesia, are believed to haveleft Malaysia under a recent amnesty program, which ended at the end ofFebruary.

Following the end of the amnesty period, authorities have been conductingraids to arrest those that have failed to leave.

Chandran said while the employment of illegal workers wasn't a rampantpractice in the country's plantations, there are concerns the crackdowncould still affect the palm oil industry in other ways.

He said the tightening of immigration procedures could potentially delaythe recruitment process for new workers.

That means oil palm plantations could face a shortage of labor if theyface difficulties hiring new workers to replace those whose work permitshave ended or will soon expire.

"And we have about 50,000 workers who are in this process," Chandran said.

The total workforce in the Malaysian palm oil industry is estimated atmore than half a million, covering over 3.8 million hectares of land.

"If there is a delay in the rehiring of workers, the palm oil industrycould be staring at losses of about MYR4 billion in 2005. That's becausethere will be fruits that will not be harvested," he added.

He didn't provide estimates on potential losses in terms of production.

Complacency Hurting Yields

Meanwhile, Chandran slammed oil palm producers in Malaysia for beingeasily lulled into complacency by high prices and failing to takemuch-needed steps to improve yields.

The average palm oil yield in Malaysia has been stagnant at below 4.0 tonsa hectare for years and suffered a slight contraction in 2004 to 3.73tons.

"Prices are good, and everyone is complacent and happy with four tons.When the prices come down, they will be running to the government andasking what it's doing to help boost prices," Chandran said.

Although some leading plantation companies have been consistentlyoperating at yields of well over 5.0 tons every year, many other producersin the country have been lagging far behind, Chandran said.

He said the failure of producers to apply fertilizer regularly,particularly during times of low prices to cut costs, is one of the mainreasons for poor yields.

"When the prices are down, they cut back on fertilizers and what happensis, if you cut back this year, the effect is only seen in the next 12 to18 months. By that time, prices would have recovered and you find that youhave less crop," he said.

It comes as no surprise, therefore, that the high-yielding plantations arealso the ones that maintain the rate of fertilizer usage regardless of theprevailing market price of palm oil, Chandran added.

The industry's unimpressive yields have also been caused by the emergenceof new players with little expertise and understanding of the nature ofthe business.

There has been a growing trend among timber companies in the eastMalaysian states of Sabah and Sarawak - the country's fastest growing oilpalm regions - to join the palm oil industry.

"A lot of these people have now become oil palm plantation companies, andtheir way of management is totally different," Chandran said.

"Being ex-timber companies, their philosophy is extraction, not plantationmanagement."

Improvement of productivity is also often neglected because someplantation companies have been investing more of their time and resourcesinto developing new, unrelated business ventures. It is not uncommon forplantation companies in Malaysia to be involved in other industries suchas property development, banking and finance.

To boost productivity, the industry needs to step up efforts to attractfresh talent to address a shortage of skilled workers at the managementand operational levels.

Industry participants and the government are planning to set up adedicated university, with plantation companies sponsoring students, tohelp rejuvenate interest in the sector.

Indonesia is very likely to surpass Malaysia as the world's biggest palmoil producer by 2010, making it imperative for Malaysian producers to gettheir act together quickly or risk being not competitive, Chandran said.

"At the management level, (the need) is to improve productivity. At theboard level, it is to make sure revenue from the plantations sector isplowed back into the plantations sector and not diversified into somethingelse," said Chandran, who will be retiring in April after about 40 yearsin the plantations industry.