18/03/2010 (The Malaysian Insider) - Palm oil output in a key growing state in Malaysia, the world’s second largest producer of the commodity, is expected to fall 15 per cent as two major rivers irrigating plantations have sunk to dangerously low levels.

The southern state of Johor in mainland Malaysia, and the top producing state of Sabah on the island of Borneo, have experienced a prolonged dry spell driven by the El Nino weather condition that can axe yields and trigger a supply squeeze.

“The hot weather will go on till April or May and the immediate impact is a 15 percent decline in production this month, in this region,” said one planter in Johor, which accounts for a fifth of the Southeast Asian country’s output.

Two rivers in Johor, Sungai Muar and Sungai Benut, are at “danger” levels, the website of Malaysia’s drainage and irrigation department showed on Thursday. One of the state’s seven rivers was on the “high alert” list.

Besides helping to irrigate the bulk of Johor’s oil palm estates, the rivers provide water to nearby palm oil mills in processing the oil palm fruit bunches.

“We could see a trend of lower yields during the high production season in the second half of this year as the hot weather is discouraging the full development of fruit bunches that are starting to grow now,” said another planter in Johor.

Malaysian palm oil futures slipped 0.8 per cent today as traders booked profits from a crude oil-driven commodities rally in the previous session, but concerns about lower output curbed losses.

“This market could well turn into a bull market now if the dry weather continues and hurts production at a time when global economies are recovering,” said a trader with a Malaysian commodities brokerage.

The dry spell is expected to continue until May in parts of mainland Malaysia and Sabah with no rains over the next week, local media quoted the Malaysian Meteorological Department as saying today.

“The situation has become more severe because of the moderate El Nino phenomenon,” the department said.

Production in Sabah will fall by another 10 per cent this month from February levels, planters there told Reuters yesterday.

Sabah is Malaysia’s top palm oil producing state, accounting for a quarter of total national output. In February, its palm oil output tumbled 15.7 per cent from a month ago to below 400,000 tonnes. — Reuters