12/08/2010 (Bloomberg) - Palm oil output in Indonesia, the world’s largest producer, may drop by as much as 10 percent this year after a longer-than-normal rainy season disrupted harvesting, an industry official said. Prices advanced.

Output may decline to 19 million to 20 million metric tons, from 21 million in 2009, said Susanto, head of marketing at the Indonesian Palm Oil Association. The country’s agriculture ministry targeted output of 23.2 million tons this year.

The drop in supplies may extend a rally in prices, which have jumped about 18 percent from a seven-month low on July 7 on concern that bad weather may hurt output in Indonesia and Malaysia when demand from Asian nations including China and India swells as the countries celebrate festivals.

The Indonesian forecast is “bullish news,” Ryan Long, a dealer at OSK Investment Bank Bhd. in Kuala Lumpur, Malaysia, said today by phone. “That should actually push the market up,” Long said.

October-delivery palm oil gained as much as 1 percent to 2,704 ringgit ($849) a ton on the Malaysia Derivatives Exchange today, reversing an earlier decline. The contract was at 2,690 ringgit at the 12:30 p.m. break.

‘Prolonged Rains’

Indonesian exports may be 16 million tons this year, lower than the 18 million-ton target, he said. The country exported 6.8 million tons in the first six months of the year, a 7.1 percent decline from the same period last year, the nation’s palm oil association, known as Gapki, said July 26.

As much as 400 millimeters (15.7 inches) of rainfall is forecast from this month to October in parts of Indonesia, including Sumatra and Kalimantan, the country’s main palm oil producing regions, the Meteorology, Climatology and Geophysics Agency said on its website. The dry season in Indonesia usually starts in July, the weather office said.

Heavy rains in Sumatra, Kalimantan and parts of Sulawesi and Java in August and September may disrupt agriculture and mining, Soeroso Hadiyanto, the agency’s deputy head for climatology, said yesterday. Tin output from the country, the largest exporter, may plunge about 20 percent this year because of the bad weather, according to the energy ministry.

‘Extreme Weather’

“La Nina has caused extreme weather, similar to what we had in 1998 but with higher intensity,” Soeroso said. “We’re once again experiencing a wet dry season in Indonesia, which will be followed by the rainy season from October, so we’ll see rains fall all year.”

Palm oil harvesting in Malaysia, the world’s second-biggest producer, may be disrupted in November and December as the La Nina weather event causes flooding in major growing areas, the Malaysian Meteorological Department said in an e-mail Aug. 6.

La Nina, caused by a cooling of the Pacific Ocean, may gain strength by the end of the year and bring higher-than-normal rains to northern Sarawak and the state of Sabah, the country’s state forecaster said. Sarawak is in Malaysian Borneo.

Indonesia produced an estimated 9 million tons in the first half, lower than the target of 10.1 million tons, Susanto said, citing growers’ reports. Indonesia doesn’t release official data.

“Second-half production is usually higher, that’s the cycle, but because of the rains I don’t think it will be able to make up for the fall” in the first half, Susanto said.

Still, Indonesian output may expand to 22 million tons this year, boosted by oil from 660,000 hectares (1.63 million acres) of maturing trees that are producing for the first time, according to Ben Santoso at DBS Vickers (Singapore) Pte.

“People are underestimating the supply potential from mature trees,” Santoso, an analyst, said in an interview. “Prices will drop significantly in the fourth quarter.”

Futures will average 2,363 ringgit a ton in the six months to December, 6 percent less than the 2,509 ringgit average so far this year, Santoso said.