El Nino is biggest wildcard for world’s most consumed edible oil
01/11/2023 (The Edge Malaysia) - Cooking oil traders are meticulously sifting through weather maps and production data for Indonesia in a quest for clues on how severely El Niño will dry out palm oil plantations in the world’s top supplier.
Oils extracted from the palms of Indonesia are used in everything from candy bars to soap, lipstick and fuel, and stable supplies of the most used edible oil are essential for keeping global food inflation under control. The arrival of the El Nino weather phenomenon traditionally parches the farmlands of Southeast Asia, reducing output of the tropical oil.
The impact on Indonesia, which supplies 60% of the world’s palm oil, will drive conversations among hundreds of growers and traders who descend on the island of Bali this week for one of the year’s top cooking oil conferences.
While dry conditions have already sparked forest fires and haze in the Southeast Asian region this year, the effect on palm oil production is relatively muted up to now, with rainfall declining less than during previous events of this type.
As of now, a “fifth of Indonesian output is likely to be impaired due to the dryness”, said Julian McGill, an agricultural economist and managing director of consultancy Glenauk Economics. “This is likely to mean that there will be no growth next year in Indonesia, but is not yet sufficient to suggest a major decline in output. We need to keep monitoring soil moisture deficits.”
In neighbouring Malaysia, which supplies about a quarter of world output, yields are already extremely low because labour issues have hampered maintenance of plantations and hindered harvesting, according to McGill. That will temper further disruptions from the weather, he said.
While oil palms are typically resilient to short bouts of drought and floods, they suffer from prolonged periods of dry weather, with the most severe impact only 12 months later. Adding to the supply risk is the alarming number of old and unproductive trees, which could further hit yields if not quickly addressed.
Even with the onset of El Nino, prices are down 11% this year and have roughly halved from a record of over RM7,200 (US$1,508) a tonne in the days after Russia invaded Ukraine last year. Dorab Mistry of Godrej International Ltd and Oil World executive director Thomas Mielke give their price outlooks on Friday (Nov 3).
Geopolitics, fossil fuel prices and the wars in Ukraine and the Middle East loom large in terms of drivers. Rising petroleum prices tend to spur more demand for crop-derived fuels such as palm and soy. Indonesia has a mandate to increase the use of palm oil in diesel to 35% this year. A move to boost the blend to 40% or more, or to use palm in aviation fuel, could lift prices further.
On the demand side, apart from the outlook for top importers India and China, traders will focus on the threat from deforestation regulations in the European Union (EU). Palm oil companies have until the end of 2024 to comply with the EU’s plan to ban imports of raw materials produced on newly deforested land, with a further six-month grace period for small businesses. Questions about the implications for millions of smallholders are being hotly discussed.