(AgriMoney) – Crude palm oil prices in Malaysia hit a 14-month high, as fears grow about the effects of El Nino, as well as widespread air pollution from forest fires.
Palm oil futures for December rose 2.2% in Kuala Lumpur, to close at 2,394 ringgits.
This is the strongest close since July 2014, and palm oil prices have now climbed 15% in a 5-day period.
Dry weather
“This was El Nino speculation for the main part,” analyst Ed Hugo of VSA told Agrimoney.com.
The El Nino weather pattern is associated with droughts in Malaysia and Indonesia, the world’s second and top palm oil producers respectively.
“El Nino drying lots of areas out,” said Mr Hugo. “We’ll see the effects on yields in 6-18 months,” he added.
On Monday analyst Thomas Mielke forecast that the effects of El Nino would cut the speed of production growth of palm oil by 50% in 2016.
Haze grows
As well as the long-term effects of El Nino, air pollution in the region is causing a short-term threat to production.
Widespread forest fires in Indonesia have blanketed parts of the country, as well as neighbouring Malaysia, with a thick haze of smog.
Mr Hugo said the haze would impact short term harvests, as opposed to the threat posed by El Nino to long term yields.
“The haze is blocking the sun, impacting harvested yields,” he said. “It’s also impacting the ability of some workers to get to the harvests.”
Many of the fires are believed to have been started deliberately, in order to clear space for agriculture, including palm oil.
Slash-and-burn agriculture, where farmers clear virgin rainforest for cultivation through the use of fire, is illegal, but widely practiced.
Currency weakness
Malaysian palm oil prices have also been boosted by the weakness of the currency.
The ringgit, which is Asia’s worst performing currency, is down 18% against the dollar this year.
This makes Malaysian palm oil more competitive in the global market place, and supports local prices.
Increasing demand
And there has been an uptick in palm oil demand.
Last week the cargo surveyor Societe Generale de Surveillance said that exports of Malaysian palm oil products for September 1-20 rose 13.3%, month-on-month, while Intetek Testing Services saw them up 7.6% over the same period.
India’s palm oil imports are likely to rise 6.2% in the year starting in November, to a record 9.6m tonnes, veteran trader Govindbhai Patel told Reuters’ on Monday.
More cautious outlook
However, separately Rabobank said that while demand for palm oil had “picked up in recent months”, the increase was “not enough to support prices”.
Indeed, the 11% rise in combined Indonesian and Malaysian exports in the first 11 months of the 2014-15 marketing year, which ends this week, has in part gone to boost stocks in the likes of China and India, “which may limit” future imports, the bank said.
Furthermore, while acknowledging the potential setbacks to Indonesian and Malaysian production from drought, Rabobank also flagged the forecasts for a large US crop of soybeans, the source of rival vegetable oil soyoil.
Although Rabobank nudged higher its forecasts for palm oil prices, which for the current quarter see an average of 2,160 ringgit a tonne, the estimate remains below the futures curve, if above the average of 2,073 ringgit a tonne recorded for the July-to-September period.
