Plantations: Navigating El Nino

In recent weeks, the scorching heat and soaring temperatures have dominated headlines, with reports of heat strokes and heatwaves affecting daily life. In this report, we delve into the impact of El  Niño and examine some of the key factors influencing Crude Palm Oil (CPO) productivity which translates to the performance of the KL Plantation Index.  

El  Niño is a climate event characterized by abnormal warming in the tropical Pacific Ocean, which can significantly affect palm oil productivity as oil palms are moisture-sensitive and require an adequate amount of rainfall to thrive. Extended periods of drought can lead to reduced flowering and fruit production, thus impacting yield for the crop.  

According to National Oceanic and Atmospheric Administration’s (NOAA) prediction for El Niño, there is a 90% chance of El Niño developing and persisting into the northern-hemisphere winter. There is an 80% chance of a moderate El Niño and 55% chance of a strong El Niño event.  

El Niño typically brings about lower rainfall, higher temperatures, and abnormally dry weather conditions in Southeast Asia, particularly in Malaysia and Indonesia—the major palm oil-producing countries. The reduced availability of water stresses the trees and hampers their ability to produce healthy fruit bunches, consequently lowering the overall yield of CPO. As such, CPO production tends to decrease during El Niño episodes, lowering the supply and inventory of CPO. This phenomenon is reflected in Figure 1, where CPO production exhibits a clear decline during El Niño periods which leads to an upward pressure on its price.