• While El Nino intensity is still unclear now, the recent SST readings show resemblance of the strong El Nino of 1997/98.
• Weather development in 3Q15 is crucial for production and price outlook, both soybean and palm oil alike.
• Stay NEUTRAL on the sector. Top BUYs in the region are FR, BAL, GENP and SOP.

What’s New

Although El Nino was declared by the Australia Bureau of Meteorology on 12 May, the effects of El Nino was hardly felt. But that is changing as weather is warming up and getting drier.

Although partly seasonal, weather forecasters are expecting below-average rainfall for July-Aug in the region, namely Sarawak, eastern part of Sabah, Central Kalimantan, West Kalimantan, South Kalimantan (major oil palm areas), Java, South Sulawesi, and southern part of Papua province (not major oil palm areas). Haze is also expected to make a comeback although the impact of haze on production is likely to be marginal compared to rainfall deficit. The total oil palm area in Malaysia and Indonesia that could be affected by this below-average rainfall forecasts over the next two months is estimated at 5.01m ha representing 32% of the total planted area. In terms of production, the said area produced ~14.2m MT or ~30% of production in this region.

While the intensity of El Nino remains unclear, the monthly sea surface temperature (SST) anomaly map recorded across the Pacific Ocean has been sustained, if not strengthened – see Fig 8- 10. Thus far, the readings have resembled those of 1997/98 which turned out to be the strongest El Nino in recent history.

What’s Our View

While the affected area appears relatively large, a mild El Nino is likely to have a muted impact on production, in our view. But a severe El Nino can possibly bring down FFB yields by up to 20%. The intensity of this El Nino has yet to be established but there are early indicators that this could be substantial.

The occurrence of El Nino is generally positive for CPO price. But the extent will depend largely on the El Nino intensity. Conversely, the present ample supply of soybean will water down overall optimism, capping near term CPO price upside, unless the El Nino phenomenon impacts major soybean producing nations as well.

We keep our NEUTRAL call on the sector. Our MYR2,400/t CPO ASP forecast for 2015 is unchanged for now. Our top BUYs in the region are Bumitama Agri, First Resources, Genting Plantations, and Sarawak Oil Palms for their growth propositions and the embedded deep values of their landbank (for the two Malaysian planters).

Source: Maybank Research - 7 Jul 2015