Palm trees produce more fruits in the second half of the year but some analysts say the peak production period has been delayed in Sabah as heavy rainfall in 1Q2009 affected the pollination process. Palm fruits are formed six months after pollination. Heavy rains also affect harvesting and fertilisation of palm trees. Flooding may also cause damage to infrastructure such as roads and bridges.

While recovery has also been slow — in a normal year, peak production would have set in by August — planters with estates in Sabah say FFB production has picked up strongly in September.

Plantation companies with huge tracts of oil palm estates in Sabah have been affected by the bout of wetter-than-usual weather. IOI Corp Bhd, which has about two-thirds of its oil palm hectarage in Sabah, saw its yield per mature hectare decline to 26.03 tonnes in FY2009 ended June 30, compared to 28.54 tonnes last year.

Sabah has the largest oil palm hectarage and mature area in Malaysia. Last year, the state produced 32.4% of the 17.7 million tonnes of crude palm oil (CPO) produced in Malaysia. Hence, Sabah’s production will be of significance.

Crop production statistics from plantation companies with estates solely in Sabah show lower numbers y-o-y despite a slow m-o-m recovery. But September numbers may bring some cheer to agronomists. For example, Sabah-based IJM Plantations Bhd registered a 32% m-o-m increase in its internal FFB production in September.

“Yes, Sabah’s September production has been picking up quite strongly. It could reach close to 10% higher compared to August,” says Donny Khor, senior vice-president, futures and options at OSK Investment Bank Bhd.

Checks with some plantation companies and privately-owned estates show FFB production growth ranging from 8% to 15% over August, he adds. As for Peninsular Malaysia, growth will likely be flat to marginal.

While recovery in FFB production brings smiles to agronomists, it is bearish news for the CPO trade as inventories rise. Export numbers also look weak with cargo surveyors Societe Generale de Surveillance and Intertek estimating m-o-m declines of 2.2% and 7.8% in September. Stockpiles reached a peak of 2.2 million tonnes in November 2008.

History may repeat itself if the respected analyst Dorab Mistry’s predictions come true. The Godrej International director expects palm oil inventories in Malaysia to rise to more than two million tonnes by the end of November. He adds that CPO futures may fall to RM1,900 per tonne but will rise to RM2,400 in 2010.

Last Friday, the December contract closed at RM2,037, 26.9% lower than this year’s peak of RM2,789 per tonne.

Khor believes the market has more or less factored the recovery in Sabah production into CPO prices.

“But it will still provide some kind of pressure, somehow or other, due to the slow demand which will result in a build-up in inventory,” he adds.

The much talked about El Nino which leads to hot and dry weather in Southeast Asia, which is detrimental to FFB production, has been mild so far. In a report on Sept 10, the US National Weather Service said current observations and trends indicate that El Nino will most likely peak at moderate strength with the likelihood of at least a moderate strength El Nino for winter in the northern hemisphere.

El Nino affects the palm oil sector on two fronts. The direct impact will be on FFB production in Malaysia and Indonesia. Indirectly, a weak El Nino leads to colder winters in the northern hemisphere, raising demand for heating and providing a boost for energy markets. This may have an impact on CPO given its usage as a feedstock for biodiesel.

Drier-than-average conditions in Indonesia have been observed and the National Weather Service expects this to continue up to November this year. However, Indonesia also has new areas coming to maturity, neutralising the impact of the weather somewhat.

Mistry is maintaining his forecast for Indonesia’s palm oil output at 21.5 million tonnes in 2009, up from 20 million tonnes last year. Meanwhile, he expects Malaysia to produce 17.5 million tonnes in 2009, compared with 17.75 million tonnes in 2008.

Last week’s earthquake in Sumatra, a major producer of palm oil, is expected to have minimal impact on shipment of the commodity, according to news reports.

On the other side of the world, the US is currently harvesting what is expected to be a bumper soya bean crop, offsetting the shortfall from the smaller southern American crop. However, frost in soya bean planting areas in the US remains a possible threat during the harvest season.

Khor sees immediate technical support for the CPO third month futures contract at RM2,070 and overhead resistance between the RM2,205 and RM2,210 levels. However, prices may slide to challenge the July 2009 low at RM1,964 if immediate support at RM2,070 fails to be sustained.

While CPO prices have declined, the share prices of big plantation companies have been holding strong, supported by buying from the Employees Provident Fund (EPF). Companies’ recent filings to Bursa Malaysia show the provident fund buying shares of Genting Plantations Bhd, IJM Plantations, IOI Corp, Kuala Lumpur Kepong Bhd and Sime Darby Bhd.

Credit Suisse, in a report on Oct 1, says the correlation between CPO prices and plantation stock prices have weakened since April this year. The correlation is now only 39%, compared to 89% over the last three years, it says, attributing the resilience in stock prices primarily to aggressive accumulation by domestic funds, especially the EPF.

The brokerage expects the supply of vegetable oil to increase over the next few months, dampening palm oil prices until end-2009. Nevertheless, it believes prices will strengthen to RM2,500 in 2010 as the impact of El Nino becomes more prominent in mid-2010, coupled with rising demand from a recovering global economy.

Hwang DBS Vickers Research is slightly more bullish, expecting CPO prices to rebound as early as 4Q2009 to between RM2,400 and RM2,500. It raised its price assumptions for 2010 and 2011 to RM2,380 to RM2,440 on the back of tighter edible oils inventory.
“We believe the recent correction in palm oil prices and likewise consolidation in plantation share prices have provided enough upside potential to warrant raising positions now. Our key message is to remain selective as we expect volatility in an otherwise upward trend in price and consumption next year,” says the research house in a report on Oct 2.

Credit Suisse prefers Indonesian plantation companies London Sumatra, Indofood Agri Resources and Sampoerna Agro due to less demanding valuations compared to IOI Corp, Sime Darby, Wilmar International Ltd and KLK.

Hwang DBS Vickers’ top picks are KLK, Sampoerna Agro and Indofood Agri.

This article appeared in The Edge Malaysia, Issue 775, Oct 5-11, 2009.