KUALA LUMPUR (Oct 6): Fitch Ratings, which expects crude palm (CPO) prices to average US$600 (about RM2,494) a tonne or higher in 2020, said today it assumes CPO prices will drop to US$560 a tonne in 2021 on higher output due to the La Nina weather pattern apart from the risk of lower biodiesel demand in Indonesia due to weak crude oil prices. 

In a note today, Fitch said La Nina, which induces higher rainfall in principal oil palm producing regions of Malaysia and Indonesia, should boost oil palm yields and CPO output in 2021 and reduce prices.

"The duration and intensity of La Nina is a key risk to our 2021 price assumption, as a prolonged and strong La Nina could hit CPO output as well as other competing edible oils.

"However, higher rainfall could also lead to flooding which could hurt output and support prices in the next three to six months,” Fitch said.

According to Fitch, the Meteorological, Climatological and Geophysical Agency of Indonesia has forecast a low-to-moderate intensity La Nina in the last three months of 2020, and expects about 55% of the nation will receive higher rainfall than average. 

Fitch said that generally, Southeast Asia, South Africa, India and Australia receive above-normal rainfall due to La Nina, while Argentina, Europe, Brazil, and the southern US experience drier weather. It said the US National Oceanic and Atmospheric Administration has also stated there is a 75% chance that La Nina will stay for the entire winter, spanning early 2021.

"A weak-to-moderate La Nina is likely to improve fresh fruit bunch (FFB) yield due to better rainfall, but a strong one could trigger flooding, disrupting harvests and FFB transport to CPO mills. A prolonged La Nina stretching for over five months could also affect fruit bunch development and result in lower pollination due to water-logging, affecting yields. 

"The last La Nina, which was weak, occurred in 2017-2018 and was followed by higher CPO output. The average FFB yield for the 10 companies which are representative of the industry improved to over 22 tonnes per mature hectare (t/ha) in 2018, from below 18t/ha in 2016.

"We expect the pattern to continue with this season's La Nina,” Fitch said.

At Bursa Malaysia today, CPO futures prices for December 2020 rose RM65 to RM2,786 a tonne at 4:18pm in tandem with higher crude oil prices. CPO prices rise with crude oil prices as costlier crude oil generates expectation of higher demand for CPO to produce biodiesel.

It was reported that crude oil prices gained on Tuesday due to fears that refineries could be hit by a storm brewing in the Gulf of Mexico, while buyers also drew relief from US President Donald Trump's return to the White House after being treated for Covid-19 in hospital.

"US West Texas Intermediate (WTI) crude futures were trading 36 cents, or nearly 0.9% higher at US$39.58 a barrel at 0710 GMT. Brent crude futures rose 25 cents, or 0.6%, to US$41.54 a barrel,” Reuters reported.