Futures & Commodities

La Nina heavy rains to hit palm oil prices after recent El Nino dry weather rally

Hurricane whips palm trees
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Not all commodities will ride the wave of recovery into 2017; palm oil prices are set to buck the trend.

The impending downturn will come after a strong rally recently due to the delayed impact of the El Nino weather phenomenon on harvests in South East Asia.

Palm oil prices on the Bursa Malaysia Derivatives exchange are currently trading around 2,600 ringgit ($644) per metric ton, up 10 percent from June as crop yields were slashed by the unusually dry weather caused by El Nino from January to April.

But the rally is not be sustainable, with prices to "ease significantly" in the coming quarters, BMI Research said in a note on Tuesday, as El Nino switches to La Nina, bringing rains that will likely boost production.

"Palm oil will be the only commodity within the agricultural complex and (the few) within the broader commodities complex to average lower on a year-on-year basis in 2017," BMI Research added.

The raw material is used in a wide variety of products from detergents to chocolates and cookies.

BMI Research predicted palm oil prices would average 2,350 ringgit a ton in 2017, against 2,500 ringgit a ton in 2016 and 2,235 ringgit a ton in 2015.

Has the commodities rally gone too far?

Commodities prices have climbed this year, with oil and iron ore experiencing strong rebounds after an extended slump as market fundamentals rebalanced.

Palm oil received a boost from the broader recovery, with El Nino-related drought giving prices a further filip. Malaysia palm-oil production was 10 percent lower in the current marketing year, which runs from October 2015 to September 2016. The country's palm oil stockpiles also hit a five-year low in May this year, BMI noted.

But, "the tightness in supply driven by El Nino in 2016 will dissipate as we turn to 2017 and fundamentals for the market will be bearish for prices," the house added.

Current meteorological forecasts for a weak La Nina event could bring slightly above average rainfall to South East Asia in the fourth quarter of 2016 and first quarter of 2017, which would have a positive six-to-nine-month lagged effect on crop yields, the analysts said. This means that there may be a bumper harvest next year.

Malaysia is the world's second largest producer of palm oil after Indonesia. Malaysian palm oil statistics are used in the industry as benchmarks due to their timeliness and reliability.

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