Fadhil Hasan, Executive Director of the Indonesian Palm Oil Association (Gapki), expects Indonesia's crude palm oil (CPO) production to decline to around 32.1 million tons in 2016 from 32.5 million tons in the preceding year. This decline, which would be the first (full calendar year) drop in Indonesia's palm oil output since 1998, is caused by the El Nino weather phenomenon. El Nino causes dry weather in Southeast Asia hence curtailing palm oil fruit yields. CPO production in Malaysia, the world's second-largest CPO producer and exporter (after Indonesia), has also been affected.
On a positive note, falling crude palm oil output in Indonesia and Malaysia (together accounting for nearly 90 percent of the world's total CPO output) will have a positive effect on benchmark palm oil futures. CPO futures in Kuala Lumpur are trading around 2,540 ringgit per ton this week after having climbed about 5 percent in February. Top CPO industry analyst Dorab Mistry sees prices climb further by about 20 percent to 3,000 per ton later this year, although he also emphasized that CPO demand from key markets (for example India and China) remains bleak.
The economy of China remains in slowdown-mode implying palm oil demand from the world's second-largest economy remains subdued. This implies that Indonesian CPO exports to China will, most likely, remain falling. India raised import taxes on CPO by 5 percent in September 2015 in an effort to protect and boost its domestic edible oils industry. Meanwhile, France and Russia are planning to implement higher palm oil import taxes. All in all, these developments put pressure on global palm oil demand.
Palm oil production in Malaysia is expected to fall by 1.5 million tons to 18.4 million tons in 2016. Mistry expects palm oil output in Indonesia to drop by 1.2 million tons to 32.3 million tons this year. The current lower CPO output cycle is expected to persist until June 2016.
Indonesian Palm Oil Production and Export Statistics:
(in USD billion)
¹ indicates forecast
Sources: Indonesian Palm Oil Producers Association (Gapki) & Indonesian Ministry of Agriculture