The El Nino cycle, a weather phenomenon that occurs once every five years on average, involves periodical warm ocean water temperatures off the western coast of South America that can cause climatic changes across the Pacific Ocean. It can lead to severe droughts in key agricultural-producing countries in Southeast Asia hence impacting on the global commodities market. In Indonesia, dry weather typically lasts from May to August. However, due to the presence of El Nino the country’s dry season may extend into September. A prolonged dry season also increases risks of forest fires.

Franky Oesman Widjaja, Vice Chairman of Agribusiness and Food at the Indonesian Chamber of Commerce and Industry (Kadin) and Chief Executive Officer at Golden Agri Resources, said haze brought about by forest fires on Sumatra and El Nino disrupt the photosynthesis process and could therefore lead to falling production of crude palm oil (CPO). Late last week, a total of six Indonesian provinces (Riau, Jambi, South Sumatra, West Kalimantan, Central Kalimantan and South Kalimantan) declared a state of emergency.

Last week it was also announced by Malaysia's Ministry of International Trade and Industry that Indonesia and Malaysia (together accounting for over 85 percent of global CPO production) will cooperate to improve the global perception of palm oil (including sustainable production methods as well as nutritional matters). Analysts believe that a successful cooperation between both nations can curtail the discount between CPO and other vegetable oils. CPO is currently trading at over a USD $150 per ton discount to soybean oil, its main rival. Soybean oil and palm oil dominate the global market, accounting for nearly 60 percent of the world’s total edible oil production. As both commodities can substitute one another, food processors tend to switch between both commodities as prices fluctuate hence the lower soybean oil price reduces demand for palm oil.

Indonesian Palm Oil Production and Export:

    2008   2009   2010   2011   2012   2013   2014   2015¹
(million metric tons)
  19.2   19.4   21.8   23.5   26.5    27.0    31.0    31.5
(million metric tons)
  15.1   17.1   17.1   17.6   18.2    21.2    20.0    19.5
(in USD billion)
  15.6   10.0   16.4   20.2   21.6    19.0    21.0   

¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture