The El Nino-inflicted dry weather in Indonesia and Malaysia, possibly the worst in nearly two decades, is expected to curtail crude palm oil (CPO) output in both countries, implying that palm oil prices can extend their rally into next year. Moreover, Indonesia will consume more CPO as the government will raise the mandatory amount of palm oil blended with diesel from 15 to 20 percent (part of its B20 biofuel program) in early 2016. Since August - when prices were at a six-year low - palm oil futures have surged 26 percent.

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Although Indonesia's B15 biodiesel program, which refers to the government's program to blend 85 percent of diesel with a mandatory 15 percent of fatty acid methyl ester (derived from palm oil), is no success yet, the government is expected to introduce the B20 biodiesel program (raising the mandatory content of fatty methyl ester in biofuel to 20 percent) in early 2016. To support the B20 program, eleven companies are ready to supply biodiesel to state-owned energy company Pertamina and publicly-listed petroleum and basic chemicals distributor AKR Corporindo between November 2015 and April 2016.

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Third-quarter corporate earnings of Astra International, one of Indonesia's largest diversified conglomerates, cause concern that economic growth of Indonesia has continued to slow in Q3-2015. Corporate earnings of Astra International are a solid indicator of the country's total growth as the company is engaged in basically all key sectors of the economy. Astra reported a 17.2 percent decline (year-on-year) in net profit to IDR 12 trillion (approx. USD $888 million). Sales fell 8 percent (y/y) to IDR 138 trillion.

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Production of crude palm oil (CPO) in Indonesia is estimated to rise to 33 million tons in 2016, roughly 500,000 tons lower than the initial forecast as the El Nino weather phenomenon is expected to impact on agricultural output by causing an extended dry season in Southeast Asia (that will perhaps last beyond December). This year, Indonesia, the global leading CPO producer and exporter, is expected to produce 31.5 million tons. Reduced output in Indonesia may support palm oil prices.

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The Indonesian government will (temporarily) stop using sustainability standards designed by the European Union regarding crude palm oil (CPO). Indonesian Minister of Maritime Affairs Rizal Ramli said the current strict standards of the European Union hurt the domestic palm oil industry, especially smallholders. Moreover, Indonesia and Malaysia, the world's two largest CPO producers and exporters, are to set up a new intergovernmental palm oil council that will design new rules and standards regarding sustainable palm oil production.

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Again schools were ordered to shut (for at least two days) in Malaysia in order to protect children from inhaling smog as the air quality remains at very unhealthy levels (nearly hazardous in some regions). The air pollutant index still shows readings of between 201 to 300 in six districts around Malaysia's capital city of Kuala Lumpur. The haze, which - reportedly - may become the worst haze ever, is caused by companies' and people's illegal slash-and-burn practices to clear land for planting on parts of the Indonesian islands of Sumatra and Kalimantan. The situation is exacerbated by the (El Nino-related) prolonged dry season.

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Apart from the Indonesian rupiah which has hit its weakest level since the Asian Financial Crisis 17 years ago, the ongoing El Nino (the weather phenomenon that brings drought to Southeast Asia) may be the strongest since 1997-1998. This means that output of agricultural commodities is to decline (but which should have a positive impact on prices). Coffee production in Indonesia is estimated to fall by seven percent to 581,000 metric tons in 2016 from an estimated 625,000 tons this year.

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Indonesia's export tax on crude palm oil (CPO) shipments will remain at zero percent in October 2015 as the government's reference CPO price fell 13 percent (month-on-month) to USD $529.51 per metric ton for October. When this reference CPO price is below the USD $750 per ton threshold, then the government scraps the export tax in an attempt to make shipments more attractive. However, exporters are still subject to the recently introduced palm oil exports levy. When the export tax is cut to zero percent, exporters are required to pay a USD $50 per ton levy for CPO and USD $30 for processed palm oil products shipments (part of these funds are channeled to Indonesia's biodiesel subsidy program).

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There is limited to no room for palm oil prices to rise in the remainder of 2015 as crude palm oil (CPO) reserves have climbed while exports are down. CPO production in Indonesia, the world’s largest producer and exporter of this commodity, may have hit the one-year high of 3.20 million tons in August (from 2.86 million tons one month earlier) as trees reached their peak production period. Meanwhile, India introduced higher taxes for overseas purchases of palm oil in order to protect domestic growers.

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The haze, caused by dozens of forest fires on Sumatra and Kalimantan, and which have spread to Singapore and Malaysia, is expected to plague the three countries in the next couple of days. Indonesian authorities, which are currently investigating forest fires in Central Kalimantan, South Sumatra, Riau, West Kalimantan and Jambi, mentioned that there are 107 people who have been named suspects, involved in 68 acts of slash-and-burn practices (according to Indonesian media).

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Indonesian President Joko Widodo (often called Jokowi) emphasized that the government of Indonesia needs to boost development of renewable energy. Although Indonesia contains huge potential for renewable energy (particularly geothermal energy), the share of renewable energy in Indonesia’s total energy use currently stands at around 5 percent only, the remainder being fossil energy. By providing incentives, attractive tariffs and an easier licensing and registration process, the government can generate more investment in this sector.

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Although the Indonesian government has already announced that biodiesel subsidies have been raised to IDR 4,000 per liter (from IDR 1,500 per liter in 2014) and bioethanol to IDR 3,000 per liter (from IDR 2,000 last year) - in a move to protect the domestic biofuel industry as production costs exceed market prices amid the low global palm oil prices -, Indonesian biodiesel producers are eager to see the country’s biodiesel price is set based on a different benchmark than the Mean of Platts Singapore (MoPS).

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Malaysia, the world’s second-largest crude palm oil (CPO) producer and exporter, will continue its duty-free export tariff for CPO in January 2015 according to information from the Malaysian customs department. Starting from September 2014 Malaysian authorities have implemented a duty-free CPO export policy in an effort to boost global demand and support international CPO prices (which have fallen nearly 20 percent this year). Indonesia, which has seen duty-free CPO shipments since October 2014, is expected to follow suit.

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Reserves of crude palm oil (CPO) in Indonesia may have declined for a second straight month in October on the back of drought and an increase in exports from Southeast Asia’s largest economy. The delayed impact of drought (which even managed to dry up several rivers in West Kalimantan in October) limited production of CPO in recent weeks. Meanwhile, exports have increased after Indonesia and Malaysia - the world’s two top palm oil producers - scrapped export taxes to boost demand for this commodity.

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Australia's Bureau of Meteorology is increasingly convinced that the world needs to prepare for a new El Niño cycle. According to the institution, the impact of this new cycle will be felt starting from July 2014 and may continue through the winter. Also the European Center for Medium range Weather Forecasting (ECMWF) and the US Climate Prediction Center stated that chances of a new El Niño cycle in 2014 are becoming higher, although it is too early to provide an indication of this year's strength of the weather phenomenon.

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Indonesia has the potential to become a global force in the biodiesel industry because of the country’s position as the world’s top producer of crude palm oil (CPO). In 2014, Indonesia’s CPO production is estimated to total 30 million tons. Traditionally, Indonesia exports about 75 percent of its total CPO production, particularly to the giant economies of China and India. As such, this commodity is one of Indonesia's most important foreign exchange earners, apart from coal, in the non-oil and gas sector.

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The Indonesian government is considering to stop exports of crude palm oil (CPO) to Europe from 2014 onwards as domestic CPO demand in Southeast Asia's largest economy is rising, brought on by the country's biofuel industry which is expected to grow 70 percent next year to 5 million tons. To curtail oil imports, the government stimulates the production of crude palm oil-based biofuel by raising the mandatory content of fatty acid methyl ester (which is made from palm oil) in biodiesel products from 7.5 percent to 10 percent.

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Usage of biodiesel for transportation in Indonesia is expected to reach 7.2 million kiloliter by 2015, a sharp increase from 600,000 kiloliter in the first nine months of 2013. State-owned Pertamina is expected to supply the extra 6.6 million kiloliter of biodiesel. The reason why the Indonesian government is eager to develop palm-based biofuel for transportation purposes is to reduce the country's reliance on the import of expensive diesel fuel. Imports of fuels and gas are the foremost reason that Indonesia is coping with a wide current account deficit.

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In order to curb imports of oil, the government of Indonesia intends to stimulate the production of crude palm oil-based biofuel by increasing the mandatory content of fatty acid methyl ester (which is made from palm oil) in biodiesel products from 7.5 percent to 10 percent. Through this policy, the government claims to be able to save up to USD $3 billion as it needs less fuel imports. Fuel imports totaled USD $5.8 billion in the first six months of 2013 and form a major cause for the USD $9.8 billion current account deficit in Q2-2013.

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Indonesia's production of crude palm oil (CPO) in the first six months of 2013 rose 25.64 percent compared to semester I-2012 to 14.7 million tons, which is a little over half of this year's CPO production target. Despite weak global demand for the commodity (accompanied by falling CPO prices), growth was accomplished due to new seeds that became productive and because the total size of Indonesian palm oil estates continues to expand. Productive estates now stand at 9.4 million hectares from 8.7 million hectares last year.

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