Plantation sector
Maintain neutral: Early in the year, the El Nino was on everyone lips but of late this has switched to the La Nina. According to the latest data, the Southern Oscillation Index and the Oceanic Niño Index both point towards a gathering La Nina. It will be important to keep a keen eye on the indices as it would give more clarity to where the sector is heading in the coming six months. A severe and prolonged La Nina could hit production, but a mild one could drive production.
The most recent La Nina event occurred over 2007/8. In Malaysia, the heavy rains that occurred in 1QCY2008 affected pollination and fertilisation and translated into negative production growth in 2009 (decline of 1%). However, interesting to note is that despite the heavy rains during 2008, production growth was still an impressive 12% year-on-year. Also when compared to major El Nino events (like the 1997/8 El Nino), the El Nino caused much more trouble with a severe production dip of 8.3%. Besides that, another La Nina reading in 1999 saw production growth and recovery of a whopping 26.9% after the 1998 production dip. It seems to be the case that a La Nina, in some cases, may actually work favourably for the industry in terms of production.
We are sticking to our RM2,400 crude palm oil average selling price (CPO ASP) for the year and deem it too early to make an actionable call on something as indeterminate as the weather. To keep our CPO ASP also means that we are expecting that 2HCY2010 has a potential to have weaker CPO prices given that stock levels will be rising from here on as the industry goes into the yearly peak production cycle.
We stick to our neutral call for now and view that MPOB statistics for July could see a rise in stock levels because of the export dip. To note, besides the La Nina, another event that could drive up CPO prices is soyabean growing season in North America, which is also being watched for a weather disruption. Also, exports could be strong in August due to festive season stocking, eating into local stocks. Besides that, crude oil prices will always continue to play a role in volatility. — ECM Libra Investment Research, July 28
This article appeared in The Edge Financial Daily, July 29, 2010.
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