As La Niña Exits, Palm Oil Production Could Rise in 2023 but Drop in 2024

La Niña’s forecasted departure in the next couple of months should deliver good news in the short run for Southeast Asia palm oil production. But starting early next year, palm yields could suffer from the drier conditions that typically follow La Niña’s exit, and this could weigh on production in 2024 and beyond.

In addition, the potential onset later this year of El Niño, which generally brings abnormally dry conditions to Indonesia and Malaysia, could exacerbate a downturn in palm production next year, according to a Gro analysis of past La Niña and El Niño transitions. As the two countries together account for 85% of world palm oil supplies, the change in climate conditions could prompt renewed volatility in palm oil prices later this year.

Palm oil prices have dropped by more than 40% since reaching an all-time peak in May 2022, in the wake of Russia’s invasion of Ukraine, but prices lately have been subdued. Available global supplies are plentiful amid weaker than expected demand, and abundant rainfall, due to La Niña, looks to boost production for the remainder of 2023.

After three consecutive years of La Niña, the US Climate Prediction Center (CPC) forecasts a high probability that the global climate pattern will soon end and be replaced by “ENSO neutral” conditions.

In its latest monthly forecast, the CPC also increased the chances that El Niño conditions could prevail starting later this year. The agency assigns a nearly 50% chance of El Niño beginning in the June through August period and a greater than 60% chance between September and November. El Niño and La Niña trends are just one factor influencing local climate conditions and don’t ensure specific weather patterns.

It typically takes six to nine months for a change in prevailing climate conditions to manifest in palm oil yields. Thus, for the remainder of 2023, Indonesia and Malaysia palm yields should continue to benefit from the recent heavy rains. And as sodden fields begin to dry in the coming months, harvesting should accelerate as workers have an easier time accessing the palm groves.

This delayed pattern was seen during the La Niña event that began mid-2007. From the start of 2008, and for the next nine months, Malaysia’s palm oil production increased on average about 15% per month compared with the previous year. After that La Niña event ended in mid-2008, replaced by ENSO neutral conditions, monthly production starting later that year fell 5% on average into early 2009. (See graph below.)

The El Niño event that ended in the first half of 2016 brought below-normal precipitation, and later that year it ushered in a period of declining production. Overall, Malaysia saw a 13% drop in production for all of 2016 in part due to the impact of El Niño, which brought abnormally dry conditions for the first half of the year. (See graph at bottom.)

Rainfall amounts during ENSO neutral conditions, when neither La Niña or El Niño are in effect, tend to be mixed. Palm trees require plenty of water to thrive and with the forecasted transition to ENSO neutral in the next month or two, the abundant soil moisture in Indonesia and Malaysia plantations could be depleted rapidly. In addition, the tropical climate’s high evapotranspiration rates could also hasten a reduction of soil moisture.

This display in Gro’s Climate Risk Navigator for Agriculture shows that current soil moisture readings, weighted for oil palm growing areas of Indonesia and Malaysia, are at their highest levels in more than a decade. The Navigator app can be used to monitor precipitation, temperature, soil moisture, and other growing conditions in near real time in the region as the impact of La Niña fades.

El Niño can have the opposite effect to La Niña, bringing below-normal precipitation to palm plantations in Indonesia and Malaysia. The chart above shows a previous El Niño event that ended in 2016, which brought drought-like conditions to the region. In 2016, Malaysian palm oil production dropped 13% from the year earlier due in part to El Niño.

Tags: Indonesia, prices, Production, Malaysia, La Nina, yields, palm oil, Эль-Ниньо, Southeast Asia