El Niño’s arrival looks certain; now it boils down to the degree
After two La Niña years, meteorologists think that an El Niño event extending into
at least early 2010 looks highly probable. In fact, the NOAA now forecasts this El
Niño will be the most intense since the severe 1997–98 episode. The impact is
already being felt. Rainfall levels in Southeast Asia have dropped sharply in recent
months and India has seen the weakest start to the monsoon in years. Judging by
the haze in Malaysia and the early surge in the number of hot spots in Borneo,
things are likely to get worse, in our view. Bear in mind that it has been eleven
years since the last big El Niño. Therefore, the probability of another significant
event has increased, exacerbated by global warming. A significant El Niño would
negatively impact agricultural output in much of the Southern hemisphere, setting
in motion a chain reaction of higher food prices as the world economy recovers.
Exporters Malaysia and Indonesia are potential beneficiaries in Asia. Importers
China and India face higher food bills and uncertain agricultural prospects
Positive impact on palm oil, rubber and sugar prices
Palm oil is the key commodity to watch for Asian investors. A significant drought
would crimp oil palm yields in Indonesia and Malaysia with a nine-month lag,
raising the prospect of much higher palm oil prices into 2010. Edible oil prices may
be further boosted by a bullish confluence of soybean supply volatility in Latin
America, an improving global economy, a weakening US$ and an elevated crude
oil price. El Niño would also cause natural rubber yields to come under pressure in
Southeast Asia, mitigating expectations of rising inventories. Sugar prices have
already shot up on the back of last year’s poor crop in India, but the weak
monsoon is raising new supply concerns for the world’s second largest producer.
Plantation sector the key focus; sector equities upgraded
While El Niño should cause oil palm yields to decline, the positive price effect
dominates: El Niño means great years for plantations. Deutsche Bank’s Plantation
Analyst Teoh Su Yin has today upgraded her recommendations on plantation
stocks in Malaysia and Singapore on more aggressive price assumptions. The
price assumptions still appear conservative relative to the last severe El Nino, in
our view, leaving further upside potential. As for fertilizers and agricultural
chemicals, an increase in crop prices should boost demand in the medium term,
raising prospects for Taiwan Fertilizers and United Phosphorous. Food companies
are likely to come under pressure, although it boils down to pricing power. Tyre
manufacturers in Korea will likely be negatively affected by rising rubber prices.