Expert: Indonesian palm oil output to drop by more than 10% if La Nina brings rain

The palm oil industry in Indonesia may experience a further decline after last year’s dry spell if the rain-bringing La Nina weather phenomenon kicks in, an expert says.

Franky Oesman Widjaja, chairman of Sinar Mas Agribusiness & Foods, expects Indonesia's crude palm oil production in 2016 to drop by 5-10% year-on-year.

The decrease is due to the impact of the El Nino that brought extreme dry weather to Southeast Asia in 2015.

But palm oil plantations in several Indonesian regions are currently being plagued by floods, giving rise to speculation of whether El Nino is to be followed by La Nina.

La Nina - the opposite of El Nino - brings cooler than average sea temperatures in the central and eastern tropical Pacific Ocean, causing wetter-than-usual weather in Southeast Asia.

Speaking at the Responsible Business Forum on Food and Agriculture, Widjaja said his prediction that Indonesia's crude palm oil (CPO) output will drop due to the impact of El Nino excludes the possible impact of La Nina in the second half of 2016.

Currently, wetter-than-usual conditions reign in several Indonesian regions, and if a full blown La Nina should occur later this year, the country’s CPO output may decline by more than 10%.

Widjaja added that the nation's CPO output could have plunged more dramatically if plantations had not planted new oil palm trees in recent years.

Without the younger generation of trees, CPO output could have decreased up to 20% in 2016.

Regarding palm oil production of Sinar Mas, output is expected to drop by 15% year-on-year in 2016 from 3 million tonnes in 2015.

This decline would be higher than the estimated overall decline of Indonesia's CPO output due to Sinar Mas’ plantations being located in the areas of Sumatra and Kalimantan that have been affected by drought and haze.

Besides the El Nino, large parts of Sumatra and Kalimantan were plagued by man-made fires between June and October 2015.

‘Create a more orderly industry’

Regarding the recent moratorium by the Indonesian government on new palm oil concessions, Widjaja said it is a good idea particularly because Indonesia needs to create a more orderly palm oil sector.

Moreover, Widjaja said there is plenty of room to enhance palm oil production without adding new plantations.

In mid-April 2016, Indonesian President Joko Widodo ordered Indonesia's Minister of Environment and Forestry Siti Nurbaya to issue a moratorium on new palm oil concessions in a number of provinces.

Although Widodo wants Indonesia to raise CPO output, he believes this increase can be achieved by increasing productivity of existing palm oil plantations, not by adding new ones.

Previously, the Indonesian Palm Oil Producers Association (Gapki) said it expects Indonesia's CPO output in 2016 to fall 5% to 31 million tonnes.

In 2015, CPO output in the world's largest palm oil grower and exporter reached 32.5 million tonnes, up 3% from output in the preceding year.

Gapki objects to the moratorium and requests the government to consider plan the plan further, as the organisation claims it will impact negatively on Indonesia's palm oil industry.

Palm oil, which is used in biodiesel production, is one of Indonesia's key foreign exchange earners and a sector that provides directly and indirectly employment to 20 million Indonesians.

This article was written by Ilari Kauppila, deputy editor at Biofuels International