Malaysia's Palm Oil Production Faces Continued Decline

KUALA LUMPUR/MUMBAI: Malaysia's palm oil production is expected to decline for the fourth consecutive month in December due to heavy rainfall affecting harvesting in the world's second-largest producer of the tropical oil, according to the industry regulator.

This anticipated reduction in output could further tighten inventories in Malaysia and continue to drive benchmark futures prices upward, which are already near their highest levels in about 2-1/2 years.

Potential Impacts of Severe Flooding

Ahmad Parveez Ghulam Kadir, the director-general at the Malaysian Palm Oil Board (MPOB), estimates a potential reduction of around 5% to 8% in crude palm oil (CPO) production under normal circumstances. However, if severe flooding persists, the reduction could reach as high as 10% to 20%.

Peninsular Malaysia, particularly its northeastern coast, and southern Thailand have been severely affected by torrential rains, leading to floods that have caused numerous fatalities, damaged homes, disrupted transport links, and destroyed thousands of acres of rice crops.

Government and Industry Responses

Malaysian Prime Minister Anwar Ibrahim highlighted that the rains were far beyond expectations, with some east coast areas receiving more than six months' worth of rainfall between November 26 and 30. The Malaysian Meteorological Department (MET) has forecast continuous rainfall in several states from December 16 to 19.

The MPOB is closely monitoring the situation, as the MET has predicted a second wave of floods due to heavy rainfall. Heavy rains could further damage plantation infrastructure, such as roads and bridges, making it difficult to harvest and transport fresh fruit bunches from estates to mills.

Market Implications and Historical Context

In November, Malaysia's CPO production declined 9.8% from the previous month to 1.62 million metric tons, marking the lowest for the month since 2020. A Malaysian palm oil producer, who chose to remain anonymous, noted that while Malaysia harvested 1.55 million tons of CPO in December 2023, production this December could be significantly lower.

Palm oil typically trades at a discount to soybean oil and sunflower oil, but is currently at a premium due to limited supplies.