As Indonesia's plantations remain shrouded in haze, the market seems to be bracing itself for worse conditions, going by the jump in palm oil futures on the Bursa Malaysia Derivatives Exchange.
"Over the past month, the futures price (for crude palm oil) has rallied about RM100 (S$33) per tonne for the 2016 and 2017 contracts," said Morgan Stanley Research analyst Charles Spencer in a report last week.
"This suggests that market participants (are) cognisant that El Nino's coming and today's benign pricing environment might not last."
Climate experts have been warning since the year began that this year's El Nino weather pattern could be among the strongest since records began in 1950.
El Nino events typically last nine months, said Mr Spencer. The forecast is for this one to peak in November and possibly last "well into the first half of 2016".
Over the past month, the futures price (for crude palm oil) has rallied about RM100 (S$33) per tonne for the 2016 and 2017 contracts... This suggests that market participants (are) cognisant that El Nino's coming and today's benign pricing environment might not last.
MR CHARLES SPENCER, Morgan Stanley research analyst, in a report
So far, the haze spell has been in line with that forecast, as blazes in the Indonesian peatlands became exacerbated by El Nino which makes dry weather drier, meaning hot spots burn more readily.
With Indonesia and Malaysia together accounting for 86 per cent of global crude palm oil production, a severe El Nino event that prolongs the dryness there for another month or two will lead to a severe drop in fresh fruit bunch yields and palm oil production for the next two years, said UOB Kay Hian in a note.
As of yesterday, the benchmark futures contract for crude palm oil had rebounded 14 per cent from its six-year low of RM1,867 on Aug 26.
Fears that the haze would reduce crop yields could be one factor behind the run-up, analysts said.
When the haze is too thick, the lower visibility and hazardous conditions for workers results in a lower harvest, said UOB Kay Hian analyst Leow Huey Chuen.
The haze also prevents insects from pollinating the flowers of the oil palm tree and hinders photosynthesis, resulting in smaller fresh fruit bunches at harvest and less oil for extraction, she said.
Another factor pushing up palm oil futures is the depreciating ringgit, which makes the commodity a cheaper alternative to soya bean oil, which is priced in United States dollars.
A short rally in crude oil prices over the same period may also have played a part, since palm oil and crude oil are blended to make biodiesel, and a run-up in crude prices tends to drive up sentiment for palm oil, said Ms Leow.
But the recent uptick in palm oil prices will hardly lift the world's most widely used vegetable oil out of the prevailing global commodities rout, analysts said.
A surplus supply of soya beans is expected to put a cap on the price of soya bean oil and its substitutes. The price of crude also remains low.
But as long as the palm oil price tracks upwards, plantation shares such as Wilmar International and Golden-Agri Resources may stand to get some upside. "From past experience, plantation stock prices go up when crude palm oil prices go up," said Ms Leow.