Plantation stocks rally as drought grips the region

CPO prices will jump thanks to El Niño.

Plantation stocks have been languishing in recent quarters, but palm oil players will get a boost with the expected development of El Niño later this year.

The Australian Bureau of Meteorology last week declared a substantial El Nino weather phenomenon for 2015, a sentiment that was echoed by Japanese weathermen.

Analysts note that drought will impact crude palm oil (CPO) production and finally cause CPO prices to tick up after months of hovering at record lows.

“El Nino events have historically resulted in dryness in palm oil regions and the resultant low production usually boosts CPO prices. We believe the El Nino could be a positive catalyst for CPO prices,” stated UOB Kay Hian analyst Chan Yuan She.

Chan noted that El Nino will impact CPO production over the next 1-2 years, as fresh fruit bunch (FFB) yields will be negatively affected.

Nicholas Teo of CMC Markets stated that the prospect of El Nino has caused plantation names to flourish, with shares of First Resources, Indofood and Golden Agri all booking gains in recent trading sessions.

“All this talk has not been ignored by the stock markets. In particular, shares of upstream palm oil plays have also registered keen interest of late. After a short consolidation from a leg up earlier in the month, shares of First Resources, Indofood and Golden Agri look like they are ready to punch higher again. Even after yesterday’s rally, these names are still down 20% over the past year. Collectively they may have found a bottom here, and they look likely to bounce with the increased activity that’s been seen in the CPO futures contracts,” he said.