Several weather forecasters recently indicated that the odds of La Niña forming by end-3Q/early-4Q are increasing. Assuming La Niña sets in during late- 3Q/early-4Q, it will likely disrupt palm oil production (as harvesting and logistic s of palm oil will be disrupted by heavier-than-usual rainfall). Impact on soybean production, on the other hand, differs among key producing countries due to different planting schedules. Impact of La Niña is more evident on key vegetable oil prices (particularly, soybean and CPO prices). We maintain our CPO price assumptions of RM3,200/mt (for 2021) and RM2,800/mt (for 2022-23) for now, pending more convincing data that supports the potential La Niña episode. Maintain Neutral stance as near term share price sentiment will likely remain weak, on the back of lingering ESG concerns. Top picks are IOI Corp (BUY; TP: RM4.67) and KLK (BUY; TP: RM26.42), and TSH Resources (BUY; TP: RM1.24).

Odds favour La Niña forming by end-2021. Several weather forecasters recently indicated that the odds of La Niña forming by end-3Q/early-4Q are increasing. La Niña is the positive phase of the El Niño Southern Oscillation (which is associated with cooler-than-average sea surface temperatures (SSTs) in the central and eastern tropical Pacific Ocean). La Niña episodes typically induce heavier rains in Southern Hemisphere (including key palm oil producing countries, such as Malaysia and Indonesia) and drier weather in Northen Hemisphere (including key soybean producing countries, such as US, Brazil and Argentina).

La Niña’s impact on palm oil output. It remains to be seen if La Nina would develop by year end (and its impact on output varies according to timing and strength of such weather anomaly). Assuming La Niña sets in during late-3Q/early-4Q, it will disrupt harvesting and logistics of palm oil in Malaysia and Indonesia (as it coincides with seasonally higher production months). This is evidenced by the 3 La Niña episodes since 2006, which impacted FFB yield in Malaysia (see Figure #2).

La Niña’s impact on soybean output. We believe the impact on soybean yield varies among countries, as planting schedules differ among countries (see Figure #3). For Brazil and Argentina, lack of rain (should La Niña develop by 4Q) will likely result in delay in soybean planting, hence impacting soybean output. Over in US, the lack of rain will likely help soybean harvest there, should La Nina arrive in late-3Q/early-4Q.

La Niña has more evident impact on vegetable oil prices. Historically, prices of CPO and soybean tend to strengthen as La Niña (as well as El Niño) sets in and weaken when the weather anomaly subsides (see Figures 5-6). During the past 3 La Niña episodes since 2007, we note that CPO price advanced by >50%.

Forecast. We maintain our CPO price assumptions of RM3,200/mt (for 2021) and RM2,800/mt (for 2022-23) for now (vs. YTD average CPO price of RM4,046/mt), pending more convincing data that supports the potential La Niña episode.

Maintain Neutral. Maintain Neutral rating, as near term share price sentiment will likely remain weak, on the back of lingering ESG concerns. Top picks are IOI Corp (BUY; TP: RM4.67) and KLK (BUY; TP: RM26.42), and TSH Resources (BUY; TP: RM1.24).

Source: Hong Leong Investment Bank Research - 5 Aug 2021