El Niño Impacting SE Asian Palm Oil Prices

Throughout Southeast Asia, many palm oil companies are seeing their plantations underperform due to the impact of this year’s very strong El Niño system. Though the unusually warm weather system may be gone by June 2016, investors are anticipating possible tough times for the sector through Q2.

Investors expect some buyers to switch to low-cost soybean oils as a palm oil substitute as questions about supply remain. Drawdown of SE Asia palm oil stockpiles may continue through Q2 2016. And near-term spot prices are expected to increase until plantation yields begin returning to normal by end of 2016.

But the end is in sight – the Pacific Ocean has begun to cool, and for the first time since September 2015 the key region mid-ocean region is now less than 2 degrees Celsius (3.6 Fahrenheit) above normal. This means El Niño has begun to moderate. Per hectare yields may recover to pre-El Niño levels by Q3 2016 as a cooling ocean improves Indonesian rainfall, decreasing fire risk and increasing palm oil supply by Q4 2016. Taken together, the result could be downdrafts on crude palm oil pricing by end of 2016.

Malaysian crude palm oil provided a useful case study: January 2016 monthly stockpiles are comparable to a year earlier, but January 2016 crude spot prices closed at 2,445 MYR versus 2,146 MYR January 2015 monthly close. Therefore, January 2016 crude palm oil appears to have traded at a 10% premium over January 2015 partly because of El Niño’s impacts.

Indonesian Governance Issues Continue

In Indonesia, Government agency BPDP reported that tax revenues from palm oil exports in 2016 were above expectations. At the same time, Norway has funded only 6% – or $60 million – of its promised $1 billion pay-for-performance funding to finance Government of Indonesia’s conservation of its forests offered in 2010. The Government of Indonesia’s underperformance on its commitments to conserve and protect its forests is similar to losing 1% of its 2013 GDP of $868 billion. As Pak Kuntoro Mangkusubroto, a former senior official in the office of former President Susilo Bambang Yudhoyono responsible implementing the forestry plan stated recently: “That is not Norway’s fault. It’s ours. I know this country well and enemy number one is corruption.”

Meanwhile, the Government of Norway has announced $50 million in funding for the Government of Indonesia’s newly formed Peat Restoration Agency. The Peat Restoration Agency was formed in January 2016 by President Widodo in response to the more than 2 million hectares of land that burned in Indonesia in 2015. It will be led by highly-respected, former WWF Indonesia expert Pak Nazir Foead.

Mandatory Reporting of Slavery in Palm Oil Supply Chains

As the U.K. just announced, modern slavery has again pushed governance issues in the palm oil sector to the forefront. Similar to the California Transparency in Supply Chains Act, which took effect at the start of 2012, companies in the U.K. will have to begin to demonstrate compliance with no-slavery sourcing, including within their supply chains. The U.K. Modern Slavery Act 2015 impacts all companies with a worldwide turnover of £36 million or more and that have a “demonstrable” presence in the U.K. The reporting obligation covers many non-British companies because of this “demonstrable” presence threshold, even if their U.K. operations are a relatively small part of their global operations.

To achieve compliance, from March 31 2016, companies that meet the “demonstrable” presence threshold in the U.K. with financial years ending on or after that date must, within six months, publish a slavery and human trafficking statement on their website.

Certified Sustainable Palm Oil Market Increases

Sales of physical Certified Sustainable Palm Oil (CSPO) have increased significantly year-over-year by the end of January 2016; recording a 162% surge for the physical uptake of Roundtable on Sustainable Palm Oil (RSPO) CSPO as compared with January 2015. This clearly reflects heightened stakeholder commitment and growing environmental awareness globally and the ability for buyers to easily switch supply from CPO to CSPO.

According to RSPO’s latest data, the sales of physical CSPO, reported through the three RSPO physical supply chain options – Identity Preserved (IP), Segregated (SG), and Mass Balance (MB) – have increased to 448,140 metric tons (MT) in the first month of 2016, as compared with 170,896 MT in the same period last year.

Yet at the same time, downstream zero-deforestation supply chain commitments in these early days are only just being implemented. Recently, Greenpeace called out Colgate-Palmolive (CL:US), Johnson & Johnson (JNJ:US), and PepsiCo (PEP:US) for being the poorest performers of 14 consumer goods companies for failing to achieve their ‘no deforestation’ promises they made to their customers. Best score was for Ferrero, the only one of the 14 companies surveyed that can trace nearly 100% of their palm oil back to the plantation it is grown on.

Norwegian Pension Fund Divestment

The Government Pension Fund of Norway – the world’s largest sovereign wealth fund – recently published their investment portfolio. An analysis by Rainforest Foundation Norway found that the fund had divested from RSPO members Indofood Agri’s parent-company First Pacific (142:HK) and Kulim Malaysia (KUL:MK).

In fact, RSPO membership may not appear to be an adequate guarantee of inclusion in the Government Pension Fund of Norway’s portfolio. Likewise, RSPO membership also may not appear to guarantee that companies do not cause unacceptable environmental damages.

Interestingly, the Government Pension Fund of Norway is still invested in Astra International (ASII:IJ), QL Resources (QLG:MK), PepsiCo, Colgate-Palmolive, Johnson & Johnson, and others.