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Southeast Asia palm oil problems could hit consumers worldwide

JAKARTA--Southeast Asia's booming palm oil industry is facing a double blow from a recent drought and a possible El Nino weather phenomenon later this year, with analysts warning a production shortfall could spark a jump in consumer goods prices.

From biscuits to shampoo and make-up, the oil has become a key ingredient in numerous products found on supermarket shelves across the globe, fueling rapid growth of the industry in the world's top two producers, Indonesia and Malaysia.

But a drought in January and February in the countries, which provide some 85 percent of the world's palm oil and are home to vast plantations where swathes of rainforest used to stand, has raised the prospect of a drop in production later this year.

Dry weather does not have an immediate effect on the fruit, which needs to be deprived of water for some months before any impact is noticeable.

While palm oil prices have risen slightly in recent months in Indonesia, the country's Palm Oil Association put it down to other factors, and industry observers predicted the drought's impact would start to be felt later in 2014.

Consumer Price Rises Likely

“We are likely to see the effects starting in September to October, and in terms of production, we are likely to see a double-digit percentage drop in Indonesia and Malaysia,” said Tan Chee Tat, a Singapore-based investment analyst at Philip Futures whose work has focused on palm oil.

“There is a high likelihood companies will pass on the price rise to consumers.”

Another threat could come hot on the heels of this year's dry weather — forecasters are predicting an El Nino weather phenomenon later this year, which could spark another drought that will hit production in 2015.

The Australian Bureau of Meteorology issued an El Nino alert this week, warning the likelihood of the weather pattern developing was at least 70 percent, and it could appear as early as July.

This follows recent warnings from other weather agencies there is a good chance of an El Nino.

El Nino, which develops every two to seven years, occurs when water warms around Indonesia, shifts eastward and rises to the surface in the eastern Pacific.

The warming water changes wind patterns and draws rain and thunderstorms toward South America and away from countries in the western Pacific.

Billions of Dollars in Damage

It typically brings floods to usually arid countries in western South America and drought to Indonesia and other countries in the region.

If this year's El Nino is as strong as the 20th century's worst in 1997-98, which was blamed for tens of thousands of deaths and billions of dollars in damage, it could wreak havoc on palm oil crops, analysts fear.

Fadhil Hasan, executive director of the Indonesian Palm Oil Association, said that production was hit in 2008 following an El Nino, and prices rose to US$1,200 a tonne. They are currently at around US$930 a tonne.

However he said that other factors, such as market speculation, may have also contributed to the rise.

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In this photograph taken on Saturday, May 10, a worker harvests fruit of palm oil trees in a plantation in the district of Langkat on Indonesia's Sumatra island. (AFP)

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