Studies show that less than 100 millimeters over two consecutive months can reduce output by 5 per cent over the next three years, while droughts longer than six months cut production by 20 per cent, analysts including Ephrem Ravi and Krishan Agarwal wrote in January. Delayed reaction Drought has a delayed impact on the bunches of cherry-sized palm fruits which are harvested all year round. Output would start dropping about six months after the tropical plants are deprived of sufficient moisture, said Joelianto, trading director in Jakarta at PT Sinar Mas Agro Resources & Technology, a unit of Golden Agri-Resources Ltd. All climate models surveyed by Australia's Bureau of Meteorology indicate El Nino is likely this year, the forecaster said April 22. The U.S. Climate Prediction Center on April 10 put the chances at 65 per cent, up from 52 per cent. Palm is among the most-vulnerable crops to El Nino weather, Goldman Sachs Group Inc. said in an April 13 report. At the time of the last strong El Nino, in 1997-1998, Indonesian production dropped 7.1 per cent and Malaysian output fell 5.5 per cent, U.S. Department of Agriculture data show. The two countries account for about 86 per cent of world supply.

Competing oils Reduced supply would put more pressure on inventories, with global demand forecast by the USDA at an all-time high of 57.3 million tons, up 4.6 per cent from a year earlier. Reserves in Malaysia were 1.69 million tons in March, 36 per cent less than the record 2.63 million tons in December 2012, according to the Palm Oil Board. A palm rally may be undermined by competing vegetable oils. World production of soybean oil will reach a record 44.6 million tons in the 2013-2014 season, after bigger crops in Brazil and the U.S., while farmers harvested the most canola ever last year in Canada, the top producer, USDA data show. Soybean-oil futures are 13 per cent cheaper than a year ago, trading at 43 cents a pound today in Chicago. U.S. growers will plant a record 81.493 million acres to soybeans this year, the USDA said on March 31. In the Midwest, where most of the crop is grown, El Nino weather tends to bring cooler, wetter conditions that aid crop development and yields. Biofuel use

The 16 per cent rally in palm-oil futures over the past year hurt demand. India, the largest importer, cut purchases in March by 23 per cent from a year earlier to 537,077 tons, down for a third straight month, the Solvent Extractors' Association of India said April 15. Purchases of soybean oil quadrupled to 189,150 tons and sunflower oil rose 8 per cent, group data show. Higher costs mean Indonesia will use 2.4 million tons of palm oil to make biodiesel this year, less than its target of 3.4 million tons, according to Fadhil Hasan, executive director of the Palm Oil Association in Jakarta. It's also possible El Nino may not occur, or will be slow to develop, and that its impact on weather in Asia may be less severe than forecast. Futures for the benchmark palm-oil contract on the Bursa Malaysia Derivatives exchange in Kuala Lumpur dropped 9.6 per cent from a high of 2,916 ringgit on March 11, leaving prices down 0.9 per cent this year after rains in recent weeks eased damage concerns. Isolated thunderstorms are forecast through May 5 for Johor and Pahang, the biggest producing states in Peninsular Malaysia, according to the Meteorological Department. Palm belt

“I expect an El Nino rally to begin only after we see pronounced dry weather in the palm belt,” Mistry said by e-mail on April 23. “The hype about an El Nino has been around for some months and the market has adopted a 'show me the money' attitude. Until El Nino actually manifests itself clearly and strongly, the market rally will have to wait.” Nestle SA, the world's largest food company and the maker of Kit Kat in Europe, said its product prices aren't linked to short-term changes in raw-material costs. The Vevey, Switzerland-based company buys 410,000 tons of palm oil a year for use in ice creams, chocolate coatings and fried noodles, Philippe Aeschlimann, a spokesman, said in an April 24 e-mail. Unilever, which sells more than 400 brands of food and home products, including Ben & Jerry's ice cream and Flora spreads and cooking oils, buys about 1.5 million tons of palm and its derivatives a year. The London- and Rotterdam-based company didn't respond to an April 24 e-mail seeking comment. Rising costs Hindustan Unilever Ltd., a Mumbai-based unit, saw “a sharp rise in palm-oil prices” during its fourth quarter, Chief Financial Officer Sridhar Ramamurthy said on an earnings conference call yesterday. Higher raw-material costs, including palm oil, coffee and tea, may erode the unit's profit margins this year, according to a report by analysts at Sharekhan Ltd., which predicted the Hindustan Unilever shares will drop.

Mondelez International, the Deerfield, Illinois-based maker of everything from Oreos to Trident gum, declined to comment, as did Kellogg, the Battle Creek, Michigan-based cereal maker that uses palm oil to cook Pop-Tarts. A spokesman for Mars, the Mclean, Virginia-based maker of candies including M&Ms, Snickers and Twix, didn't return e-mails and telephone calls yesterday seeking comment. The use of palm oil has drawn criticism from environmental and consumer groups, who say farmers are destroying peatlands and rain forests in Southeast Asia to expand plantations. Nestle, Unilever, Kellogg, Mondelez and Mars are among the companies that have said they will buy only palm certified by the Roundtable on Sustainable Palm Oil. About 16 per cent of world production is certified by the RSPO, its website says. Damage done The drought in January and February was already the worst in parts of Sumatra and Peninsular Malaysia for that period since 1997, according to Donald Keeney, a meteorologist at MDA Weather Services in Gaithersburg, Maryland. Average rainfall for those months ranges from 250 millimeters in northwestern Malaysia to more than 800 millimeters in northern Kalimantan and parts of East Malaysia, Keeney said by e-mail on April 24. “The damage is already done,” said Ben Santoso, an analyst in Singapore with DBS Vickers Securities Pte. who has tracked the industry for 17 years. “Even though the rainfall has returned to normal, it's probably a little bit too late. Output during the peak harvesting season will not be as high as previous years because of the drought that we saw in January and February and that's before El Nino.”

Limited gains In Indonesia, an expected increase in palm production may be limited during the first half of 2014 because of dry weather, according to Martua Sitorus, executive deputy chairman at Singapore-based Wilmar International Ltd., the world's largest palm-oil processor, in February. The lack of rain will hurt yields in the fourth quarter this year, in late 2015 and in early 2016, Oil World, a Hamburg- based industry researcher, said in an April 17 report. Even without El Nino, output will grow more slowly this year, RHB's Tai said. “You can have a mild El Nino, by historical standards, you still can have a severe drought,” Tai said. The year “2006 was supposedly a mild El Nino, but still some oil palm regions didn't see a drop of rain for five to six months, so it can be that bad,” he said.