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Can This Weather Phenomenon Benefit Oil Palm-Related Stocks?

According to the Bureau of Meteorology in Australia, El Nino, a weather phenomenon which can cause extreme droughts, is expected to hit the globe over the next six months. The last time an El Nino occurred was back in 2009 and 2010.

The weather phenomenon has the potential to greatly affect crop production in Southeast Asia and this may have implications for the oil palm industry in the region given that oil palm is one of its important crops.

As major Singapore-listed firms like Wilmar International Limited (SGX: F34) and Golden Agri-Resources Ltd (SGX: E5H) – both are part of Singapore’s market benchmark the Straits Times Index (SGX: ^STI) – are actually two of the largest palm oil plantation owners in the world, should investors here focus on El Nino?

While El Nino may affect crop production, it’s hard to tell if it really would have a trickle-on impact on palm oil prices. During the last El Nino, palm oil prices had basically doubled – but it’s worth pointing out that the weather phenomenon had occurred during a period when the global economy was also recovering from the global financial crisis of 2008-09. It is thus hard to pinpoint the extent of the weather’s influence on the movement of palm oil prices.

But whatever is the case, I believe that what may cause oil palm prices to move is not a critical factor to consider for investors interested in palm oil-related stocks. This is because the act of making predictions about future palm oil prices is a fruitless endeavour.

We will never be able to accurately and consistently predict how the price of a commodity will move over the long-term. So, if we fall into the trap of focusing on commodity price movements as the thesis of our investment in a company, we’d be treading on the realms of speculation, and that’s an area where the odds of us getting things right become slimmer.

With that in mind, a focus on the business operations of commodity producers might be a more useful approach for investing in these companies.

The effects of El Nino may influence a palm oil producer’s business and selling prices for a year or two. But over the long-term, a palm oil producer’s production levels is linked directly to the execution of its growth plans.

Factors like the age profile of its trees, its planting schedule, the amount of land it can expand its plantations into, and the efficiency of its operations can be a clear indicator of how a palm oil producer’s production levels will change over the long-term.

If for instance, a palm oil producer has a very young age profile for its trees and has plans to expand its planted area aggressively, its long-term production levels should increase in tandem if the efficiency remains unchanged.

Foolish Summary

Farmers might rightfully be very worried about the possibility of an El Nino happening in the near future. But as investors, we should remind ourselves that such effects tend to be short-lived in nature.

For any company in general, we should be worrying more about its long-term risks and considering its opportunities along the same time horizon – it’s no different with palm oil stocks.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns shares in Wilmar International Limited.