Riset Perkebunan Nusantara, a state-owned research firm, expects Indonesia's crude palm oil (CPO) production to drop 4.2 percent (y/y) to 32 million tons in 2016. The firm further adds that in 2015 Indonesia had a total of 11.3 million hectares of palm oil plantation, consisting of plantations owned by the state (750,000 hectares), plantations owned by the private sector (5.97 million hectares) and plantations owned by smallholders (4.58 million hectares). The palm oil sector is one of Indonesia's key foreign exchange earners. Indonesia is the world's largest producer and exporter of palm oil, followed by Malaysia.

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It is increasingly believed that the El Nino weather phenomenon will hit Indonesia in the next couple of months. Over the past weeks reports already surfaced about unusual dry weather impacting negatively on harvests of agricultural commodities in parts of Southeast Asia. In Indonesia, dry weather traditionally lasts from May to August. However, El Nino may cause warmer conditions and extending these into September hence affecting output in the peak harvest season. This will cut agricultural output and provide inflationary pressure.

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In the past couple of weeks unusually dry weather in several parts of Southeast Asia has led to expectation that harvests of agricultural commodities in the region will be disappointing. More and more weather forecasters are convinced that the El Nino weather phenomenon (i.e. periodical warm ocean water temperatures off the western coast of South America that can cause climatic changes across the Pacific Ocean) is to return this year causing droughts in the key agricultural-producing countries.

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Ahead of the World Rubber Summit 2014 (held between 19 and 21 May in Singapore), Asril Sutan Amir, adviser to the Indonesian Rubber Association (GAPKINDO), said that Indonesian rubber output may decline by three percent or 100,000 metric tons (Mt) to 3 million Mt in 2014 due to the impact of this year's possible new El Nino cycle. An extended dry season will lead to damaged rubber trees and thus less production. Indonesia is currently the world's second-largest rubber producer after Thailand.

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Australia's Bureau of Meteorology is increasingly convinced that the world needs to prepare for a new El Niño cycle. According to the institution, the impact of this new cycle will be felt starting from July 2014 and may continue through the winter. Also the European Center for Medium range Weather Forecasting (ECMWF) and the US Climate Prediction Center stated that chances of a new El Niño cycle in 2014 are becoming higher, although it is too early to provide an indication of this year's strength of the weather phenomenon.

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