Drought Threatens S.E. Asia Food Price Gains Amid Haze

Bloomberg, 28 Feb 2014

The drought parching Singapore and swaths of Malaysia and Indonesia threatens to raise food prices, slow economic growth and disrupt water supply in the region, home to the world’s oldest tropical rain forests.

Areas around Kuala Lumpur, Malaysia’s capital, started water rationing this month. Neighboring Singapore, which had a record 27 days without rain from Jan. 13, is preparing for the dry spell to persist into the first half of March. In Indonesia’s Riau province, officials declared a state of emergency as forest fires blanketed the region in haze.

The drought’s fallout may escalate to slower economic growth from just “discomfort” if it continues next month, Malaysia’s international trade minister said yesterday. The price of palm oil, one of Southeast Asia’s most important crops, is surging as the weather hampers production.

“The impact will be on growth and inflation,” said Wai Ho Leong, the Singapore-based senior regional economist at Barclays Plc who predicts higher prices may hurt consumers in the region.“The rise in vegetable and cooking oil prices will add to inflation concerns in Malaysia, which is already trying to contain a jump in inflation expectations.”

Malaysian inflation accelerated to a two-year high of 3.4 percent in January, more than the median estimate of economists for a reading of 3.3 percent, according to a Feb. 19 report. Fourth-quarter gross domestic product rose at the fastest pace in a year, data show. Singapore’s consumer prices rose 1.4 percent from a year earlier while inflation in Indonesia was 8.22 percent.

Not Normal

Southeast Asia is under the influence of the Northeast Monsoon, which brings dry and stable air from the South China Sea and lessens the likelihood of rainfall, said Winston Chow, an assistant professor of geography at the National University of Singapore.

“February is the driest month for Singapore,” Chow said.“What’s not normal is the length of the dry spell.”

The countries join Australia, Brazil, Kosovo and parts ofThailand and the U.S. as among those battling drought.

California Governor Jerry Brown declared a state of emergency after 2013 became the driest on record. Most farmers in California’s Central Valley, the world’s most productive agricultural region, will get none of the water they requested this year from a federally controlled system due to the drought, the U.S. government said this month.

With agriculture accounting for less than 8 percent of Malaysia’s economy, the government is sticking to its forecast for 5 percent growth this year, Mustapa Mohamed, the trade and industry minister, said in an interview. Should the drought last through March, “agriculture could be affected.”

Palm Oil

Palm oil, the world’s most-used edible oil, is heading for the biggest monthly advance since October. Southeast Asia’s dry weather is spurring speculation of lower output growth, according to Michael Coleman, a hedge-fund manager.

Malaysia and Indonesia account for 86 percent of palm output, according to the U.S. Agriculture Department. Futures may advance to 3,000 ringgit ($915) a metric ton within four months, the highest price since 2012, said Coleman, who helps to manage the $143 million Merchant Commodity Fund from Singapore. The price settled at 2,779 ringgit yesterday.

Investors are also betting that an El Nino weather pattern will return in 2014, potentially cutting palm output, Coleman said. El Nino affects weather worldwide and can parch Indonesia and Malaysia.

Dry weather may limit Indonesia’s increase in palm production in the first half, Martua Sitorus, the executive deputy chairman at Wilmar International Ltd., said Feb. 21. The Singapore-based company is the largest palm oil processor.

‘Unfavorable Weather’

Crude palm oil output fell 12 percent to 396,493 tons last year due to “unfavorable weather,” London Sumatra Indonesia said in a statement today.

In Malaysia, the government is preparing funding to help Selangor state nationalize water assets in the region surrounding the capital. Water rationing began in parts of Selangor this week after the drought drained reservoirs, and will extend to 431,617 households, the Star reported on itswebsite, citing Malaysia’s water services commission.

“The supply of raw water in Selangor state is in a critical condition,” Khalid Ibrahim, the chief minister of Selangor state, said in a faxed statement on Feb. 24. “The water levels at a few dams have been shrinking to reach an alarming stage.”

Malaysia supplies water to Singapore, which consumes about 480 million U.S. gallons a day. The nation gets about 60 percent of its water from the Malaysian state of Johor and draws on local reservoirs and streams, its national water agency said.

Recycling Wastewater

Singapore plans to triple its wastewater recycling and increase desalination capacity almost tenfold to meet as much as 80 percent of water demand in 2060, according to the agency’sreport. The push to develop the industry has drawn businesses including General Electric Co. (GE) and Siemens AG (SIE) to invest, and created local water companies such as Hyflux Ltd. (HYF)

Khon Kaen has growing water shortages as supplies drop in dams and rivers, with the most recent rainfall in the Thai province in December, the National News Bureau said. Farmers in the area have been urged by the Royal Irrigation Department to help by stopping any off-season rice growing, according to NNT.

Water Bombing

In Riau, the second-biggest province on Sumatra, an emergency was declared through March 12 because of smoke from fires, said Sutopo Purwo Nugroho, a spokesman at Indonesia’s disaster management agency. Extinguishing the fires will require water bombing, according to local officials.

Satellite images showed 11 fire hot spots in Riau on Feb. 24 compared with as many as 243 on Feb. 11, according to Indonesia’s Forestry Ministry.

“It’s very likely that the lack of rain so far does promote conditions in which these hot spots can form,” said Chow at National University of Singapore.

Disputes over haze flare up regularly between Indonesia, Malaysia and Singapore. The latest was in June, when smog in Singapore reached a record because of Indonesian forest fires.

While the drought is blamed for forest fires in Riau province, other parts of the country are grappling with floods.

Some western parts of Sulawesi island, the nation’s main cocoa-growing region, got as much as 15 inches (38 centimeters) of rain this month, according to MDA Weather Services in Gaithersburg, Maryland. That’s about two to three times normal and excess moisture is increasing the risk of crop diseases.

Coffee, Oil

Coffee shipments from Indonesia may decline 17 percent this year to the lowest since 2011 as rain cuts output. Sales may drop to 375,000 tons from 450,000 tons in 2013, according to the median of five exporter and roaster estimates compiled by Bloomberg. That’s the lowest in three years, Central Statistics Agency data show.

Weather is also affecting Indonesia’s oil output, energy regulators said last month. Rain and large waves disrupted production at the West Madura and Mudi fields in East Java, Elan Biantoro, a spokesman at SKK Migas, the oil and gas upstream regulator, said in an interview last month.

Weather-related price increases may be particularly unfavorable for legislators running for office this year in Indonesia, Leong of Barclays said. “Any rise in food prices on the street will be an election issue,” he said.