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Indonesia Floods Hit Palm Oil Production

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Indonesia flooding is wreaking havoc on palm plantations in Central Kalimantan, the country’s second-largest crude palm oil producing region. 

Indonesia’s government has declared a flood emergency as of October 17 that will last 21 days. It’s the third flood emergency declared this year for Central Kalimantan, following flooding in both August and September. The region accounted for 17% of Indonesia’s total palm oil production in 2021, and has about 12% of total palm planted area, according to the Central Statistics Bureau of Indonesia. 

Gro’s Observed Flood Index shows the prevalence of flooding in Central Kalimantan, also known as Kalimantan Tengah. And Gro’s Climate Risk Navigator for Agriculture shows the accumulated rainfall for the region is at the second-highest level in more than 20 years. 

Palm industry officials also will be assessing the damage from heavy rains falling in east Malaysia’s key palm growing regions of Sarawak and Sabah, which together account for 54% of the country’s total palm acreage. Soil moisture levels for the two regions are at a decade high, as shown by Gro’s Climate Risk Navigator. Indonesia and Malaysia, respectively, are the largest and second-largest producers of palm oil worldwide. 

Indonesia’s extreme weather events, which are creating widespread property destruction and forced evacuations, are being caused by the rare return for a third year of La Niña. The global climate pattern is expected to last until early 2023, bringing higher levels of rainfall to Southeast Asia even as it brings excessive dryness to regions in the Western Hemisphere.   

In the short term, the flooding will depress crude palm oil production in Central Kalimantan as workers are unable to collect the palm fruit that will then be left to rot. Transportation links in and around the region also are impeded. Production out of Malaysia also could be reduced. 

These maps from the Gro Portal show how much rain is falling in locations across Indonesia and Malaysia. They also show how much precipitation amounts differ from a 10-year mean. 

The August to November period is normally when palm oil production peaks in Indonesia and Malaysia. Instead, the prospect of reduced supplies this year is pushing up palm oil futures prices, which have gained 6.2% since the Indonesia flood emergency declaration on October 17 to close Wednesday at 4165 ringgit/tonne on the Malaysia Bursa exchange. Prices are also up about 28% from this year’s low reached in late September. Also supporting palm oil prices are rising tensions in the Russia-Ukraine war and lower expectations for US soybean yields.

While the heavy rains are damaging to short-term production, they bode well for palm oil production down the road. A Gro analysis previously found that above-average precipitation in Indonesia and Malaysia, which replenishes water tables, is often associated with higher palm oil yields 6-8 months later and possibly longer, as Gro wrote about here

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