Palm oil prices, which have rebounded 18% in little more than a month, have scope to extend their recovery, top grower Sim Darby said, citing weather setbacks poised to cut its own output.
"Crude palm oil prices are expected to improve," said the Malaysia-based group, the world's top palm oil plantations company by land area, with a land bank of nearly 1.0m hectares.
Sime Darby forecast Malaysian values averaging 2,550-2,700 ringgit a tonne in the October-to-December period, offering room for values to increase above the level that Kuala Lumpur futures were trading at on Tuesday.
November futures closed at 2,577 ringgit a tonne, a gain of 1.4%, while December futures ended up 1.3% at 1,541 ringgit a tonne.
The group cited support for values from "falling inventory levels and the expected decline in production, a result of the prolonged drought during the year" in many key growing areas in South East Asia, which is responsible for the vast majority of world palm oil output.
Official data earlier this month showed output in Malaysia, the second-ranked producing country after Indonesia, down 12.7% year on year in July, a reduction commentators have attributed largely to dryness blamed on the El Nino weather pattern.
And Sime Darby forecast that its own output may fall markedly in its 2017 fiscal year, which ends next June.
"We normally project around 4-5% growth" per year, said Franki Anthony Dass, Sime Darby's plantations managing director.
"But looking at lagged effects of El Nino, we find that it may drop around 10%" compared with the last financial year.
The group said that, in the year to the end of June 2016, its crude palm oil output rose by 3.3% to 2.44m tonnes, although that figure was swollen by the acquisition of Papua New Guinea-based New Britain Palm Oil.
Sime Darby's crude palm oil output in Malaysia, where the group has a land bank of nearly 350,000 hectares, fell by 10.6% to 1.18m tonnes.
In Indonesia, where it has a land bank of 284,000 hectares, output dropped by 9.4% to 770,000 tonnes.
"The lower production in Malaysia and Indonesia was principally due to unfavourable weather conditions – prolonged dry season and flooding – and exacerbated by the effects of El Nino," the group said.
Plantation profits for the year dropped 18.5% to 1.05bn ringgit, largely thanks to the dent to margins from lower plantation productivity.
However, helped by one-off gains in property Sime Darby's overall earnings attributable to shareholders eased by a more modest 0.9% to 2.41bn ringgit.
Group revenues for the year rose 0.5% to 43.96bn ringgit.
Shares in the group - which also announced a private placement of 316.4m new shares, equivalent to 5% of its share baes, to pay-off debt and boost investment – closed down 4.2% at 7.80 ringgit in Malaysia.
By Mike Verdin