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Watch out for Godzilla El Niño

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam • 4 min read
Watch out for Godzilla El Niño
Like Godzilla, El Niño can cause immense destruction / Photo: Latrach Med Jamil via Unsplash
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It has been nine years since Godzilla, a horror movie, was released. Most investors may not know about it or have forgotten the story.

They should now rush to stream it. The movie could provide a clue to the weather event that could ravage the markets in 2023.

Godzilla was a fictional monster that stood over 200 metres tall. The giant lizard was taller than UOB Plaza. Skyscrapers disintegrated from Godzilla’s radioactive breadth. He could crush tanks in his fist.

The character is based on dinosaurs and prehistoric reptiles. The 2014 movie was a part of a series that started in Japan in 1954. It is a metaphor for the devastation caused by the bombing of Hiroshima and Nagasaki.

Today, the world is facing devastation of a climatic kind. It is called El Niño, a climatic condition that takes place in the Pacific region. The consequence of El Niño is extreme dry weather.

Like Godzilla, El Niño can cause immense destruction. During El Niño, there are droughts, floods, and storms.

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El Niño has also taken its toll on this island. Singapore’s weather has seen record highs this year. On May 13, the temperature reached 37°C. You could have fried an egg on the asphalt in Ang Mo Kio.

This week, we faced the other extreme. Singapore has seen more rainfall these few days than in the whole of 1997.

The last four El Niño instances occurred in 1982–83, 199–98, 2009–10 and 2015–16. The frequency is around once every five years.

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Food prices rose sharply during all four instances. Dry weather can reduce crop yield and lower agricultural production. There is a shortage of grains, fruits and vegetables.

Stock market investors should prepare for these shortages. A natural candidate is palm oil. This region produces 85% of the world’s palm oil.

Palm oil is also the most traded edible oil in the world. Listed palm oil proxies on the Singapore Exchange include Wilmar, Golden Agri and Bumitama Agri.

El Niño has suppressed crude palm oil (CPO) production growth. CPO prices rose an average of 22% during previous instances.

Irrespective of El Niño, the case for palm oil prices is solid. China and India are providing strong demand. There is a craving for fried food in these giant economies. Also, palm oil is cheaper than soybean oil, its close competitor.

High oil prices bodes well for palm oil. More palm oil is now used for biodiesel. Indonesia’s B35 mandate states that the diesel sold has to include 35% palm-based fatty acid methyl ester. Malaysia requires the ratio to be 20%.

This suggests that the stock-to-usage ratio for palm oil could narrow from 20%. If so, palm oil could rise sharply from the current level of US$1,100 ($1,478) per tonne.

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As with Godzilla, El Niño’s impact is not easy to predict. Godzilla can swing from being a villain to a hero. He can attack civilians in some movies, as well as protect them in others.

Similarly, higher palm oil prices may not be positive for the plantation stocks. There have been serious changes since the previous El Niño. The appetite for palm oil among consumers remains solid. But, the stomach for palm oil companies is weak. There is now an aversion towards the sector among fund managers.

Palm oil companies such as Wilmar and Golden Agri have been accused of deforestation. The natural habitat of the Indonesian wildlife is being destroyed. Green Peace estimates that one-third of the region’s orangutans have perished due to illegal logging.

I learnt of this issue in 2019, when I brought the executives of a massive plantation company to the UK to meet fund managers. Hardly any of the fund managers took the meetings. Instead, we had to meet the ESG (environmental, social and governance) heads of the funds.

Investors may want to forsake the palm oil stocks. Investing in the commodity may be a better bet.

There are other food items that are candidates for scarcity. For instance, rice is a staple in this region. Dry weather could cause a rice shortage. Only 7% of the world’s rice is traded. Thailand and Vietnam are the main rice exporters. El Niño caused rice prices to double in 2008–2009. Rice traders like Patum Rice, LT Foods and Kohinoor Foods could be winners this time round.

El Niño’s arrival gives us much food for thought.

Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column

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