Malaysian palm oil prices have risen too far too fast and a dramatic fall awaits as traders focus on expectations of stellar output after the first quarter of 2012, while milder than expected La Nina weather promises fewer disruptions than usual.

Malaysian palm futures jumped almost 20 percent over the two months to early November as markets quickly priced in a weather premium over fears that yields could be hurt by the arrival of a La Nina as Southeast Asian producers enter the monsoon season in the fourth quarter.

But weak yields from rains and floods over the next two or three months will be buffered by palm stocks of well over two million tonnes in second-largest producer Malaysia at the start of the fourth quarter, thanks to six months of high output.

"The market seems to be reacting too much and I would have thought they would have intelligently discounted the monsoon rains and even La Nina, given the supply picture is not bad," said James Fry, chairman of commodities consultancy LMC International.

"Last year till the start of early this year, production was very low and we are going to see output growth this time around. There is also the factor of more plantations in Indonesia coming to maturity. I guess it can be easy to forget about this."

Cash markets see heavy rains continuing into next year and triggering floods that complicate production and processing with refined, bleached and deodorised palm olein (RBD) cargoes for Jan-March priced $40 a tonne higher than April-June.

A Reuters survey of nine Southeast Asian planters, who have a total of 1.8 million hectares under palm cultivation, shows this may not be the case. The La Nina episode and the monsoon rains are not excessive for the beginning of the season, say survey respondents from Malaysia and largest palm producer Indonesia.

"I've been hearing from our field guys that it has started to rain this year, with no flooding yet, just showers," said Michael Kesuma, head of investor relations at Jakarta-listed palm oil producer Sampoerna Agro.

At its worst, the La Nina could trim Malaysian palm oil output by 15 percent each month from November to January, some of the Malaysian planters said.

Even so, three successive drops of 15 percent each month to January 2012 will only reduce output to 1.17 million tonnes from October's production of 1.91 million tonnes, which was a two-year high, Reuters calculations show.

That compares with 1.06 million tonnes last January when a moderately strong La Nina hit Southeast Asia and lifted palm oil prices to their highest in three years in February as floods disrupted the supply chain in Malaysia.

"The weather issue has been taken out of hand in the markets. But there are many traders now who are going to go short in this market because prices have gone up too fast," said a Malaysian trader with a commodities brokerage in Kuala Lumpur.

The most recent episode of the La Nina weather phenomenon extends to more than two years a string of erratic weather events that began with El Nino-induced drought in mid-2009.

The heavier-than-usual rains in Southeast Asia it brings generally slash harvesting rounds in estates and the oil palm fruits' prolonged exposure to moisture hurts yields, forcing sellers to offer the edible oil at a discount.

However, some industry players believe supply may not be affected after the World Meterological Organisation (WMO) said it was unlikely the current la Nina episode would be as strong as the 2010-2011 episode that ended in May.

"We predict that weather conditions in 2011-2012 will be more conducive for palm oil plantations than the previous year," said Nurhayati, head of the climate section at Indonesia's weather office.

"We don't see any bad impact of weather conditions on palm oil production."

Production tends to rebound strongly in double-digit percentage points after the monsoon and a seasonally lower first quarter as heavy rains, especially in the evening, tend to spur pollination in oil palm trees.

The concern over erratic weather hurting yields and an unsustainable rise in prices has partly been driven by Malaysian production data of slowing growth, due partly to limited acreage and ageing trees.

But the reality is Indonesian production has been growing as more acreage comes to maturity, helping to offset any slowing growth in its competitor.

Nevertheless, the latest government estimates show Indonesia has planted oil palms on 8.3 million hectares across the archipelago, which will produce 23 million tonnes this year, the industry expects.

This compares with government and industry estimates of 18 million to 19 million tonnes for Malaysia this year.

Analysts do not think world production will suffer, however.

"There is no serious weather threat to production across the globe," said Emily French, managing director of US-based agriculture consultancy Consiliagra.

"Palm oil production is on the decline for now but there just isn't a supply shock or a weather threat. I need something bigger than that to get worried." – Reuters