El Niño may reduce Malaysia’s palm oil production

The global palm oil market could face tighter supplies in the MY 2026/27 as El Niño threatens palm oil production in Malaysia. At the same time, domestic demand is expected to increase following the nationwide expansion of the mandatory B15 biodiesel blend. The outlook was presented in a new report by the U.S. Department of Agriculture (USDA).

The USDA lowered its forecast for Malaysia’s palm oil production in the 2026/27 marketing year to 19.7 mln tons, citing expected dry weather associated with El Niño. The agency expects lower rainfall to reduce fresh fruit bunch yields, with the strongest impact likely to be felt during the third and fourth quarters of the marketing year due to the delayed response of oil palm trees to moisture stress.

In contrast, the production estimate for the 2025/26 marketing year was raised to 20.0 mln tons, up 300 thsd tons from the previous year. According to the USDA, cumulative output between October 2025 and May 2026 exceeded the same period a year earlier by more than 1 mln tons. Oil palm planted area is expected to remain virtually unchanged at around 5.15–5.16 mln ha.

Lower fresh fruit bunch production is also expected to reduce output of palm kernel oil and palm kernel meal. With less raw material available for processing, production across the palm kernel sector is projected to decline slightly compared with the previous marketing year.

Government biofuel policy will provide additional support for domestic demand. Following the transition from B10 to B12, Malaysia introduced the mandatory B15 biodiesel blend on Peninsular Malaysia on June 1, 2026. According to the Malaysian Palm Oil Board (MPOB), the move to B15 alone is expected to increase annual palm oil demand by approximately 204 thsd tons.

The USDA forecasts Malaysia’s domestic palm oil consumption at 4.59 mln tons in the 2026/27 marketing year, up 330 thsd tons from the previous season. Food consumption is expected to remain relatively stable at around 950 thsd tons, with most of the increase coming from biodiesel production.

Despite lower production and stronger domestic demand, Malaysia is not expected to face a supply shortage. However, ending stocks are projected to decline from 2.8 mln tons in 2025/26 to 2.56 mln tons in 2026/27. To balance the market, palm oil imports are forecast at 550 thsd tons, while exports are expected to remain strong at around 15.9 mln tons.

India, China, and Kenya are expected to remain the key destinations for Malaysian palm oil exports. According to the USDA, Malaysia’s exports will continue to benefit from palm oil’s price advantage over soybean oil, although the gap with soybean oil from Argentina and Brazil has narrowed, increasing competition in the global vegetable oil market.

Tags: Malaysia, palm oil