El Niño to hit palm oil production with a 12–16 month lag

The expected emergence of El Niño towards the end of 2026 could negatively affect palm oil production in Malaysia and Indonesia in 2027–2028. Major palm oil producer SD Guthrie expects production to remain largely unaffected through the rest of this year, as the impact of hotter and drier weather on plantation yields typically emerges with a 12–16 month lag.

Risks are already increasing in Indonesia. Wilmar International has reported declining rainfall in Kalimantan since July, where 70–80% of its Indonesian estates are located. According to CIMB Securities, a prolonged dry spell could significantly affect yields in 2027–2028. Wilmar’s fresh fruit bunch production already declined by 6% y/y in the first half of 2026 due to lower production in Indonesia.

The risk of lower production comes amid an already tight global vegetable oil supply outlook. SD Guthrie expects tightening global supplies and resilient demand to keep crude palm oil (CPO) prices elevated, while the emergence of El Niño could further intensify supply-side pressure.

Additional support could come from biofuel demand. Indonesia is preparing to implement its B50 biodiesel mandate, which would increase the share of palm oil in biodiesel to 50%. Against this backdrop, combined with firm crude oil prices, SD Guthrie expects CPO prices to remain at MYR4,600–5,000/t through the end of 2026 and potentially rise to MYR5,200/t in the first quarter of 2027.

Malaysia’s benchmark palm oil prices have already risen 18% this year to MYR4,723/t. If dry conditions in Indonesia persist, lower Indonesian export supplies could provide further support to global prices while strengthening the position of Malaysian producers in the international market.

Tags: Malaysia, palm oil, crop forecast