Era of cheap palm oil is coming to an end

The palm oil market is at a crossroads as it faces a complex mix of supply constraints, surging demand for biodiesel, and adverse weather conditions. Once a staple for its versatility and affordability, palm oil is now seeing rising prices and an uncertain future. Experts are questioning whether the era of cheap palm oil is coming to an end as these challenges intensify.

Supply-side issues are particularly prominent in Malaysia and Indonesia, the world’s largest producers of palm oil. In Malaysia, persistent heavy rainfall and potential La Niña conditions have led to flooding in key production areas, damaging oil palm trees and reducing yields. Indonesia, meanwhile, reported a drop in crude palm oil production to 39.96 million metric tons between January and October 2024, down from 41.78 million metric tons during the same period in 2023. These weather-related disruptions, combined with slower replanting rates, are straining global supply and driving prices higher.

At the same time, demand for palm oil in biodiesel production is surging. Indonesia’s plans to increase its biodiesel blend rate to 40% in 2025 and eventually to 50% will require millions of additional metric tons of palm oil. This shift is expected to significantly reshape global vegetable oil markets, putting further upward pressure on prices. Substitutes like sunflower oil and rapeseed oil are also facing supply challenges due to adverse weather in Canada, Ukraine, and Russia, as well as ongoing geopolitical conflicts that continue to disrupt production.

Price dynamics suggest that palm oil may remain expensive in the coming years, with forecasts placing the average price at RM4,600 per metric ton in 2025, up from RM4,200 in 2024. High palm oil prices may drive some consumers to shift to alternatives like soybean oil, which is expected to see increased production in Brazil and Argentina. However, the limited availability of alternative oils means that demand for palm oil is likely to stay strong, further tightening global supplies.

In the long term, the outlook for palm oil remains uncertain. Aging oil palm trees and slower replanting rates are likely to reduce yields in key producing regions, exacerbating supply constraints. Coupled with the increasing demand for biodiesel and ongoing weather-related challenges, these factors suggest that the days of cheap palm oil may indeed be over. As the world transitions to more sustainable energy sources, the palm oil market’s resilience will be put to the test in the years ahead.

Tags: Indonesia, prices, Malaysia, palm oil