Malaysia’s Palm Oil Output Expected To Rebound In 2025/26 Amid Lingering Challenges: BMI

Source:  BusinessToday

After an anticipated decline in the 2024/25 season, Malaysia’s palm oil production is projected to see a partial recovery in 2025/26, with output forecast to increase by 0.5% year-on-year to reach 19.5 million tonnes. This modest recovery is primarily attributed to favorable climatic conditions, including anticipated ENSO-neutral conditions and normal rainfall patterns, according to a commentary released today by BMI, a Fitch Solutions Company.

However, the report highlights that Malaysia’s palm oil sector will continue to grapple with persistent structural challenges, particularly an acute labor shortage and lagging replanting efforts, which are expected to cap long-term growth.

Following an estimated 1.6% year-on-year decline in the 2024/25 season, the 0.5% increase projected for 2025/26 signals a slight rebound in production. Meteorological forecasts for the second half of 2025 into early 2026 suggest largely normal weather conditions across major palm oil producing states, signaling minimal weather-related disruptions.

Despite the production uptick, BMI anticipates a slight decline in Malaysia’s domestic palm oil consumption by 2.0%, from 3.9 million tonnes in 2024/25 to 3.8 million tonnes in 2025/26. This is primarily due to easing industrial demand amid slow progress toward biofuel targets and tighter restrictions on the used cooking oil trade. Consequently, Malaysia’s share of global palm oil production is expected to ease slightly from 25.2% in 2024/25 to 23.9% in 2025/26.

A significant hurdle for the Malaysian palm oil industry remains its heavy reliance on foreign workers, who constitute approximately 80% of the workforce. Stringent regulations aimed at addressing worker exploitation have constrained the inflow of new laborers, while low wages and the physically demanding nature of plantation work deter local participation. This acute labor shortage has directly impacted yields, as many estates are unable to fully harvest available crops, thereby limiting overall production growth in the short to medium term.

BMI reports that with limited land available for expansion, Malaysia’s palm oil production growth is increasingly dependent on yield improvements achieved through replanting aging trees. However, the Malaysian Palm Oil Council (MPOC) reported that only 2.0% of the total planted area was replanted in 2024, significantly below the national annual target of 4% to 5%. This lag is attributed to persistently high palm oil prices since 2021, which have incentivized farmers to prioritize immediate gains from existing, albeit lower-yielding, trees over the longer-term benefits of replanting. While a slight reversal is expected as prices ease in 2025/26, this trend is anticipated to largely persist over the longer term.

Malaysia’s Budget 2025 allocated an additional RM100 million to encourage smallholders to replant unproductive trees through grants and soft loans. However, this mirrors efforts from the previous year that showed limited impact on replanting rates, suggesting a need for more effective incentive structures. While measures like the revised windfall profit levy threshold (effective November 1, 2024) and adjustments to export duty rates aim to improve profitability and support domestic production, BMI believes more robust and targeted incentives are crucial for sustainable growth.

Despite being unable to compete with Indonesia in terms of production scale due to land limitations, Malaysia has successfully reinforced its reputation as a reliable palm oil exporter. This was particularly evident after Indonesia’s 2022 export ban highlighted Malaysia’s consistency in meeting international demand.

Furthermore, BMI said Malaysia is proactively advancing its sustainability efforts, with over 80% of its domestic production certified for export in 2024 under standards like the Malaysia Sustainable Palm Oil (MSPO) certification. This commitment to sustainability is crucial in light of regulations like the European Union Deforestation Regulation (EUDR), which mandates deforestation-free commodities for entry into the EU market.

By strengthening its monitoring and traceability standards, the agency noted that Malaysia is positioning itself as a global leader in sustainable palm oil, offering a competitive edge amidst growing global demand for reliable and ethically produced commodities.

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