Amid the current pressures, palm oil harbors latent potential and fresh opportunities.
As the world's largest palm oil producer, Indonesia, together with Malaysia, serves as the primary supply source for major global demand countries. Its production and export situation significantly impact the global supply landscape. According to data from the Indonesian Palm Oil Association (GAPKI), Indonesia's cumulative production from January to August 2025 reached approximately 39.04 million tons, an increase of 4.52 million tons compared to the 34.52 million tons recorded in the same period last year. GAPKI estimates that full-year palm oil production for 2025 will reach between 49.61 million and 51.54 million tons, surpassing the 48.16 million tons produced in 2024. Favorable weather conditions and new harvests from replanting programs are the primary drivers of this year's production growth. However, we are not optimistic about the growth rate of Indonesia's production in 2026. The Indonesian government has been vigorously advancing a crackdown on illegal oil palm plantations this year, with the newly established state-owned enterprise, Agrinas Palma Nusantara, taking over management of these lands. As of November 2025, the Indonesian government has confiscated approximately 3.7 million hectares of illegal oil palm plantations, nearly half of which (about 1.51 million hectares) have been transferred to Agrinas for management. Against this backdrop, the market holds significant concerns regarding the new enterprise Agrinas's management experience and capabilities, potential shifts in business focus, and the dampening effect of unfavorable policies on investment in oil palm cultivation. These factors are likely to constrain further production growth. The Director of GAPKI stated that Indonesia's crude palm oil (CPO) production in 2026 is expected to grow by 3%-4% year-on-year. From a market year perspective (October to September of the following year), data from the Foreign Agricultural Service (FAS) indicates that, barring extreme weather, production for the 2025/26 year is forecast to increase by 1.5 million tons to 47.5 million tons, halving the growth rate seen in the previous year.
The fundamental logic underpinning seasonal production declines in Malaysian palm oil remains unchanged, and sustained high monthly output may be difficult to maintain.
The primary theme for Malaysian palm oil production this year has been modest growth. Based on production data for January to October 2025 released by the Malaysian Palm Oil Board (MPOB), Malaysian crude palm oil production has reached 16.51 million tons, a modest increase of 280,000 tons compared to the 16.23 million tons produced in the same period last year, representing a growth rate of only 1.7%. Unlike last year, however, production levels remained robust in September and October, which typically mark the onset of the production decline cycle. Particularly in October, output exceeded expectations with an 11% month-on-month increase, leading to ongoing inventory accumulation at the origin. This has been a core factor contributing to the price decline since the fourth quarter. The current unexpectedly high production in Malaysia and its inventory levels, which are near a six-year peak, inevitably fuel concerns about continued counter-seasonal production growth. Analyzing the underlying reasons, the start of the seasonal decline in previous years was triggered by the onset of the rainy season in November. This year's difference lies in the delayed arrival of the rains, which only began in mid-November. Consequently, high-frequency SPPOMA production data for the first 20 days of November still indicated growth. However, the belated arrival of the rainy season likely also signals a delayed onset of the production decline cycle. Subsequently, sustained high monthly output from Malaysia will be difficult to maintain. Coupled with aging palm trees and the drought impact experienced from May to August this year, the growth potential for 2026 appears limited. According to estimates from the Foreign Agricultural Service (FAS), production for the 2024/25 year is projected at 19.5 million tons, maintaining a pattern of stable, slight growth compared to the previous year. Given the positive growth expectations on the demand side, the overarching theme of a tight supply-demand balance in the new year may be difficult to break. Biodiesel policies are becoming a crucial demand engine.
Supported by low inventories in India, export demand from producing regions shows resilience despite pressures.
During the 2024/25 sales year, palm oil prices remained higher than soybean oil for most of the period, prompting Indian refiners to shift their purchases towards soybean oil. This led to India's palm oil imports dropping to a five-year low. However, demand can rebound rapidly when the price advantage returns. In May 2025, India's palm oil imports surged by 84% month-on-month, precisely due to its higher cost-effectiveness compared to soybean and sunflower oils at the time. Currently, the international price spread between soybean oil and palm oil has narrowed significantly compared to before, which will substantially alleviate constraints on India's palm oil imports going forward. On the other hand, inventory data from the Solvent Extractors' Association of India (SEAI) up to October 2025 indicates a sharp decline in India's channel inventories for edible oils, reaching near five-year lows. Although port inventories have increased year-on-year, the overall level of vegetable oil inventories has fallen by 28% from an already low base in the previous year. Against the backdrop of India's vast population base and steadily rising consumption demand (approximately 3% annual consumption growth), the low inventory situation and gradually improving price ratios are key factors supporting the resilience of palm oil exports from producing regions in the new year. However, the timing of export surges needs to be aligned with Indian festival cycles.
Indonesia's B50 policy is the core variable for incremental demand growth.
The Indonesian government is actively advancing its biodiesel program, with the current mandatory blending ratio set at 40% (B40). Reflecting on the implementation of the B40 policy this year, it experienced twists and turns between expectations and reality. Originally scheduled for implementation on January 1, 2025, it was repeatedly delayed until finally taking effect in March. The market initially estimated an annual target volume of 15.6 million kiloliters. According to data disclosed by the Indonesian Biofuel Producers Association (APROBI), cumulative consumption reached 12.25 million kiloliters as of November 10, achieving 79% of the annual target, which is below the typical seasonal progress rate. Indonesia's determination to promote higher biodiesel blending ratios is firm and clear. This year, it once again proposed a plan to increase the mandatory blending ratio to 50% (B50) in the second half of 2026. According to Bloomberg estimates, implementing B50 would require approximately 19 million tons of crude palm oil, an increase of about 4 million tons compared to the B40 phase, while crude palm oil exports would be cut by 5.3 million tons. If implemented as scheduled, this will undoubtedly become a crucial engine in 2026 for driving incremental demand growth for palm oil and pushing price levels higher. However, the current point of contention lies in the potential deviation from the B50 plan's timeline. If it is repeatedly delayed, it could trigger a phase of price correction as expectations are scaled back. Key factors to monitor closely include, on one hand, the progress of related policy studies and testing, which typically take 6-8 months. Indonesian energy ministry officials have indicated that laboratory testing for B50 was completed in August, and road tests are now underway to verify fuel performance and vehicle compatibility. On the other hand, if the POGO spread (the price difference between palm oil and diesel) widens, the economic viability of biodiesel weakens, which could reduce blending incentives. This is particularly true for the non-subsidized sector, where implementation might be significantly less effective, posing challenges to the biodiesel program's advancement and potentially leading to demand falling short of expectations. The sustainability of import margins is the key to resolving the current pressure on domestic palm oil in China.
China relies almost entirely on imports for its palm oil supply. This year, China's palm oil import volume has generally been lower than the same period last year. Customs data shows that total palm oil imports from January to October 2025 amounted to 2.5269 million tons, a decrease of 491,600 tons, or 16.29%, compared to the cumulative import total of 3.0186 million tons in the same period last year. Import margins are the core factor influencing purchasing willingness and arrival schedules, and their fluctuation has been significant this year. Since 2024, China's palm oil import margins have been in a state of deep inversion (mostly below -500 yuan/ton), which directly led to the year-on-year decline in imports during the first half of the year. A turnaround occurred in mid-to-late July 2025, as rising market prices led to a significant improvement in import margins, narrowing the inversion to within -100 yuan/ton, and even approaching parity at times. This change greatly boosted companies' purchasing enthusiasm, leading to increased bookings in subsequent months, but also sowed the seeds for inventory accumulation by year-end.
According to survey data from MySteel, as of November 21, 2025, commercial palm oil inventories in key regions across China had increased to 667,100 tons, a significant 31.34% rise compared to the 507,900 tons recorded during the same period last year. The rapid accumulation of inventory is attributable to both the supply pressure from improved imports and arrivals in the second half of the year and the limited absorption capacity of downstream demand. Entering 2026, high inventories and weak demand may continue to suppress domestic palm oil prices in China and weigh on basis performance. It is challenging for the domestic market itself to break this negative feedback loop. The focal points of attention should therefore remain concentrated on production data from the origins, developments in biodiesel policies in major producing countries (such as Indonesia's B50 policy), and the resulting sustainability of import margins. Conclusion: Adhering to Fundamentals, Embracing Volatility.
Looking ahead to 2026, the vegetable oil complex will operate within the overall context of a tight global supply-demand balance for vegetable oils. Pricing will revolve around the supply-demand contradictions triggered by two major uncertainties: "international trade relations" and "biodiesel policies." The uncertainty associated with the management transition following the nationalization of plantations in Indonesia, the world's leading palm oil producer, coupled with structural issues in Malaysia such as aging tree stocks and labor shortages, and the arrival of the seasonal production decline, collectively solidify supply-side constraints. Against this backdrop of firm supply-side support, the key variable determining the upside potential lies in the incremental demand generated by Indonesia's B50 policy. Whether this policy is implemented on schedule will determine if palm oil can become the core engine driving price breakthroughs in the vegetable oil complex in the second half of the year. Overall, the vegetable oil sector in 2026 will continue to exhibit relatively divergent logical threads but will generally follow the operational characteristic of "supply determining the direction, policy determining the magnitude." It is also important to note that the strong substitution relationships among the three major vegetable oils (palm, soybean, rapeseed) create interlinked effects, preventing each oil from being viewed in complete isolation. Identifying the most critical driving factor among the three major oils at any given time will be key to capturing short-term trends and judging relative price strength.
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