Persistent drought triggered by a strong El Nino is expected to curb yields next year, pushing palm oil production in Indonesia and Malaysia lower in 2027, which would tighten global supply and drive prices higher.
Based on the median estimate from a survey of seven analysts, combined output from the world's two largest palm oil producers is projected to fall by about 3%. Among them, Indonesia's production is expected to drop to 49 million tonnes, while Malaysia's output is seen declining to 19.5 million tonnes.
Three analysts said that, combined with Indonesia's expanding palm-based biodiesel blending policy and declining yields from aging palm trees, the ongoing drought could constrain supply and push benchmark palm oil prices toward 5,000 ringgit ($1,226) per tonne in 2027.
Agricultural markets have been preparing for the effects of a strong El Nino. Hot and dry weather in Indonesia is expected to persist beyond the usual April-to-September cycle. The impact of El Nino on palm yields typically appears with a lag.
Sathia Varqa, a senior analyst at Fastmarkets Palm Oil Analytics, said: "The El Nino weather currently occurring is widely forecast to affect 2027 production, but the extent of the impact depends on its severity and duration."
Indonesia's meteorological agency said the country's rainy season usually begins in October, but this year it may be delayed until November or December and could be shorter than usual. El Nino has already worsened fires in Kalimantan, a major palm-growing region, with the number of hot spots rising to a decade high, disrupting fertilization, harvesting and transportation.
Warren Tay, a trader at Eco Palm International Sdn., said: "Kalimantan has been severely affected by haze. We expect the region to account for the largest share of next year's production decline."
However, the impact on output may be smaller than initially feared. The Indonesian Palm Oil Association expects production to fall 3% in 2027, compared with an earlier forecast of a 5% decline.
For now, supply remains ample. Kuala Lumpur palm oil futures fell as much as 2.3% on Friday, touching a two-month low. Malaysia's inventory is already at its highest level of 2026 and is expected to exceed 3 million tonnes by year-end, as production peaks while demand remains weak.
Analysts Alvin Tai and Jason F. Miner wrote in a report: "Palm oil inventories are rising and could hit a record high in the next one to three months, which will limit the upside for prices this year."
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