On June 11, the National Oceanic and Atmospheric Administration (NOAA) officially declared the onset of El Niño conditions in the tropical Pacific. The latest forecasts indicate a roughly 75% probability that the El Niño event will reach strong or greater intensity between November and January. Since June, monthly rainfall in Indonesia has declined significantly, falling below historical averages for the same period. At the same time, extreme drought conditions are unfolding.
Officials in Indonesia reported on August 10 that the country is experiencing unusually severe drought, with wildfires intensifying in East Java, Sumatra, and Kalimantan. The total area burned has now exceeded 107,000 hectares. The fires are concentrated in the Jambi and South Sumatra regions of Sumatra, as well as Central Kalimantan on the island of Borneo. Since June, Indonesia's monthly rainfall has been consistently below historical averages, while maximum temperatures remain at record highs, even surpassing levels seen in 2015. The El Niño climate pattern has exacerbated drought conditions in Indonesia's dry season, increasing the dryness of vegetation and peatlands, creating favorable conditions for fires and accelerating their spread and severity.
The impact of El Niño on palm oil production is primarily driven by high temperatures and drought, which reduce the proportion of female flowers on oil palms and increase male flowers. This often leads to a decline in palm oil yields. Additionally, fires directly destroy some palm oil plantations, and the resulting haze blocks sunlight, reducing photosynthesis and lowering both fruit yields and oil extraction rates. Past El Niño events have caused a 2% to 5% reduction in Indonesian palm oil production. If a production decline occurs this year, the reduction could be 3% to 5% in the second half, particularly in the fourth quarter, placing it at historically low levels. Looking ahead to next year, Oil World forecasts that 2027 Indonesian palm oil production will fall to 47.6 million tonnes, a decrease of 1.6 million tonnes or 3% year-on-year.
Comparison of Current Wildfires with Past Events
Indonesia is currently suffering from an unusually severe drought, with wildfires raging in East Java, Sumatra, and Kalimantan. As of August 10, the burned area has exceeded 107,000 hectares, affecting forests and peatlands. While some firefighting measures are underway, no suitable rain clouds for artificial precipitation are expected before August 18. Indonesia's Meteorology, Climatology, and Geophysics Agency (BMKG) has stated that the most critical firefighting period will be from August to September, as dry vegetation combined with strong winds creates a high risk of rapid fire spread. The local government has extended the forest and land fire emergency status until October 31. Wildfires occur annually in Indonesia to varying degrees, with the June to September dry season often leading to fires due to high temperatures and drought. Many fires are also caused by land clearing through burning, which, when combined with dry peatland conditions, leads to frequent outbreaks.
The NOAA's declaration of El Niño in June has intensified the situation. Since June, Indonesia's monthly rainfall has been consistently below historical averages, and maximum temperatures are at record highs, even exceeding 2015 levels. The El Niño climate pattern has worsened the drought, increasing the dryness of vegetation and peatlands, which has fueled the fires and accelerated their spread. In the context of El Niño, weather conditions in producing regions have drawn significant market attention. A comparison of the current fires with three previous El Niño years shows a clear pattern of increased severity.
Impact of Wildfires on Palm Oil Production
Research has extensively quantified the effects of fire, drought, and haze on palm oil yields. A 2024 study by Corning and colleagues, focusing on the 2015 Indonesian fires, used a coupled CMIP6 climate model, FLAM fire model, and GLOBIOM global land-use model to estimate that the event caused a production decline of more than 5%. They also projected that under three warming scenarios, future similar events could see burned areas and production losses expand by up to 25%, with local palm oil prices rising by 70%. This highlights the systemic risk posed by the combined effects of climate change and fires on the oil palm industry. A 2019 study by Stiegler and others found that during the early stages of the 2015 El Niño drought, increased incident shortwave radiation briefly boosted net CO₂ absorption by 50%. However, as fire haze emerged, incident solar radiation fell by 35% compared to non-drought conditions, with diffuse radiation becoming the dominant shortwave flux. This caused net CO₂ absorption to plummet by 86%, effectively halting net carbon accumulation for about 1.5 months and leading to a 35% decline in fruit yields. The authors emphasized that without human-caused fires and the associated haze, the negative impacts of drought on carbon fluxes, accumulation, and yields would not have been as severe. The combination of drought and haze was the critical factor, not drought alone.
Regarding oil extraction rates (OER), a 2016 study by Mathews and Ardiyanto examined the impact of dense haze from peat fires in Central Kalimantan from September to October 2015 on palm oil mill OER. They found that reduced sunlight hours led to low OER in October and November 2015. Fruit bunch sampling showed that internal fruits were pale yellow with low oil content. Overall, the impact of El Niño on palm oil production operates through several pathways: 1) High temperatures and drought reduce the proportion of female flowers, increase male flowers, and disrupt weevil pollination. Prolonged drought also affects fruit development and oil content, meaning even after rainfall returns, oil palm trees take time to recover, leading to delayed production declines of 8 to 12 months. 2) Fires directly destroy some palm oil plantations. For instance, in Jambi province alone, approximately 540 hectares of peatland, including large areas of oil palm plantations, have been burned. 3) Haze blocks sunlight, reducing photosynthesis, and also indirectly affects harvesting, transportation, and oil extraction rates.
A comparison of recent El Niño events shows clear production impacts: The 2014-2016 El Niño led to a 3% year-on-year drop in Indonesian palm oil production in 2015/2016. A weak El Niño beginning in October 2018 resulted in a 4% reduction in annual production lagged by 8-12 months (June 2019 to May 2020). The El Niño that started in June 2023 and lasted until June 2024 is expected to cause a 2% to 5% year-on-year decline in production lagged by 8-12 months (February 2024 to January 2025). These events demonstrate a significant delayed impact of El Niño on production. Currently, the Indonesian Palm Oil Association (Gapki) expects production growth in 2026 to be less than 2%, down from its earlier April forecast of a potential 2 million tonne reduction in 2026 crude palm oil production compared to 2025. Oil World forecasts 2025/2026 (October to September) production at 49.48 million tonnes, an increase of 80,000 tonnes year-on-year. However, on a calendar year basis, Oil World projects 2026 production at 49.2 million tonnes, a decrease of 500,000 tonnes. Cumulative production from January to May 2025 was about 25 million tonnes, up 10% year-on-year. If a production decline materializes this year, the reduction in the second half, especially the fourth quarter, could be 3% to 5%, placing it at historically low levels. For next year, Oil World forecasts 2027 production at 47.6 million tonnes, a decrease of 1.6 million tonnes or 3% year-on-year.
Impact of El Niño on Palm Oil Prices
Theoretically, if El Niño occurs during the traditional peak production season, it can have a beneficial effect on current fresh fruit bunch (FFB) yields. Currently, palm oil is in its peak production period. Malaysian palm oil stocks increased in July as expected, with production at historically high levels, suggesting that high stocks may persist. China's palm oil market shows weak supply and demand, with inventories gradually building and now significantly above the five-year average. The fundamentals of palm oil are marginally bearish, and this weak reality is likely to limit price upside in the third quarter. In the short term, palm oil lacks strong upward drivers. Geopolitical factors occasionally cause volatility, but overall, macroeconomic and market sentiment is weak, leading to expectations of a sideways trading range. However, the probability of a strong El Niño event increases during the second half of the year. As the production season enters its low phase and the lagged effects of El Niño take hold, palm oil output may be significantly constrained. Reduced supply could drive inventory drawdowns, while bearish factors gradually diminish. With potential catalysts such as production declines due to El Niño, the full implementation of B50 biodiesel blending in October, and the establishment of a unified export agency (DSI) in Indonesia, palm oil prices could shift higher. The earliest opportunity for a sustained upward trend could be in the fourth quarter of this year or the first or second quarter of next year.
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