El Niño Risk and Costly Fertiliser Put Palm Oil Supply on Edge for 2026

Indonesia’s palm oil market is moving into 2026 with a credible downside risk to production and a structurally tighter global balance, pointing to a moderately bullish price backdrop for crude palm oil (CPO) and refined products. In the coming months, the key swing factors are the depth of El Niño-related dryness and whether smallholders can afford timely fertiliser applications. Indonesia supplies around 60% of world palm oil trade, so even a 1–2 million tonne output loss would be felt quickly in European food, biodiesel and oleochemical value chains. Futures on Bursa Malaysia remain below MYR 4,600/tonne (≈EUR 880–900) but sentiment is increasingly driven by Indonesian weather and policy signals rather than short-term demand noise.

Prices & Futures Structure

Malaysian CPO futures have recently traded just under MYR 4,600/tonne amid a firmer ringgit and softer rival oils, but still show a roughly 25–27% gain year-on-year, reflecting a tighter vegetable oil complex. In euro terms, this implies front-month levels around EUR 880–900/tonne, with 2026 contracts on Bursa Malaysia Derivatives in a moderately elevated range around MYR 4,500/tonne (≈EUR 860–880).

Analysts’ base cases still assume some seasonal supply build into mid-2026, but price expectations around RM 4,200–4,300/tonne (≈EUR 800–840) are now challenged by Indonesian downside risks to output and higher domestic biofuel demand from the planned B50 blend. Any confirmation of yield losses or more aggressive biodiesel uptake would likely put a floor under prices and cap downside corrections.

Supply & Demand Balance

Indonesia’s crude palm oil production reached about 51.7 million tonnes in 2025 on GAPKI figures, up 7.3% year-on-year, while USDA’s lower baseline of 48 million tonnes highlights methodological uncertainty rather than a fundamentally different trend. A prospective 2 million tonne decline in 2026 implies a 4–4.5% contraction from current levels under either dataset — significant in a market where Indonesia accounts for roughly 60% of global palm oil trade.

The risk is conditional but credible: if El Niño materialises as strongly as Indonesia’s meteorological agency expects and fertiliser is not applied by the end of the first semester, output losses of 1–2 million tonnes become more likely. Smallholder farmers, who manage about 37% of plantation area and face steep fertiliser inflation, are at the centre of this risk, as input cutbacks translate quickly into lower bunch weights and oil extraction rates.

On the demand side, domestic Indonesian use is poised to rise. Implementation of a B50 biodiesel mandate could increase internal CPO consumption by around 3 million tonnes per year, directly reducing exportable surplus and raising the sensitivity of export flows to any production shock. In parallel, global buyers of vegetable oils have limited room to switch away, as soybean and sunflower oil markets are also navigating their own supply constraints.

Fundamentals & Drivers

Weather & agronomy. El Niño episodes typically bring below-normal rainfall to Sumatra and Kalimantan, stressing trees during flowering and fruit set. Indonesia’s meteorological agency is flagging a longer and more severe dry season in 2026 than in 2025, raising the probability of drought in core producing regions. In the near term (early May), local forecasts for Sumatra and Kalimantan still show scattered thunderstorms and high humidity, so the severe dryness has not yet fully emerged, but the seasonal transition window is narrowing.

Input costs. Fertiliser prices for many Indonesian growers have risen more than 30–50%, partly due to disruptions and cost pressures linked to the Middle East conflict. Smallholders, lacking access to cheap credit and bulk purchasing, are cutting application rates and substituting organic fertilisers. While this helps contain cash costs, it risks under-fertilisation and structurally lower yields if high prices persist over the next 6–12 months.

Policy & biodiesel. GAPKI has recently warned that B50 implementation from mid-2026 could trim export earnings by diverting more CPO into the domestic biodiesel pool, and has urged authorities to keep the mandate flexible in light of volatile crude oil prices and uncertain palm output. In combination with a potential weather-driven production loss, this raises the prospect of a structurally tighter export balance, particularly for refined palm olein and stearin flows to Europe and Asia.

Weather Outlook for Key Regions

Short-term forecasts (next 7 days) for Sumatra and Kalimantan feature predominantly cloudy, hot conditions with recurring thunderstorms and daily highs around 30–33°C. While these patterns remain broadly supportive for soil moisture, they do not preclude a shift to drier-than-normal conditions as the dry season advances.

The main agronomic watchpoints over the next 30–90 days are cumulative rainfall deficits versus normal and field-level reports of bunch formation and abortion rates. If rainfall quickly tails off while fertiliser remains under-applied, the upper end of the 1–2 million tonne downside range becomes more plausible, with visible effects in GAPKI and export statistics from Q3 2026 onwards.

Trading & Risk Management Outlook

• Producers & crushers: Consider incremental hedging of 2026 output on price dips towards the lower end of analysts’ RM 4,200–4,300/tonne range (≈EUR 800–840), as downside is increasingly weather- and policy-limited. Maintain flexibility to lift hedges if El Niño impacts fail to materialise.
• European refiners & biodiesel blenders: Secure a higher share of 2026 supply under term contracts with optionality on volumes, focusing on certified sustainable streams that may face additional tightening if smallholder certification is disrupted by cost pressures.
• Importers in Asia & MENA: Monitor Indonesian export policy and domestic biodiesel uptake closely; a stronger-than-expected B50 pull could justify building modest strategic inventories of palm and substitute oils despite current price levels.
• Speculators: Bias towards buying on pullbacks, with tight risk controls, as the balance of risks for 2026 leans to the upside given credible production downside and rising domestic demand.

3‑Day Directional Outlook (Indicative, in EUR)