El Niño set to crimp palm oil output in 2027, squeezing supply

According to fresh market updates, Indonesia and Malaysia are anticipated to produce less palm oil in 2027 as prolonged dry weather caused by a firm El Niño will depress yields next year, tightening global supplies and lifting prices.

Production in the world’s two biggest growers is forecast to decline around 3%, according to the median estimates of seven market watchers surveyed by Bloomberg News for supplies from the two countries. Output will likely slide to 49 million tons in Indonesia and 19.5 million tons in Malaysia.

Combined with Indonesia’s expanding palm-based biodiesel mandate and falling yields from aging trees, persistent dry weather could curb supplies and drive up benchmark palm crude prices toward 5,000 ringgit ($1,226) a ton next year, according to three market watchers.

Agricultural markets have been bracing for the impact of a powerful El Niño, with hot and dry conditions anticipated to persist beyond the usual April-September period in Indonesia. The effects on palm yields typically emerge with a lag.

“The El Niño weather happening right now is widely predicted to have an impact on output in 2027, but the extent depends on its severity and the length,” stated Sathia Varqa, a senior market observer at Fastmarkets Palm Oil Analytics.

Indonesia’s rainy season, which typically begins in October, may be delayed until November or December this year and could be shorter than usual, according to the country’s weather agency. El Niño is already worsening fires in the key palm-growing region of Kalimantan, where hotspots have advanced to the highest in a decade, disrupting fertilizer application, harvesting and transportation.

“Kalimantan has been severely affected by haze,” stated Warren Tay, a trader at Eco Palm International Sdn. “We expect the region to account for the largest share of next year’s production slide.”

Still, the impact on output may be less severe than initially feared. The Indonesian Palm Oil Association forecast a 3% slide in 2027 output, compared with an earlier estimate of 5%.

For now, supplies stay ample. Futures in Kuala Lumpur declined as much as 2.3% on Friday to a two-month low. Malaysian inventories, already at their highest in 2026, are forecast to exceed 3 million tons by year-end as production peaks and demand stays weak.

“Rising palm oil inventory marks, which could hit a record high in the next 1-3 months, are set to limit price upside this year,” Bloomberg Intelligence agriculture market watchers Alvin Tai and Jason F. Miner wrote in a note.