El Niño stirs up palm oil: Indonesian and Malaysian production is expected to drop 3% in 2027, and the price may rise to 1,226 US dollars

The Zhitong Finance App learned that the ongoing drought caused by strong El Niño will reduce yield next year, and palm oil production in Indonesia and Malaysia is expected to decline in 2027, thereby tightening global supply and boosting prices. According to the median market estimate from a survey of seven analysts, the combined production of the world's two largest palm oil producers is expected to drop by about 3%. Among them, Indonesia's production is expected to drop to 49 million tons, and Malaysia's production is expected to drop to 19.5 million tons.

Three analysts said that, combined with Indonesia's expanding palm-based biodiesel blending policy and declining yield of older palm trees, continued droughts may curb supply and push the benchmark palm oil price to 5,000 ringgit (1,226 US dollars) per ton in 2027.

The agricultural market has been preparing for a strong El Niño impact. Indonesia's hot and dry weather is expected to continue after the usual April to September cycle. The impact of El Niño on palm yield is often delayed.

Sathia Varqa, senior analyst at Fastmarkets Palm Oil Analytics, said, “The current El Niño weather is widely predicted to have an impact on 2027 production, but the extent of the impact depends on its severity and duration.”

According to the Indonesian Meteorological Agency, the country's rainy season usually starts in October, may be postponed to November or December this year, and may last shorter than previous years. El Niño has intensified fires in Kalimantan, a major palm-growing region. The number of hot spots has risen to the highest level in ten years, disrupting fertilization, harvesting, and transportation.

Eco Palm International Sdn trader Warren Tay said, “Kalimantan is seriously affected by the smog. We expect the region to account for the largest share of the drop in production next year.”

However, production is likely to be less affected than initially feared. The Indonesian Palm Oil Association expects production to drop 3% in 2027, compared to a 5% decline previously.

As of now, the supply is still adequate. Kuala Lumpur palm oil futures fell 2.3% on Friday, hitting a two-month low. Malaysia's inventory is already at its highest level in 2026, and is expected to exceed 3 million tons by the end of the year. Demand is still weak as production peaks.

Analysts Alvin Tai and Jason F. Miner wrote in the report: “The rise in palm oil inventories is likely to reach record highs in the next 1 to 3 months, which will limit the upward space for prices this year.”