Cautious optimism for plantations

MALAYSIA’S plantation sector heads into 2026 with a cautiously constructive backdrop, underpinned by yield recovery, structurally higher biodiesel demand and improving estate efficiency, even as elevated inventories and uneven export momentum temper near term enthusiasm.

The operating outlook for IOI Corp Bhd, one of the country’s largest integrated palm oil players, is firmly tilted towards recovery.

“For IOI Corp’s plantation segment, fresh fruit bunches production is projected to be higher in financial year 2026 (FY26), driven by a larger proportion of palms reaching prime age and young palms coming into maturity, despite ongoing and accelerated replanting in Sabah,” its plantation director Sudhakaran Nottath Bhaskaran says.

“Improved estate management through mechanisation and digitalisation should further support our productivity growth. We maintain a positive outlook for our plantation segment to deliver good financial performance in FY26.”

That assessment broadly mirrors the sector’s post-El Niño rebound.

After a strong production recovery in 2025, analysts expect growth to normalise in 2026 as the industry enters a lower seasonal output phase and faces weather uncertainties linked to the onset of La Niña.

However, yields are expected to remain positive in the near term, helped by a younger age profile across estates following years of aggressive replanting.

At IOI Corp, accelerated replanting has materially reshaped its plantation profile.

“We have accelerated our replanting for some years now in order to improve planting age profile, whereby 50% of the palms were tall in 2018, this has now been brought down to 18%,” Sudhakaran notes.

As replanted palms mature, IOI Corp expects a meaningful uplift in yields over the next few years, lowering unit costs from FY26 onwards as the heavy replanting phase tapers off.

Labour – a long-standing structural challenge for the sector – appears more manageable than in previous years, though not entirely resolved.

Sudhakaran says the company currently does not face labour shortages, having improved worker amenities and reviewed wage structures to remain competitive.

Crucially, mechanisation is reducing dependence on manual labour.

“We have also reduced manual work content by expediting mechanisation and expanding it into more activities, which we hope will help to attract more local workers to work as machine operators,” Sudhakaran says.

This shift is increasingly important as risks remain around foreign worker intake policies, particularly in Peninsular Malaysia.

From a pricing perspective, crude palm oil (CPO) remains the key earnings swing factor.

IOI Corp expects near term support to persist.

“Looking ahead, the potential onset of La Niña weather phenomenon, which could disrupt harvesting activities and output, together with the seasonal low production period from November 2025 to February 2026, and early festive demand next year, should provide a supportive environment for CPO prices,” Sudhakaran says.

“CPO prices are likely to stay above RM4,000 per tonne over the next three to four months.”

CGS International (CGSI) Research is more bullish over the medium term, lifting its CPO price assumption to RM4,500 per tonne for 2026 from RM4,000 previously.

The research house argues that rising biodiesel mandates are creating a structural floor for vegetable oil prices.

Indonesia, the United States and Brazil, which together account for about 60% of global biodiesel production, are increasingly diverting domestic oilseed output into fuel, tightening export availability of both palm and soybean oil.

With global consumption of major vegetable oils projected to rise by 6.1 million tonnes in 2026, CGSI Research expects the global stock-to-usage ratio to fall further, lending support to prices.

On the supply side, it flags slower palm oil production growth in 2026 after the sharp rebound in 2025, alongside longer-term land-related risks in Indonesia, where millions of ha of plantations are under review or have been seized.

These factors could start constraining supply from the second half of FY26, reinforcing price support.

However, the near term picture is less straightforward, particularly for Malaysia.

RHB Research remains “neutral” on the sector, highlighting that Malaysian palm oil inventories hit a six-year high of 2.84 million tonnes in November 2025, pushing the stock-to-usage ratio well above its historical average.

Exports have been sluggish, partly due to demand normalisation after the festive season and relatively high stock levels in key importing countries such as India and Pakistan.

While CPO is trading at a wide discount to competing oils, RHB Research notes that Indonesia continues to enjoy a tax advantage, supporting its export growth at Malaysia’s expense.

Indonesia’s policy choices also loom large over competitiveness.

Sudhakaran notes that while Indonesia’s recent hike in export levies on refined products “could help create a more level playing field for Malaysian CPO downstream players”, pricing advantages remain due to Indonesia’s scale and sourcing.

Aggressive downstream capacity expansion there is also creating overcapacity risks.

He adds that IOI Corp plans to counter these pressures by focusing on low-contaminant oils, sustainability compliance and operational efficiency – areas that could matter more as regulations such as the EU Deforestation Regulation reshape trade flows.

Cost pressures, meanwhile, appear more benign than in recent years.

Sudhakaran says fertiliser and labour costs have stabilised, though logistics costs remain exposed to tightening domestic transport rules and geopolitical risks affecting shipping.

Encouragingly for margins, he expects unit costs to fall as yields recover post-replanting. For investors, the debate increasingly centres on positioning.

CGSI Research has upgraded the sector to “overweight”, favouring pure upstream players such as Hap Seng Plantations Holdings Bhd, Ta Ann Holdings Bhd and SD Guthrie Bhd for their higher earnings sensitivity to CPO prices and attractive dividend yields.

Integrated players, while more diversified, may see earnings diluted by higher feedstock costs and forward sales commitments.

IOI Corp itself has been upgraded to “add” by CGSI Research, reflecting higher CPO assumptions and the value of its strategic stake in Indonesia-listed Bumitama Agri.

Ultimately, while elevated inventories and export competition may cap near term upside, the medium-term outlook for Malaysia’s plantation sector looks firmer than it has in years.

With yields recovering, costs stabilising and biodiesel demand reshaping global oil markets, the sector appears better positioned to weather volatility, provided weather risks and policy surprises do not derail the fragile balance between supply and demand.