PALMOILMAGAZINE, KUALA LUMPUR – The global palm oil industry is facing a potential new challenge in the second half of 2026, as rising risks of extreme weather linked to a strengthening El Niño phenomenon are expected to emerge. The condition could reduce palm oil production in Malaysia and Indonesia while opening room for higher crude palm oil (CPO) prices in the international market.
Market research firm CGS International Securities Malaysia said that, based on discussions with agronomist Dr. Lee Chin Tui and recent data from the United States National Oceanic and Atmospheric Administration (NOAA), there is a 63% probability of a strong El Niño developing between November 2026 and January 2027.
Quoted by Palmoilmagazine.com from NST, Friday (June 19, 2026), Lee noted that early signs of dry conditions could begin as early as July 2026. Historical patterns show that prolonged dry weather has had a significant impact on oil palm productivity.
During the 2016 El Niño event, Malaysia’s CPO production fell by 13.2% year-on-year. In Indonesia, output from ten major palm oil producers declined by an average of 13.4%. The country also recorded production contractions of 5.3% in 2019 and 8% in 2024 during periods of low rainfall.
CGS International stated that any weather-related disruption in Malaysia and Indonesia would have a major impact on global supply, as both countries are the world’s key palm oil producers. A production decline would tighten supply and potentially push CPO prices higher.
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Fertilizer Costs and Productivity Risks
Beyond weather risks, the palm oil industry is also facing rising production costs, particularly fertilizer prices. Geopolitical tensions between the United States and Iran previously triggered a spike in urea prices this year, although the situation has eased following signs of de-escalation.
Dr. Lee cautioned that reducing fertilizer application to cut costs could be risky, especially during heatwaves. High temperatures increase nitrogen loss through volatilization, reducing fertilizer efficiency.
Long-term field trials show that stopping fertilization does not immediately affect yields. However, mature oil palm plantations may experience an average yield decline of around 11% over five years compared to consistently fertilized estates.
He also stressed the importance of water management in plantations. Adequate soil moisture supports nutrient absorption and helps maintain productivity under climate stress.
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Weakening FFB Output in Malaysia
Although Malaysia’s CPO production reached 7.38 million tons in the first five months of 2026—higher than the same period last year—CGS International noted that this does not fully reflect underlying field conditions.
The increase was largely driven by a higher oil extraction rate (OER), while fresh fruit bunch (FFB) output actually declined by 3.1% year-on-year.
Dr. Lee said Malaysia’s full-year 2026 CPO production target of 19.5–20 million tons would be challenging to achieve. A key benchmark to watch is the industry’s ability to maintain monthly output of around 1.8 million tons during the third quarter.
If the second-half weather turns drier than expected, FFB production pressure from drought stress is likely to intensify. A normalization in extraction rates could further weigh on overall CPO output.
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Biodiesel Demand to Support Market
Despite the risks, CGS International maintained its “Overweight” outlook on the Malaysian plantation sector. The firm said palm oil demand remains supported by mandatory biodiesel policies in Malaysia and Indonesia, as well as its price competitiveness against soybean oil.
CGS added that potential supply constraints in the second half of 2026 through 2027—particularly from Indonesia—could create a more favorable pricing environment for Malaysian producers.
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The firm also highlighted selected plantation companies that are better positioned to withstand weather volatility, particularly those with stronger selling prices and estates that are more resilient to prolonged dry conditions. (P2)
