The Indonesian Palm Oil Producers Association (GAPKI) projects that extreme El Niño conditions could reduce crude palm oil (CPO) output by as much as 5 million tonnes, with significant impacts expected as early as next year. This potential decline in production coincides with the rollout of a mandatory increase in palm-based biodiesel to a 50% blend (B50) from the current 40%. This mandate is anticipated to increase domestic CPO absorption and reduce supply available for export markets. GAPKI previously estimated that B50 implementation could raise domestic CPO consumption for biodiesel to between 16.3 million and 17 million tonnes annually.
Despite the expected production decline, ensuring palm oil supply for domestic use remains the top priority. GAPKI chairman Eddy Martono stated that domestic demand would be met, with any shortfalls primarily affecting export volumes. Producers anticipate national CPO output of around 53 million tonnes in 2026, which should be sufficient to meet the higher domestic fuel demand. Indonesia, being the world's largest producer and exporter of palm oil, is expanding its domestic use of the commodity to reduce diesel imports and achieve energy self-sufficiency.
El Niño's impact, particularly on rainfall in Indonesia, is forecast to be severe, with the Meteorology, Climatology and Geophysics Agency (BMKG) predicting strong levels for this year, affecting strategic agricultural regions. This dry weather could lead to forest fires and haze, as well as pressure on regional inflation. While domestic demand for CPO is expected to increase due to the B50 mandate, CPO prices are difficult to predict, as they are influenced by various factors, including the B50 rollout, developments in other vegetable oil markets like sunflower, soybean, rapeseed, and canola oils, and the El Niño phenomenon.
Analysts note that while El Niño could lead to lower production volumes, the resulting higher prices could benefit upstream producers. Historical data from similar strong El Niño events in 1997-98 and 2015-16 showed material cuts in global crop yields. The current El Niño has an 81% probability of reaching "very strong" levels by October-December 2026, potentially persisting into early 2027. Some forecasts suggest CPO prices could surge, with some projecting a rise toward or beyond MYR 6,000 per tonne, especially if the B50 mandate and El Niño-induced production disruptions occur simultaneously.
