The ongoing El Niño weather phenomenon is projected to severely curtail palm oil output in 2027, primarily in Malaysia, due to the lagged impact of dry weather on fresh fruit bunch (FFB) yields. The U.S. Department of Agriculture (USDA) has revised its forecast for Malaysia's palm oil production for the 2026-27 marketing year (October-September) down to 19.7 million metric tons, citing expected reduced rainfall from June 2026 into 2027. This reduction in supply is anticipated to become more evident in the third and fourth quarters of the marketing year, reflecting the typical delay in oil palm productivity response to environmental stress.
Adding to the supply squeeze, Malaysia's escalating biodiesel blending mandates, moving from B10 to B12 and then to B15, will significantly boost domestic palm oil consumption. The full effect of the B15 mandate, implemented in Peninsular Malaysia from June 1, 2026, is expected to increase domestic consumption by 330,000 metric tons year-over-year, reaching 4.59 million metric tons in 2026-27. This surge in industrial demand from biodiesel producers is likely to slow stock accumulation without necessarily causing outright shortages. Consequently, ending stocks are forecast to dip from 2.8 million metric tons in 2025-26 to 2.56 million metric tons in 2026-27.
Despite the reduced production and heightened domestic consumption, Malaysia's palm oil exports are expected to remain robust, with the USDA projecting 15.9 million metric tons for 2026-27. However, export growth could face headwinds from increased competition with Indonesia, a narrowing price advantage over alternative vegetable oils, and the larger domestic biodiesel consumption. Analysts, such as those from BIMB Securities, predict that while firmer crude palm oil (CPO) prices in 2026 might benefit upstream planters, the earnings impact in 2027 could be more balanced or slightly positive, as higher prices contend with weaker yields and lower FFB volumes. Overall, El Niño is seen as a near-term price-supportive catalyst and a long-term yield risk, with its major operational impact surfacing in 2027.
