Palm Oil Production Set to Rise as Crop Dodges the Impact of El Niño

Palm oil production in Indonesia and Malaysia looks set to increase to record levels this year despite earlier concerns that El Niño might trigger a reduction in output. 

Rainfall has been plentiful in the two countries’ major palm growing regions — as seen in this display from Gro’s Climate Risk Navigator for Agriculture — which is forecast to help hold palm oil yields mostly steady. Although El Niño, which set in in mid-2023, typically brings dry weather to the region — potentially hurting yields — the impact from the climate event has largely been concentrated in southern Indonesia where relatively little palm is produced. 

View this Gro display of palm oil production, trade, and crop health data. Indonesia and Malaysia account for a combined 85% of the world’s palm oil production.

Precipitation levels in Indonesia and Malaysia have been well above historical norms since November. Although El Niño is forecast to remain in effect at least through April, the chance that above average rainfall will continue in the coming months is greater than 50% in most areas, and above 80% in some locations, according to Gro’s Climate Indicator Forecast. Forecasts this far in advance come with a high degree of uncertainty.

Heavy rainfall in palm growing areas could lead to flooded fields, which often delays harvesting. However, forecasts also call for temperatures in the region to be well above average for several more months, which could increase evaporation. 

Harvested palm area, which has largely plateaued in recent years, is likely to increase only modestly in 2024 based on annual trends estimated from Gro's oil palm land use classification model. Gro built the model — which maps year-on-year changes in mature palm area via remote sensing and computer vision — as a key component in developing a palm oil production model that will integrate palm tree age and weather impacts to forecast production. 

Palm oil prices have moved little in the past year, whereas soybean oil prices are down 23% in that time. As a result, the price spread between palm and soy — the two most widely consumed oils — has narrowed from the record wide level seen last March (see chart below). 

The narrowed spread has moved the palm/soyoil price ratio back to within a historically normal range. That might allow food manufacturing companies, which can often use the two oils interchangeably, to take advantage of increased procurement options.

The spread between palm oil prices (blue line) and soybean oil prices (green) has narrowed from the record wide level seen in March 2023. As a result, the palm/soyoil price ratio (orange) — a factor food manufacturers consider in making purchasing decisions — has returned to within a historically normal range.