KUALA LUMPUR — The single most consequential variable for Malaysia's palm oil industry in 2026 is not trade policy, not biodiesel mandates, and not the ebb and flow of global demand. It is the weather—specifically, the increasingly likely emergence of a "Super El Niño" event that could devastate production and send prices spiraling above RM5,000 per tonne.
The warning signs have been accumulating for months. The Malaysian Meteorological Department has indicated that the likelihood of El Niño reaching the "very strong" or "Super El Niño" category between October and December has risen to more than 90% . The US National Oceanic and Atmospheric Administration has projected a 63% probability of a strong El Niño emerging between November 2026 and January 2027 . And agronomists expect dry conditions to begin appearing as early as July 2026, with prolonged dry weather historically having a significant impact on palm oil production .
The historical precedents are sobering. During the 2016 El Niño episode, Malaysia's CPO production fell 13.2% year-on-year, while a sample of 10 major Indonesian producers recorded a 13.4% decline in output . Indonesia also experienced production contractions of 5.3% in 2019 and 8.0% in 2024 during periods of low rainfall . The 2015 Super El Niño, which occurred under similar conditions, was followed by a 13% decline in Malaysia's palm oil production—equivalent to 2.6 million tonnes—the following year .
What makes the 2026 situation particularly precarious is the timing. Malaysian Palm Oil Council CEO Belvinder Sron noted that dry weather conditions have developed relatively late in the year compared with 2015, making rainfall between September and November critical in determining the severity of the dry conditions and the extent of El Niño's impact on production in 2027 . The upcoming monsoon season in December is expected to help mitigate the potential impact, but the window for relief is narrowing .
The production data already shows signs of stress beneath the surface. While Malaysia produced 7.38 million tonnes of CPO in the first five months of 2026—higher than the corresponding period last year—this increase was largely driven by improved oil extraction rates, which offset a 3.1% year-on-year decline in fresh fruit bunch production . CGS International has warned that market expectations for full-year CPO output of between 19.5 million and 20 million tonnes may prove challenging to achieve, identifying monthly production of 1.8 million tonnes in the third quarter as a key benchmark to watch .
The agronomic risks are being compounded by higher fertilizer costs following the US-Iran conflict, which triggered a sharp rise in urea prices this year . While some plantation companies may be tempted to reduce fertilizer application to contain costs, agronomist Dr Lee Chin Tui warned that doing so during heatwaves could exacerbate yield risks, as elevated temperatures increase nitrogen losses through volatilization, reducing fertilizer efficiency . Drawing on long-term field trial data, Lee said the impact of halting fertilizer application is typically delayed, but prime-age palms could suffer an average yield decline of about 11% over the following five years compared with continuously fertilized estates .
The weather story is not uniform across the region. Belvinder noted that the impact of El Niño across Southeast Asia has been uneven in 2026, with Indonesia experiencing drier conditions since late June, particularly in Sumatra and Kalimantan, while Malaysia has yet to experience critical dryness, although temperatures have been rising . This divergence matters because Malaysia and Indonesia together account for the vast majority of global palm oil supply, and production shortfalls in either country can materially tighten market conditions .
The market has already begun pricing in the risk. CPO futures on Bursa Malaysia Derivatives rose above RM4,900 per tonne by mid-August, while 2027 forward contracts were trading above RM5,000 per tonne, reflecting growing concerns over the potential impact of El Niño . Belvinder projected that palm oil prices would remain above RM4,600 per tonne in September, with the possibility of remaining above this level through the rest of the year .
But the bullish case extends beyond weather alone. Disruptions to shipping in the Red Sea and reduced traffic through the Strait of Hormuz have kept crude oil prices elevated above US$80 per barrel, providing support to the broader vegetable oil market . The timing of these supply concerns, ahead of India's Diwali restocking season, is providing additional support to palm oil . And Indonesia's B50 biodiesel blending program, with its three-month transition period ending in September, could further strengthen demand for palm oil, reducing export availability .
The interplay between weather and policy creates a particularly volatile outlook. HLIB's Chye Wen Fei noted that the global palm oil market could remain structurally undersupplied should weather risks, fertilizer disruptions, and Indonesia's biodiesel policy converge . This could come at a time when Indonesia's higher biodiesel blending mandate is expected to absorb a larger share of palm oil supply, leaving less for export markets .
For Malaysia's plantation companies, the weather risk cuts both ways. Companies with older estate profiles, such as Hap Seng Plantations, may provide greater yield stability during severe dry weather, according to CGS International . Companies with younger, more productive estates may benefit more in normal years but could be more vulnerable to moisture stress. And companies with diversified operations, including downstream and non-palm revenue streams, may be better able to absorb production shocks.
The key uncertainty is whether the monsoon season will arrive in time and with sufficient intensity to replenish soil moisture before irreversible damage occurs. Belvinder noted that the previous Super El Niño occurred in 2015, and Malaysia's production fell 13% the following year, but in 2026 dry conditions developed later, making the September-to-November rainfall period critical .
As the industry braces for what could be its most challenging weather year since 2016, one thing is clear: the palm oil market's fate in 2026 and 2027 will be determined as much by rainfall patterns in Sumatra and Borneo as by any policy decision in Brussels, Jakarta, or Kuala Lumpur. For investors, producers, and policymakers alike, the weather is no longer a background variable—it is the central risk that demands attention, preparation, and, ultimately, resilience.