Periodic/Sector reports
Plantation: El Niño And B50 To Keep CPO Supply Tight And Prices High In 2027
Highlights
- We raise our 2027 CPO price assumption to RM4,700/tonne from RM4,400, a 6.8% upgrade, and hold 2026 at RM4,500/tonne. We maintain our OVERWEIGHT call on the sector.
- Rainfall already lost during the build-up to El Niño through August is committed to the 2027 harvest; our model cuts Malaysia's 2027 crop by 10.5% and Indonesia's by 2.9%.
- We sit deliberately below the Bursa Malaysia crude palm oil futures curve, which implies an RM4,900-5,200 average for 2027. Demand destruction should cap the move: soft oils already represent 52% of India's vegetable oil imports.
Analysis
- Stocks built on soft exports in 2026. The Malaysian Palm Oil Board's (MPOB) August release put ending stocks at 2.82m tonnes, +7.5% mom and +28.2% yoy, the highest in over two years. The build is mainly due to softer exports: January-August production of 12.63m tonnes was flat yoy and the August print was the fifth consecutive yoy decline. We close 2026 at 19.67m tonnes, inside MPOB's 19.50m-19.80m guidance.
- The supply shock is already in the ground. The relative oceanic Niño index (RONI) read +1.36 in July and is building at 0.39/month against a best historical build of 0.323; the US Climate Prediction Center puts a 75% probability on a +2.5 peak in October-December, above every event since 1950. August palm-belt rainfall was 53% below normal, the second driest since 1950. Palm's lag structure carries that deficit into the 2027 harvest, and five of six prior episodes with crop records cut the following crop 7-17% below trend.
- B50 removes exports while adding demand domestically. Indonesia's 50% palm-based biodiesel mandate reaches full pump coverage on 1 October, absorbing roughly 17m tonnes a year, about 35% of national output and some 3m more than B40. We put Indonesian exports at 22.99m tonnes in 2027, down 10.6% yoy, against 24m-28m historically. A palm-gasoil spread of -US$195/tonne means biodiesel output would not require subsidies, making the mandate enforceable.
- The balance tightens sharply in 2027. We take Malaysian output down 4.0% to 18.88m tonnes and Indonesian output down 3.0% to 52.87m tonnes due to El Niño, against Indonesian domestic disappearance up 9.8% to 30.88m tonnes on biodiesel. Combined ending stocks fall to 2.67m tonnes from 5.76m and Malaysia's stocks-to-use ratio drops to 4.6% from 15.5%.
Highlights
- We raise our 2027 CPO price assumption to RM4,700/tonne from RM4,400, a 6.8% upgrade, and hold 2026 at RM4,500/tonne. We maintain our OVERWEIGHT call on the sector.
- Rainfall already lost during the build-up to El Niño through August is committed to the 2027 harvest; our model cuts Malaysia's 2027 crop by 10.5% and Indonesia's by 2.9%.
- We sit deliberately below the Bursa Malaysia crude palm oil futures curve, which implies an RM4,900-5,200 average for 2027. Demand destruction should cap the move: soft oils already represent 52% of India's vegetable oil imports.
Analysis
- Stocks built on soft exports in 2026. The Malaysian Palm Oil Board's (MPOB) August release put ending stocks at 2.82m tonnes, +7.5% mom and +28.2% yoy, the highest in over two years. The build is mainly due to softer exports: January-August production of 12.63m tonnes was flat yoy and the August print was the fifth consecutive yoy decline. We close 2026 at 19.67m tonnes, inside MPOB's 19.50m-19.80m guidance.
- The supply shock is already in the ground. The relative oceanic Niño index (RONI) read +1.36 in July and is building at 0.39/month against a best historical build of 0.323; the US Climate Prediction Center puts a 75% probability on a +2.5 peak in October-December, above every event since 1950. August palm-belt rainfall was 53% below normal, the second driest since 1950. Palm's lag structure carries that deficit into the 2027 harvest, and five of six prior episodes with crop records cut the following crop 7-17% below trend.
- B50 removes exports while adding demand domestically. Indonesia's 50% palm-based biodiesel mandate reaches full pump coverage on 1 October, absorbing roughly 17m tonnes a year, about 35% of national output and some 3m more than B40. We put Indonesian exports at 22.99m tonnes in 2027, down 10.6% yoy, against 24m-28m historically. A palm-gasoil spread of -US$195/tonne means biodiesel output would not require subsidies, making the mandate enforceable.
- The balance tightens sharply in 2027. We take Malaysian output down 4.0% to 18.88m tonnes and Indonesian output down 3.0% to 52.87m tonnes due to El Niño, against Indonesian domestic disappearance up 9.8% to 30.88m tonnes on biodiesel. Combined ending stocks fall to 2.67m tonnes from 5.76m and Malaysia's stocks-to-use ratio drops to 4.6% from 15.5%.
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