Malaysia’s palm oil industry is expected to face tighter supply conditions in the 2026-27 marketing year as El Niño-driven dry weather is likely to reduce production while higher biodiesel blending boosts domestic demand, according to the latest oilseeds and products update from the US Department of Agriculture (USDA).
The report, released on July 1, said palm oil production is expected to moderate after a strong performance in 2025-26, with increased biodiesel consumption absorbing a larger share of available supplies and slowing stock growth, S&P Global reported.
The USDA has lowered its forecast for Malaysia’s palm oil production in the 2026-27 marketing year (October-September) to 19.7 million metric tonnes, citing dry weather linked to El Niño from June 2026 into 2027.
The report said reduced rainfall is expected to affect fresh fruit bunch (FFB) yields, with the impact likely to become more visible during the third and fourth quarters of the marketing year because oil palm productivity typically responds with a delay.
In contrast, the USDA raised its estimate for 2025-26 palm oil production to 20 million metric tonnes, up by 300,000 tonnes, after output between October 2025 and May 2026 exceeded the corresponding period of the previous year by more than one million tonnes despite slower production during April and May.
The harvested area is expected to remain largely unchanged at 5.15 million hectares in 2025-26 and 5.16 million hectares in 2026-27.
The report also projected lower production of palm kernel oil and palm kernel meal in 2026-27 as reduced fresh fruit bunch availability is expected to limit crushing activity.
Malaysia’s move from B10 to B12 and now to the B15 biodiesel blending programme is expected to significantly increase domestic palm oil consumption over the next two marketing years.
According to the report, the Malaysian Palm Oil Board estimates that shifting from B10 to B12 increases palm oil demand by about 130,000 metric tonnes annually, while the expansion to B15 could add another 204,000 tonnes. The full impact is expected during the 2026-27 marketing year following the implementation of the B15 mandate in Peninsular Malaysia from June 1, 2026.
The USDA expects domestic palm oil consumption to rise to 4.59 million metric tonnes in 2026-27, an increase of 330,000 tonnes from the previous year, mainly due to higher industrial demand from biodiesel producers.
Consumption during 2025-26 has been revised to 4.35 million tonnes as the B15 mandate will apply only during the final months of the marketing year.
Food consumption is expected to remain stable at around 950,000 tonnes in 2026-27 compared with 940,000 tonnes in 2025-26.
The stronger domestic demand is expected to slow stock accumulation without causing supply shortages.
Ending stocks are forecast to decline from 2.8 million metric tonnes in 2025-26 to 2.56 million tonnes in 2026-27, while remaining sufficient to meet domestic consumption and export requirements.
To support supplies, the USDA has raised Malaysia’s palm oil import forecast for both 2025-26 and 2026-27 to 550,000 metric tonnes.
Imports between October 2025 and April 2026 reached about 290,000 tonnes, supported by increased shipments from Indonesia amid uncertainty surrounding changes to Indonesia’s palm oil governance framework.
Despite lower production and rising domestic consumption, Malaysia’s palm oil exports are expected to remain robust.
The USDA increased its export estimate for 2025-26 to 15.75 million metric tonnes, while exports in 2026-27 are projected at 15.9 million tonnes.
Demand is expected to remain supported by major importers such as India, Kenya and China. However, export growth could face pressure from competition with Indonesia, a narrower price advantage over competing vegetable oils and higher domestic biodiesel consumption.
The report noted that soybean oil prices in the United States remain significantly higher than palm oil prices, although palm oil’s price discount compared with soybean oil from Argentina and Brazil has narrowed.
According to the USDA, this pricing has continued to support Malaysian palm oil exports, particularly to price-sensitive markets such as India.
According to Platts, part of S&P Global Energy, crude palm oil (CPO) delivered to India’s west coast was assessed at $1,213.50 per metric tonne on July 3 for July loading, down $2.50 per tonne from the previous day, while August shipments were priced $3.50 per tonne higher than July cargoes.
