El Niño risk could tighten palm oil supply, lift CPO prices – CGS International
17/06/2026 (New Straits Times), Kuala Lumpur - Malaysia's plantation sector could face renewed production risks in the second half of 2026 as forecasts point to the development of a strong El Niño event, potentially tightening global palm oil supply and supporting crude palm oil (CPO) prices, according to CGS International Securities Malaysia Sdn Bhd.
The firm said a recent discussion with agronomist Dr Lee Chin Tui highlighted growing weather-related risks after the latest data from the US National Oceanic and Atmospheric Administration (NOAA) indicated a 63 per cent probability of a strong El Niño emerging between November 2026 and January 2027.
Lee expects dry conditions to begin appearing as early as July 2026, with prolonged dry weather historically having a significant impact on palm oil production.
During the 2016 El Niño episode, Malaysia's CPO production fell 13.2 per cent year-on-year, while a sample of 10 major Indonesian producers recorded a 13.4 per cent decline in output.
Indonesia also experienced production contractions of 5.3 per cent in 2019 and 8.0 per cent in 2024 during periods of low rainfall.
CGS International said any weather-induced production shortfall in Malaysia and Indonesia, which account for most of global palm oil supply, could materially tighten market conditions and lend support to CPO prices.
The firm noted that agronomic risks are being compounded by higher fertiliser costs following the US-Iran conflict, which triggered a sharp rise in urea prices this year despite recent easing amid signs of de-escalation.
While some plantation companies may be tempted to reduce fertiliser application to contain costs, Lee said doing so during heatwaves could exacerbate yield risks, as elevated temperatures increase nitrogen losses through volatilisation, thereby reducing fertiliser efficiency.
Drawing on long-term field trial data, he said the impact of halting fertiliser application is typically delayed, but prime-age palms could suffer an average yield decline of about 11 per cent over the following five years compared with continuously fertilised estates.
He added that effective water management remains critical, as adequate soil moisture improves fertiliser uptake and supports yield performance during periods of climatic stress.
CGS International also said Malaysia's underlying fresh fruit bunch (FFB) production trends appear weaker than headline CPO output figures suggest.
Malaysia produced 7.38 million tonnes of CPO in the first five months of 2026, higher than the corresponding period last year.
However, the increase was largely driven by improved oil extraction rates (OER), which offset a 3.1 per cent year-on-year decline in FFB production.
According to Lee, market expectations for Malaysia's full-year CPO output of between 19.5 million and 20 million tonnes may prove challenging to achieve.
He identified monthly CPO production of 1.8 million tonnes in the third quarter as a key benchmark to watch.
He said drier-than-expected weather conditions in the second half of the year could place further pressure on FFB yields due to moisture stress and, together with OER normalisation, lead to a larger decline in overall CPO production.
Despite the near-term risks, CGS International maintained its "Overweight" rating on the Malaysian plantation sector, citing continued structural demand support from biodiesel mandates in Malaysia and Indonesia as well as palm oil's price competitiveness relative to soybean oil.
The firm believes that supply constraints in the second half of 2026 and 2027, particularly from Indonesia, could create a more favourable pricing environment for Malaysian producers.
Among its preferred stocks, CGS International highlighted Ta Ann Holdings Bhd and Hap Seng Plantations Holdings Bhd, citing their relatively stronger realised CPO prices compared with Indonesian peers.
It added that Hap Seng's older estate profile could provide greater yield stability during severe dry weather, while Ta Ann's smaller plantation footprint may be easier to manage operationally under challenging conditions.