01/07/2026 (The Edge Malaysia) - THE emerging El Niño cycle is expected to support crude palm oil (CPO) prices over the near to mid-term, but the eventual impact on Bursa Malaysia-listed plantation companies will depend on whether higher selling prices can outweigh weaker production.

Most analysts expect the effect to come in stages, with concerns over tighter palm oil supply seen to keep CPO prices firm in the near term, benefiting upstream planters, while fresh fruit bunch (FFB) output remains relatively resilient. However, the larger production could be hit later, possibly from the first half of 2027, as the prolonged hot and dry weather begins to affect yields.

For context, US scientific and regulatory agency National Oceanic and Atmospheric Administration announced on June 11 that El Niño conditions were present, estimating a 63% chance of a very strong El Niño during the November to January 2027 period, potentially placing it among the largest events on record.

“I reckon the industry must brace for high-magnitude production risks. According to the latest data and ocean indicators, this specific El Niño cycle could be highly comparable in strength to the devastating 1997-1998 event, which was one of the most severe in history. If you recall, the 1997-1998 event is remembered as one of the worst environmental and agricultural disasters in Southeast Asian history. The massive forest and peatland fires for agricultural development got completely out of control, thus blanketing the region in a suffocating haze lasting for months. That crisis was the ultimate wake-up call for regional governments resulting in The Asean Zero Burning Policy (1999),” M R Chandran, advisor to the Roundtable on Sustainable Palm Oil and chairman of IRGA Group of Companies, tells The Edge.

Hot weather supports CPO prices for now

For now, the majority of analysts are looking at the El Niño cycle’s short- to mid-term impact on CPO prices.

“If a very strong El Niño materialises, particularly if accompanied by prolonged below normal rainfall in key producing regions, and actual production losses become more visible, we could see further upside risk to our CPO price forecasts, especially for 2027,” BIMB Securities Equity Research analyst Saffa Amanina Mohd Anwar observes.

Year to date, CPO prices have risen 12% to the RM4,491 level last Tuesday, with analysts forecasting average CPO prices of RM4,400 per tonne in 2026 and RM4,500 in 2027. The higher forecast for next year reflects expectations that the lagged impact of El Niño will begin to tighten supply more visibly.

Analysts and plantation experts have routinely explained that the larger impact on FFB production is usually not immediate, as the more visible production impact typically comes with a lag due to the long oil palm fruiting cycle.

“If dry conditions intensify in the second half, some early impact on FFB output could start to appear towards late 2026. However, we believe the bigger production and yield impact is more likely to be felt in 2027, as the lagged effect from prolonged dry weather becomes more visible over the following six to 12 months, with potential lingering effects depending on the severity and duration of the dry spell,” says BIMB’s Saffa.

She forecasts the earnings impact for 2026 would still be more positive for upstream planters, as firmer CPO prices should support realised selling prices while production is expected to remain decent, supported by the seasonal higher-crop cycle in 3Q2026.

“For 2027, the earnings impact could become more balanced or slightly positive. Higher CPO prices would remain positive, but weaker yields and lower FFB volumes could partly offset the benefit, particularly for companies with higher exposure to drier regions, weaker labour availability or less effective fertiliser application. In short, we view El Niño as a price-supportive catalyst first and a yield risk later, with the larger operational impact more likely to be seen in 2027,” she explains.

Meanwhile, CIMB Securities head of research Ivy Ng projects total CPO production to fall 2% to 3% this year from 20.28 million tonnes in 2025, which would put the output at roughly 19.7 million to 19.9 million tonnes.

Similarly, plantation consultant Chandran, who holds a cautious view on the weather and its impact, forecasts Malaysian output of 19.7 million tonnes and Indonesian production of 50.5 million to 51 million tonnes. Indonesia’s CPO production in 2025 was 51.7 million tonnes after increasing 7.26% from 48.1 million tonnes in 2024.

To CIMB’s Ng, the El Niño theme is not simply a bet on higher CPO prices. She says the beneficiaries will likely be planters that can capture higher selling prices while maintaining production, or major players with estates spread across enough locations to reduce their exposure to severe dry weather in any single region. Meanwhile, smaller planters whose land is less affected by severe weather conditions also stand out as beneficiaries.

Upstream, geographically diversified players to gain

For equity investors, upstream-focused plantation companies are seen to offer the most direct leverage to higher CPO prices.

Within BIMB Securities’ coverage, Saffa identifies Hap Seng Plantations Holdings Bhd (KL:HSPLANT), Sarawak Oil Palms Bhd (KL:SOP), Sarawak Plantation Bhd (KL:SWKPLNT), TH Plantations Bhd (KL:THPLANT) and TSH Resources Bhd (KL:TSH) as the more direct beneficiaries.

“[These companies] should benefit more directly from elevated CPO prices, given their upstream exposure and limited downstream margin drag. In contrast, large integrated planters could see part of the CPO price upside diluted by downstream exposure, higher feedstock costs or a more diversified earnings base,” Saffa explains.

BIMB regards Hap Seng Plantations as one of the more straightforward beneficiaries because it is a pure upstream producer and sells most of its CPO at spot prices, allowing higher market prices to show up more quickly in its earnings. Saffa adds that the group has also historically achieved realised CPO selling prices above the Malaysian Palm Oil Board average, supported by its certified sustainable CPO and selling strategy.

“Its production profile could provide further support. About 19% of its palms have yet to reach prime mature age, while its FFB yield and oil extraction rate have remained above the Malaysian and Sabah averages,” BIMB’s Saffa shares.

CIMB’s Ng adds that larger plantation groups tend to offer greater protection from localised drought because of the geographical spread of their estates.

“El Niño patterns could change. Sometimes it impacts Indonesia more severely, sometimes Malaysia. As we can’t predict the impact, companies with a more diverse spread tend to hedge better against El Niño. The more diversified estate players such as Kuala Lumpur Kepong Bhd (KL:KLK) and SD Guthrie Bhd (KL:SDG), which have plantations in various geographical locations, should be ‘safer’. The smaller players would be lucky if the El Niño effects don’t affect their spots directly, and if they are completely unaffected, they’ll be big beneficiaries,” says Ng, who has “buy” calls on plantation heavyweights IOI Corp Bhd (KL:IOICORP), Kuala Lumpur Kepong, Hap Seng Plantations and United Malacca Bhd (KL:UMCCA).

Year to date, shares in IOI Corp stood 5.75% higher at RM4.25 last Tuesday, while KLK, Hap Seng Plantations and United Malacca closed 3.9%, 1.4% and 1.5% higher at RM20.58, RM20.58 and RM5.80 respectively.

BIMB’s Saffa believes the El Niño theme is not yet fully reflected in plantation share prices, and this is despite the Bursa Malaysia Plantation Index outperforming the broader market this year after hitting a 10% high to 9,155.51 points on April 3, a level not seen since June 2014.

Year to date, the plantation index was 5.2% higher at 8,759.28 points as at last Tuesday with the sector trading at an average price-earnings ratio of 15.43 times.

‘Planters are not overly concerned about drought yet’

Looking back on past cycles, CGS International in a note on June 16 recalls that the strong El Niño in 2016 led to CPO production declines in the two largest producing countries. Malaysia’s production fell 13.2% year on year or 2.6 million tonnes, while Indonesia posted a y-o-y decrease of 13.4% or 1.3 million tonnes (based on a sample of 10 Indonesia plantation companies).

“Separately, during the low-rainfall years of 2019 and 2024, Malaysia’s CPO production grew but Indonesia’s output contracted 5% and 8% y-o-y respectively. In 5M2026, Malaysia’s CPO production rose 1.5% y-o-y. Nevertheless, the underlying FFB production declined 3.1% y-o-y or 1.2 million tonnes, which was offset by a stronger oil extraction rate, indicating that while milling and operational efficiencies improved, biological agronomic yields showed signs of weakening,” says CGS, which is bullish on SD Guthrie, Hap Seng Plantations and Ta Ann Holdings Bhd (KL:TAANN) (“add” call, target price: RM6.85) “for its upstream operations benefiting from high CPO prices, and its attractive FY2026 dividend yield of 6%”.

Despite forecasts of a severe El Niño, plantation companies have yet to report the widespread drought that would confirm a major supply shock.

“Although parts of the northern peninsula, west coast and Johor were very dry earlier this year, rainfall has remained sufficient and planters are not overly concerned,” says CIMB’s Ng.

“The market is watching for a major drought. If it happens, the impact on production yields would only become visible about six months later. That is why CPO prices have remained muted despite the El Niño warning. Palm buyers will only react when they see an actual impact on supply,” says Ng, who expects the production effect to emerge in the first half of next year.

BIMB’s Saffa’s CPO price forecasts already incorporate some supply risk from El Niño, stronger biodiesel demand and a tighter global palm oil supply-demand balance. She thinks a very strong event, combined with prolonged below normal rainfall and actual production losses, could push CPO prices above these assumptions, especially next year.

Meanwhile, Chandran takes a cautious view of the current cycle and believes the industry should prepare for a potentially severe production disruption.

“The indicators highlight that this cycle is tracking as a ‘super El Niño’, establishing itself as one of the strongest events recorded since 1950. It has disrupted normal rainfall patterns, introducing record rainfall deficits and historic, prolonged droughts lasting between six and eight months across all key oil palm growing regions in Southeast Asia, surpassing the normal one-to-three-month dry spells. The severity of the drought and rainfall deficits has been notably more intense in Indonesia than in Malaysia.

“I reckon the industry must brace for high-magnitude production risks. According to the latest data and ocean indicators, this specific El Niño cycle could be highly comparable in strength to the devastating 1997-1998 event, which was one of the most severe in history,” Chandran warns.

That said, BIMB’s Saffa notes that current share prices do not yet fully reflect a potential very strong El Niño scenario, where prolonged dry weather could translate into visible FFB production losses in 2027.

“Hence, we still see room for further upside if weather risks worsen, with stronger upside likely among upstream-focused planters, given their higher CPO price leverage,” she says.

For investors, the timing of the technical process matters because the market can price in a potential supply shortage before plantation companies begin reporting weaker output.

Chandran expects regional production to fall 10% to 15% next year if a severe El Niño materialises. Instead of normal global palm oil supply growth of about 2.5 million tonnes, he estimates that supply could contract by two million to three million tonnes, representing 4.5 million to 5.5 million tonnes supply loss to the market.

https://theedgemalaysia.com/node/807940