"The End of Cheap Palm Oil? Output Stalls as Biodiesel Demand Surges"

The palm oil market is at a crossroads. For years, the world's most widely used vegetable oil has been a staple in everything from cooking to cosmetics, thanks to its versatility and cost-effectiveness. But as demand for biodiesel surges, driven by policy mandates and environmental concerns, the future of palm oil looks increasingly uncertain. Supply-side challenges, exacerbated by adverse weather conditions and slower replanting rates, are putting upward pressure on prices, raising the question: is the era of cheap palm oil coming to an end?



Supply Constraints and Weather Woes

The palm oil market continues to face significant uncertainties heading into 2025. Supply-side challenges, driven by adverse weather conditions and a slower pace of replanting, are exacerbating the situation. In Malaysia, the Malaysian Meteorological Department forecasts that the high rainfall trend will continue at least through the first quarter of 2025, with a potential for La Niña weather conditions. This persistent wet weather has led to flooding in key production states, damaging oil palm trees and reducing yields. As weather conditions normalize in the latter half of the year, drier weather could improve growth and harvesting conditions, though its full impact on production may only be realized in 2026.

Indonesia, the world's largest palm oil producer, is also facing challenges. The country's crude palm oil (CPO) production from January to October 2024 reached 39.96 million metric tons (mmt), down from 41.78 mmt in the same period in 2023. Total annual production is projected at 48 mmt, lower than 50.07 mmt in 2023. These weather-related uncertainties may impact overall production and yields, as seen in the declines in Honduras and Papua New Guinea due to adverse weather and bud rot disease.

The Biodiesel Boom

While supply constraints are tightening, demand for palm oil in biodiesel production remains robust. Indonesia's biodiesel blend rate is set to increase to 40% (B40) in 2025 from the current 35% (B35), with further plans to raise it to 50% (B50). The Indonesian Palm Oil Association (GAPKI) estimates that achieving B40 will require an additional 1.7 million mt of palm oil, while reaching B50 could drive demand higher by an additional 5 million MT. This increase underscores the growing role of biodiesel as a driver of palm oil consumption.

The shift in demand towards biodiesel and other renewable energy sources is expected to significantly influence the future dynamics of the global vegetable oil market. Key substitutes for palm oil, such as sunflower oil and rapeseed oil, may face supply constraints, supporting higher prices. Drier-than-average weather conditions in major producing regions, including Canada, Ukraine, and Russia, are likely to impact production. Additionally, the ongoing Russia-Ukraine conflict continues to disrupt the global sunflower oil supply, keeping inventories tight. Sunflower oil production is projected to decrease to approximately 20.0 million MT in 2025 from 2024’s 22.1 million MT.

Price Dynamics and Policy Impacts

Palm oil prices are expected to remain high, averaging RM4,600/metric tonne (MT) in 2025 (2024F: RM4,200/MT; 2023: RM3,812/MT). This is due to global supply constraints, driven by reduced exports from the largest palm oil producer, Indonesia, as well as recent adverse weather conditions in Malaysia. The high prices of palm oil may prompt a shift to soybean oil, which remains more competitive due to increased production in Brazil and Argentina. However, the limited availability of alternative vegetable oils sustained strong demand for palm oil despite rising costs, ultimately reducing global ending stocks.

Government policies and regulations play a crucial role in shaping the demand for biodiesel and other renewable energy sources. For example, the European Union ReFuelEU Aviation legislation sets blending obligations of 2% for 2025 and 6% for 2030, which is forecast to increase the biojet fuel share. Similarly, the United States Department of agriculture has reported that farms spanning 1,000 acres can generate an additional profit of US$ 32,800 by producing biodiesel, indicating the economic incentives for biodiesel production.

Long-Term Outlook

The long-term outlook for the palm oil market is clouded by uncertainty. Adverse weather conditions and slower replanting rates are expected to have significant long-term effects on palm oil production in key regions like Malaysia and Indonesia. These factors are likely to exacerbate supply-side challenges, leading to reduced yields and lower overall production. The slower replanting rates mean that a significant portion of the oil palm trees in these regions are aging, which will lead to declining yields over time. This, combined with the weather-related challenges, could result in a long-term reduction in palm oil production, exacerbating supply constraints and supporting higher prices.

In conclusion, the palm oil market is facing a perfect storm of supply constraints, surging biodiesel demand, and adverse weather conditions. While the era of cheap palm oil may be coming to an end, the market's resilience and adaptability will be tested in the years to come. As the world continues to grapple with the challenges of climate change and energy transition, the future of palm oil remains uncertain, but one thing is clear: the days of cheap palm oil are numbered.