Indonesia's main palm oil producers' group warned this week that El Niño could cut the country's output by as much as 3 million tons in 2027, as drought and plantation fires hit trees already weakened by a year of skipped fertilizer.

Eddy Martono, chairman of the Indonesian Palm Oil Association, known as Gapki, gave the warning at the group's 22nd Indonesian Palm Oil Conference and 2027 Price Outlook in Nusa Dua, Bali, the Jakarta Globe reported on Thursday. "El Niño makes an already difficult situation worse," he said, because it brings fires as well as drought.

For investors in Asia, the forecast cuts against the mood in the futures market. Benchmark palm oil prices in Kuala Lumpur have been sliding on swelling Malaysian inventories. A supply shock in Indonesia, the world's largest producer, would hit exports first, because Jakarta has made clear that domestic needs, led by its biodiesel program, come before foreign buyers.

Gapki sees 2027 harvest at risk

The 3 million-ton figure is not new, but Gapki's decision to repeat it at its flagship price conference matters. In August, Martono said in an interview reported by The Edge Malaysia that output "may still decline but probably by around three million tonnes next year." At the time, the association had trimmed an earlier estimate of a 4 million to 5 million ton loss after rain fell in some plantation areas. A 3 million ton drop would equal roughly 5% of annual output; Indonesia produced 56.6 million tons in 2025, according to the same report.

Martono also said in August that domestic supply would be prioritised and that export volumes, not local supply, would take the hit.

The association's concerns go beyond the weather. Some smallholders have put off applying fertilizer because of financial pressure, leaving their trees more exposed to dry conditions, according to the Jakarta Globe account of the Bali meeting. Martono also said the country's aging plantations and weak smallholder yields call for a nationwide replanting drive, and it is pushing for drought-tolerant, high-yield seed varieties.

The group has been trying to lift productivity in other ways. It introduced two more pollinating weevil species, Elaeidobius subvittatus and Elaeidobius plagiatus, in April to work alongside Elaeidobius kamerunicus, recently brought in from Tanzania, and in May it distributed 29,281 wild oil palm seeds collected in Tanzania for breeding.

Strong 2026 so far, with biodiesel taking a bigger share

The warning comes after a strong year for the industry. Indonesian production reached 47 million tons in the first nine months of 2026, up 8.4% from a year earlier, Gapki said. Exports of crude palm oil, palm kernel oil and oleochemicals rose 9.6% to more than 27.3 million tons over the same period, earning $32.3 billion.

Domestic consumption reached 18.8 million tons, supported by the B50 biodiesel mandate, which requires a 50% blend of palm-based fuel in diesel. Each step up in the blend pulls more oil out of the export market, and a smaller crop would sharpen that trade-off.

That matters for importing countries and for listed plantation companies in Jakarta, Kuala Lumpur and Singapore. Planters with large Indonesian estates would face lower volumes but could gain from higher prices if the crop falls short. Refiners and food makers that rely on imported palm oil would face higher costs. Indonesia has also set a higher export growth target alongside a new palm oil reference price, part of a broader push to manage how much of the crop leaves the country.

Futures market focused on Malaysian stockpiles

Traders have so far focused on near-term supply rather than next year's weather. The January 2027 crude palm oil contract on Bursa Malaysia Derivatives fell RM121, or 2.69%, to RM4,375 a ton on Nov. 5, its lowest close since March 6, InfoSAWIT reported, citing Reuters. Traders expected a larger build in Malaysian inventories than earlier forecast.

A Reuters survey estimated that Malaysian stocks rose 6.8% in October to about 3.75 million tons, from a record 3.51 million tons in September, according to the same report. Malaysian palm oil prices had already fallen to their lowest since June in October on record stockpiles.

Anilkumar Bagani of Sunvin Group said in the same report that Indonesian exporters may speed up shipments over the next two months to take advantage of lower export tariff brackets and to avoid possible transaction fees linked to export registration with sovereign wealth fund Danantara, which were reported to be scheduled for January. A rush of Indonesian cargoes before the end of the year would add to the near-term glut, even as Gapki points to tighter supply later in 2027.

The gap between those two stories, ample stocks now and a weather-driven shortfall next year, is what plantation investors will be weighing in the coming months. The next markers are the Malaysian Palm Oil Board's monthly supply and demand reports and the pace of Indonesian shipments before the January fee date.