Weather & Crops Note – 6 August 2026

Palm oil markets are watching the weather as much as the balance sheets. The current El Niño episode (ONI +1.4) continues to shape conditions across the Malaysian and Indonesian palm belts, with notable dryness reported in Sarawak, Sumatra/Riau, and Kalimantan. While the market is focused on near-term supply and demand, the agronomic clock is ticking: El Niño-driven drought typically hits yields with a 6-12 month lag, mainly through reduced fruit bunch weight.

Dry Belts, Delayed Impact

The dry spell across key growing regions is not yet a harvest emergency, but it is a signal for forward production. Soil moisture deficits now can translate into smaller bunches and lower oil extraction rates later in the season. For Malaysia, the dry conditions in Sarawak are particularly relevant given the state’s significant share of national output. In Indonesia, the dry belts of Sumatra/Riau and Kalimantan are critical to the world’s largest palm oil supply chain.

Our model outlook suggests that while current production is still supported by seasonal patterns, the lagged effect of this dryness could begin to show in late 2026 or early 2027. Historically, El Niño-related yield losses are not immediate; they emerge as the crop develops. This means the market may be underestimating the potential for tighter supply ahead, even as near-term stocks build.

Heavy Rain Risk Remains

Even as some areas are dry, the broader Southeast Asian region remains vulnerable to heavy rain events. La Niña, which often follows El Niño, typically brings wetter conditions and can disrupt harvesting and logistics. For now, the immediate threat is less about drought and more about the possibility of intense rainfall that could slow field access, reduce harvest days, and delay shipments.

Near-Term Production Outlook

For Malaysia, the latest MPOB data (June 2026) showed production at 1,638,777 tonnes, up 8.1% month-on-month, with stocks at 1,332,697 tonnes. These figures reflect the current seasonal upswing, but weather remains a wildcard. If dryness persists, the pace of output growth could moderate in the coming months.

In Indonesia, the reference price stands at about $1030/MT, and the dry belts are a concern for the second half of the year. The market’s attention is also on the upcoming MPOB release in about five days, which will provide fresh data on July production and stocks. Positioning is bearish, but weather-driven uncertainty is high.

Bottom Line

The El Niño footprint is visible in the dryness across major producing regions. While the immediate impact is limited, the lagged effect on yields is a real risk. Traders should monitor rainfall over the next few weeks, as any intensification of dry conditions could reinforce the case for tighter supply later in the season. Conversely, a shift to wetter weather would ease those concerns but could introduce harvest disruptions. The weather, as always, remains a key swing factor for palm oil prices.