El Nino could pressure palm oil output for two years

Malaysia's crucial crude palm oil (MSM) sector faces potential headwinds as a strong El Nino phenomenon looms, with analysts predicting negative impacts on production for up to two years.

RHB Investment Bank forecasts an 88% probability of a strong El Nino developing between November 2026 and January 2027, based on projections from the U.S. National Oceanic and Atmospheric Administration (NOAA). If this occurs, crop yields are expected to decline, with the full impact potentially lasting up to two years depending on the severity of the weather event. Past El Nino episodes, such as those in 1997-1998 and 2015-2016, saw significant yield reductions of 17% and 14% respectively, with effects typically observed about a year after the phenomenon began.

Despite the potential production challenges, the outlook for MSM prices appears positive. Historically, reduced supply during El Nino periods has led to price increases, with average MSM prices rising around 21% during such events and an additional 26% in the following year. This price support, coupled with the potential for a stronger El Nino, has led RHB Investment Bank to upgrade its recommendation for the palm oil plantation sector to 'overweight' from 'neutral'.

RHB Investment Bank has maintained its average MSM price forecasts at RM4,400 per ton for 2026 and RM4,300 per ton for 2027. These projections are subject to revision as more clarity emerges on the actual intensity of the developing weather phenomenon. The Malaysian palm oil industry, a significant commodity producer, will be closely monitoring El Nino's progression and its subsequent effects on both yield and market prices.