By Faridat Salifu
Rising biodiesel demand and worsening production prospects in Indonesia and Malaysia are tightening the palm oil market, sending prices higher and providing support to competing vegetable oils such as canola.
Indonesia increased its biodiesel blending mandate to 50 per cent (B50) in July 2026, from 40 per cent previously, a policy expected to increase domestic palm oil consumption and reduce export supplies.
The United States Department of Agriculture’s Foreign Agricultural Service (FAS) forecasts Indonesia’s industrial palm oil use at 17.4 million tonnes in 2026-27, up 16 per cent from 15 million tonnes in the previous marketing year.
At the same time, Indonesian palm oil exports are projected at 23.1 million tonnes, below the previous FAS forecast of 25 million tonnes.
Palm oil prices have already responded to the tighter outlook, with nearby futures up 19 per cent from the beginning of the year as of Aug. 14, according to Barchart.
Weather conditions are adding to supply concerns. Indonesia is experiencing an El Niño period expected to persist into 2027, with dry conditions forecast to peak in August and September.
A positive phase of the Indian Ocean Dipole expected from September to December could further intensify dry weather in major producing regions, including Sumatra and Kalimantan.
FAS expects the prolonged dryness to reduce palm oil yields and has lowered Indonesia’s 2026-27 production forecast to 47.2 million tonnes, from 48 million tonnes previously.
Malaysia is facing similar production pressures, with output forecast at 19.7 million tonnes, down from 20 million tonnes in the previous year.
The country also increased its biodiesel mandate from B10 to B15 in June, which is expected to increase domestic palm oil consumption by 330,000 tonnes.
Despite the tighter supply outlook, Malaysia’s exports are forecast to rise slightly to 15.9 million tonnes in 2026-27, supported by demand from India, Kenya and China.
The tightening palm oil market is also benefiting canola, with November canola futures breaking above $805 per tonne earlier this month and testing $820 on Aug. 14, according to Errol Anderson of Errol’s Commodity Wire.
The developments highlight how government biodiesel policies and weather conditions are combining to reshape supply and demand across the global vegetable oil market.
