El Niño Drought and Biofuel Demand Squeeze Indonesian Palm Oil Supplies as Industry Warns of Falling Output

Indonesian palm oil producers are bracing for a period of tighter supplies as an intense El Niño brings drier weather and a heightened risk of fires to key growing regions, while domestic demand is being pushed upward by government biofuel policy.

Industry executives and officials are gathering in Bali on Nov. 12–13 for the sector’s annual conference against this backdrop of mounting strain. The trade association says the outlook is becoming “stressful,” warning that output is expected to decline by 2027 if current pressures persist.

The immediate concern is the weather. El Niño conditions are linked to reduced rainfall across parts of Indonesia, and producers in major palm oil hubs such as Kalimantan and Sumatra are already contending with drought impacts and fires that can disrupt harvesting and damage plantations. When dry spells intensify, companies often face operational slowdowns and rising costs tied to fire prevention, damage control, and logistics, all of which can weigh on production volumes.

At the same time, policy-driven demand is moving in the opposite direction. Indonesia has been working to increase biodiesel consumption, a strategy that relies heavily on palm oil as a feedstock. As the government expands biodiesel usage, more palm oil is pulled into the domestic energy market, tightening the balance between local needs and export supply.

That combination—weather-related risks to output and a structural lift in domestic demand—has sharpened concerns about near-term availability and longer-term production capacity. For buyers, the squeeze raises the prospect of more competition for supply. For producers, it introduces uncertainty around how to plan investment and operations when both climate conditions and regulatory requirements are exerting pressure at the same time.

The warning from the trade association that production could fall by 2027 underscores the possibility that this is not a brief disruption but a multi-year challenge. If drought and fires recur and biodiesel mandates keep expanding, the industry may have limited flexibility to respond quickly, particularly if plantations need time to recover from damage or reduced yields.

As conference discussions begin in Bali, industry participants are expected to focus on how to navigate the dual constraints of climate variability and evolving biofuel rules. The stakes are high for one of Indonesia’s most important commodity sectors, which sits at the intersection of agricultural output, energy policy, and global trade.

Why it matters

Indonesia is the world’s largest palm oil producer, so tighter supplies can ripple through food, consumer goods, and fuel markets. If output weakens while biodiesel demand grows, exporters, domestic users, and international buyers may all face higher prices and greater volatility. What happens next will depend on how severe El Niño conditions become and how aggressively biodiesel requirements continue to expand.