On Tuesday (August 25), the palm oil market was rife with news. Malaysian Plantation Industries and Commodities Minister Noraini Ahmad told the media after an event in Negeri Sembilan that the impact of El Niño on the yield of commodity crops such as palm oil typically becomes apparent after several months of sustained high temperatures and low rainfall; the head of the Malaysian Meteorological Department had previously raised the probability of a "super El Niño" occurring between October and December to over 90%. On the same day, a study published online in PNAS questioned the actual incremental effect of the zero-deforestation commitments made by Indonesian oil palm concessions over the past decade. With supply-side news compounded by long-term risks, the CPO market has not yet formed a unified trading direction based on these changes.

Why is it difficult to observe the increase in the commitment to zero deforestation?

The study covered Indonesian oil palm concession areas, using concessions associated with companies that had adopted the Zero Deforestation Commitment (ZDC) as the treatment group and those not associated as the control group. During the full implementation period of the commitment from 2018 to 2020, the annualized deforestation rate in both groups decreased to approximately 0.5%. Researchers' preferred calculations showed a 6.5 percentage point decrease in deforestation rates in ZDC-associated areas and a 6.63 percentage point decrease in non-ZDC areas, an additional reduction of only 0.12 percentage points, with a standard error of 0.67 percentage points, statistically indistinguishable from zero. Study author Robert Heilmayr stated bluntly, "This means these companies are not special," "Deforestation rates have decreased significantly regardless of ZDC," and "They cannot explain the recent decline in deforestation in Indonesia." There are three underlying reasons: First, most concessions already represent "old boundaries," with forest cover in ZDC areas reaching only 11% in 2012 and around 10% in non-ZDC areas, limiting the area available for clearing. Second, CPO prices in 2018-2020 were significantly lower than in 2001-2012; PLOS One research shows that for every 1% price decrease, new industrial plantations decreased by 1.08%, and deforestation decreased by 0.68%. Third, Indonesia's 2011 forest moratorium, 2016 peatland ban, and the freeze on new plantation permits from 2018-2021 collectively dampened expansion momentum. Furthermore, positive spillover effects may cause unrelated companies to also reduce deforestation, resulting in the control group being "contaminated" and underestimating the promised effectiveness.

B50 and Super El Niño constitute a long-term stress test.

The study does not negate the long-term value of the Zero Deforestation Commitment (ZDC). Matthieu Stigler, the lead researcher from the University of Geneva, points out that "it is precisely during times of crisis when forest pressures are rising that the ZDC commitment can play a truly additional protective role." Currently, Indonesia's mandatory blending of B50 biodiesel began on July 1st, and the government estimates that approximately 2.3 million hectares of land are needed to meet the demand of 19.73 million kiloliters of FAME. The environmental organization Satya Bumi's aggressive scenario estimate is as high as 5.36 million hectares, with a potential deforestation of 1.5 million hectares. If B50 truly drives domestic raw material demand and pushes up CPO prices, companies that have made the commitment may face restrictions on expansion, thus tightening available supply. On the weather front, Noraini Ahmad emphasizes that "if high temperatures and drought persist, El Niño will definitely affect commodity crops," and states that the department prioritizes helping smallholder farmers cope. The Malaysian Meteorological Department has raised the probability of a super El Niño in the fourth quarter to over 90%, but the effects typically lag by several months. This means that yield losses are more likely to be reflected in the first quarter of 2027 production data than in the present. Traders should focus on monitoring Indonesia's blending compliance rate, abnormal rainfall in producing areas, and whether the government readjusts land permits, as these variables will determine the speed at which the zero deforestation commitment shifts from "no incremental" to "hard constraint."

Frequently Asked Questions

Why didn't the zero-deforestation commitment lead to additional deforestation reductions? Research shows that the deforestation rate reduction in ZDC-linked and non-linked areas was almost the same from 2018 to 2020, with an additional reduction of only 0.12 percentage points, which was statistically insignificant. Reasons include the scarcity of remaining forests on the old boundaries, relatively low CPO prices, multiple government bans restricting expansion, and positive spillover effects causing non-linked companies to also reduce deforestation. How do positive spillover effects affect research conclusions? Positive spillover effects refer to the zero-deforestation commitment being transmitted to non-committed companies through supply chain pressures, NGO monitoring, and collective industry action, causing the control group to also reduce deforestation. This can cause the two groups to converge, potentially underestimating the true incremental effect of the commitment. How much will the B50 biodiesel policy boost palm oil demand? Indonesia's B50 program, launched on July 1st, requires a 50% biodiesel blend. The government estimates it requires approximately 2.3 million hectares of new land, while environmental organization Satya Bumi's aggressive scenario estimates as high as 5.36 million hectares, with a potential deforestation of 1.5 million hectares. If implemented effectively, it will significantly increase domestic palm oil feedstock demand. When will the impact of a super El Niño on palm oil production become apparent? The Malaysian Meteorological Department has raised the probability of a super El Niño occurring between October and December to over 90%, but Minister Noraini Ahmad points out that the effects typically lag by several months. Therefore, yield losses are more likely to be reflected in production data in the first quarter of 2027, rather than immediately. Under what conditions will the Zero Deforestation Commitment (ZDC) become important again? Lead researcher Matthieu Stigler believes that the ZDC commitment could play a truly additional protective role when forest stress increases, prices rise, or new demand emerges. If the B50 policy drives up palm oil demand and prices, companies with commitments may limit expansion, thus affecting supply elasticity.