On Wednesday (September 2), the most active palm oil futures contract on the Bursa Malaysia Derivatives Exchange (BMD) maintained a slightly bullish trend, as the market digested the worsening drought in Indonesia's core producing regions and its ripple effects on the supply chain. Recent market movements reflect a shift in traders' focus from export demand data to more fundamental supply-side structural disruptions, especially given the backdrop of a "super El Niño" phenomenon in the world's leading producer.

River levels are critical, disrupting both coal and palm oil transport.

A report released by a well-known organization on Wednesday confirmed that extreme drought has significantly disrupted coal and palm oil shipping in Kalimantan, Indonesia. The Mahakan River, a crucial logistical artery, has seen a significant drop in water levels recently, while East Kalimantan province recorded almost no rainfall throughout August. The low water levels have forced some coal producers to limit barge loading to prevent grounding. Gita Mahyarani, executive director of the Indonesian Coal Mining Association, revealed that member companies in East Kalimantan have generally reported transportation difficulties, with barge carrying capacity being forced to decrease from 7,000 tons to approximately 5,500 tons per trip. This has directly led to reduced efficiency per trip, increased frequency of voyages, and higher unit logistics costs. Mursidi, an official from the local port authority, also confirmed this operational adjustment, noting that even with reduced loads, some barges still face difficulties traveling upstream.

Palm oil logistics chain under pressure, potential risks emerging in warehousing and production.

Similar problems are impacting the palm oil industry. Hadi Sugeng, an official with the Indonesian Palm Oil Association (GAPKI), stated that the receding water level of the Kapuas River in West Kalimantan is severely hindering shipments from local plantations. This province accounts for approximately 10% of Indonesia's total oil palm plantation area, and about 40% of its production relies on this waterway for transportation. Currently, plantations are urgently seeking alternative transportation solutions, including trucks, but Sugeng admitted that coordinating truck services is not easy, requires time and coordination, and transportation costs have already risen. He expressed concern about downstream storage capacity; although current storage tanks can still hold palm oil that cannot be shipped out, if the logistical disruption continues until the end of the month, refineries will be unable to receive fresh fruit bunches, leading to production problems.

Drought inhibits fertilization, leading to a downward revision of 2027 yield forecasts.

The impact of the drought has spread from logistics to production and maintenance. At another event held on the same day, GAPKI Secretary General Hadi Sukheng announced the latest production forecast, lowering Indonesia's 2027 palm oil production forecast by 2.9% to 56.8 million tons. This is mainly attributed to the continued drought disrupting plantation maintenance schedules. Sukheng explained that many companies have stopped fertilizing due to insufficient soil moisture, as fertilization at this time would only result in waste due to volatilization. Furthermore, influenced by the spillover effects of geopolitical conflicts, fertilizer prices have surged by about 30% in the second half of the year, and the high input costs have further suppressed the willingness to fertilize. The association also slightly revised its 2026 total production forecast for crude palm oil and palm kernel oil from 58.8 million tons to 58.5 million tons, due to the dry weather slowing down the fruit ripening cycle. It is worth noting that, on a year-on-year basis, the estimated production in 2026 is still about 3.4% higher than the 56.55 million tons in 2025. This is due to the replanting program over the past five years and the gradual harvesting of new plantations, as well as signs of some non-oil palm land being converted into smallholder oil palm plantations. The increase in production from new production areas has to some extent offset the yield losses caused by El Niño, but this is not a long-term solution. Logistics bottlenecks and maintenance stagnation have a more direct impact on near-month supply.

Market Logic and Focus

In summary, the core of the current palm oil market dynamic has shifted from simple inventory data to a dual narrative of immediate logistical congestion and long-term production losses. Physical obstacles in transportation are an immediate bullish factor, while the negative impact of reduced fertilizer application on production in 2027 and beyond provides a longer-term risk premium for the market. Future attention should be paid to: first, rainfall forecasts for the Kalimantan region in the next week or two, which will determine whether river levels can recover; second, the pace of plantation shipments given the high cost of alternative logistics; and third, subsequent revisions to GAPKI's monthly inventory and export data.

[Further Reading]

1. Why is the impact of declining river levels in Kalimantan so critical on palm oil transportation? A: Kalimantan (including East and West Kalimantan provinces) is the core production area for palm oil and coal in Indonesia. The region has relatively weak infrastructure, and inland waterway transportation is the most economical and efficient way to transport bulk commodities. The Mahakam and Kapuas rivers act as "water highways," bearing the heavy responsibility of transporting products from inland plantations to ports for export. If water levels drop too low, causing barges to reduce their load or stop operating, it not only directly increases the transportation cost per ton but also leads to inventory buildup in the production area due to the sudden drop in transport capacity. If fresh fruit bunches cannot be processed in time, it will cause substantial production losses. 2. How does a "super El Niño" typically affect palm oil yields in Southeast Asia? A: El Niño typically brings high temperatures and drought to Southeast Asia (especially Indonesia and Malaysia). For oil palm trees, drought delays the flowering and pollination cycle of female flowers, resulting in lighter fruit bunches and lower oil content. More seriously, persistent water shortages affect nutrient absorption by the tree, hindering the unfolding of new leaves. This yield loss is delayed, typically appearing in yield data 9 to 12 months after the drought begins. This is the core reason why GAPKI lowered its 2027 yield forecast. 3: Why is fertilization during drought considered "wasteful"? A: Water is essential for nutrient dissolution and absorption by roots through soil solution. Under extreme drought conditions, soil moisture content is extremely low, preventing applied fertilizers (especially nitrogen and potassium) from effectively dissolving and migrating to the root absorption zone. Simultaneously, in hot and dry environments, nitrogen fertilizers such as urea are easily lost through ammonia volatilization. Furthermore, lack of water also limits transpiration in oil palm trees, resulting in insufficient nutrient absorption. Therefore, fertilization during severe drought has a very low input-output ratio. 4: How might other major global vegetable oil markets respond to supply disruptions in Indonesia? A: As the world's leading palm oil supplier, supply disruptions in Indonesia have global spillover effects. If logistical bottlenecks persist, they will directly tighten global vegetable oil trade flows, forcing buyers to turn to Malaysia for alternative sources, thus pushing up Malaysian palm oil futures prices. Furthermore, palm oil is a substitute for soybean oil and sunflower oil in the food and energy sectors. If palm oil prices continue to strengthen, the price difference between palm oil and its substitutes will narrow, potentially leading to some demand shifting to soybean or sunflower oil, indirectly supporting the global vegetable oil price center. 5: Besides weather, what other variables will ultimately affect the actual production of palm oil? A: In addition to weather, key factors to watch include labor adequacy (especially the progress of foreign worker visa issuance), the efficiency of replanting programs (the speed at which high-yield varieties replace older trees), and fertilizer costs and availability. Furthermore, the enforcement of Indonesia's mandatory biodiesel blending policy (B40/B50) will directly impact domestic consumption, thereby regulating the scale of exportable supply. These variables are intertwined and collectively determine the final supply available in the international market.