On Wednesday (September 16), the palm oil market focused on supply disruptions in Indonesia's Kalimantan region. A well-known institution reported that day that production in Indonesia's main palm oil producing areas may decline by 12% to 15% in the fourth quarter due to prolonged drought and widespread fires damaging plantations. This news added a new bullish factor to palm oil futures prices, which had already been supported by tight inventories, and significantly increased market concerns about long-term supply.

Production cuts in Kalimantan: The combined effects of fires and drought

Cheang Kang Wei, an agricultural commodities analyst at Singapore-based StoneX brokerage, stated that Kalimantan's output, after a decline of approximately 11% to 12% in August , is likely to fall further by 12% to 15% from October to December due to extremely dry weather over the past two months, particularly in Central and West Kalimantan. Kalimantan accounts for more than a third of Indonesia's total palm oil production and has also been the hardest hit by wildfires in recent weeks. Cheang pointed out that Central and West Kalimantan account for approximately 13% and 14% of Indonesia's palm oil production, respectively, and together with East Kalimantan, these three provinces account for about 36% of the country's total production. East Kalimantan, which was a major contributor to last year's production growth, is now also affected by drought, meaning that the production reduction is not limited to a specific area but covers the core of Indonesia's palm oil production.

Fire scale and tree damage: Extended supply recovery period

Indonesia is grappling with its worst wildfires in 11 years , with El Niño-related drought leaving forests and peatlands extremely dry. Eddy Martono, president of the Indonesian Palm Oil Association, stated that the fire damage could continue to suppress palm oil production for some time. He made a key assessment: fire-damaged oil palm plants may die or be under stress, requiring approximately three years to recover . This implies that even with a short-term return of rainfall, the recovery of lost production will take far longer than a quarter. Government data shows that approximately 202,000 hectares were burned nationwide from January to July this year, while the environmental organization YKAN estimates an additional 600,000 hectares damaged in August alone. The sharp escalation of the fires in August corroborates analysts' observations of a decline in production during the same month.

The agency lowered its production forecast, but annual production is still higher than last year.

GAPKI has lowered its 2026 palm oil production forecast by 2.9% , directly due to the impact of fires. However, the association also pointed out that total production for the year will still be higher than last year due to new plantations coming online. This detail is worth noting for traders: the marginal changes in production cuts are concentrated in the fourth quarter, but the annual supply base has not shifted to an absolute shortage. In other words, the current market is driven more by expectation gaps and mismatches in timing than by a complete reversal of the annual supply-demand balance sheet. If the increased production from new plantations can partially offset the losses in Kalimantan, then the upside potential for prices will depend on the actual extent and duration of the production cuts.

Key points to watch in the future

From a price fluctuation perspective, the recent upside risk for palm oil mainly stems from the continued escalation of expectations regarding production cuts in Kalimantan, and the potential for long-term supply premiums due to long-term damage to trees from fires. However, it's important to be wary that if production in other producing regions (such as Sumatra) is normal, or if overall Indonesian export demand slows due to higher prices, the marginal push from the production cut narrative will weaken. Going forward, key factors to watch include: first, the recovery of rainfall in Kalimantan from September to October; if the drought continues, the production cut may move closer to the upper end of the range; second, the actual verification of GAPKI monthly production data, whether the August decline was revised upwards or downwards by subsequent data; and third, whether the pace of new plantation commissioning can provide an effective buffer in the fourth quarter. The current market is dominated by supply disruptions , but the fact that annual production is still higher than last year necessitates caution when chasing high prices. Traders should closely monitor high-frequency verification signals from weather in producing regions and official production figures.

Frequently Asked Questions

Q: How significant is the impact of the Kalimantan production cut on Indonesia's national palm oil production? A: The three provinces of Kalimantan account for approximately 36% of Indonesia's total palm oil production, with Central Kalimantan and West Kalimantan accounting for approximately 13% and 14% respectively. If production in this region decreases by 12% to 15% in the fourth quarter, the direct drag on national production would be approximately 4% to 5%, a significant but not devastating impact. Q: Why does the impact of fires on oil palm take three years to recover? A: Oil palm is a perennial crop. Fires can directly kill the trees or subject them to severe stress, reducing fruit set. Even if the trees survive, it takes about three years for them to recover to normal yield levels. This means that the production cut is not a single-quarter event but can affect multiple years. Q: GAPKI lowered its 2026 production forecast, so why is the total annual production still higher than last year? A: The downward revision is 2.9%, but the increase from new plantations starting production is sufficient to offset the losses caused by the fires, so the total annual production is still higher than last year. This shows that the production cut is mainly concentrated in the fourth quarter, rather than a fundamental reversal of the supply and demand pattern throughout the year. Q: What is the core driver of the current palm oil market? A: The core driver is the supply premium resulting from the expected production cuts in Kalimantan and the long-term damage caused by fires. The market is trading on marginal changes in fourth-quarter production declines, rather than an annual shortage, thus the market is characterized by timeliness and expectation gaps. Q: What confirmation signals should we pay attention to going forward? A: We should focus on whether rainfall in Kalimantan recovers in September and October, the actual realization of GAPKI monthly production data, and whether new plantations coming online can provide an effective buffer in the fourth quarter. These signals will determine the sustainability of the production cut theme and the upside potential for prices.