For decades, palm oil has been the cheapest and most widely used vegetable oil globally, driving affordability in food, cosmetics, and biofuels. However, the dynamics are shifting, and the era of cheap palm oil may be coming to an end. A combination of stagnating production and rising demand for biodiesel, particularly in Indonesia, is set to reshape the market and keep prices elevated in the years ahead.
1. Production Constraints: Aging Plantations & Weather Risks
Palm oil production is stagnating in Malaysia and Indonesia, which together account for 85% of global supply. Several factors are at play:
- Aging Palm Trees: Many oil palm plantations are past peak productivity, and replanting has been slow due to high costs and a four-year waiting period before new trees yield fruit.
- Adverse Weather: Excessive rainfall, floods, and potential La Niña conditions have disrupted production and delayed harvesting.
- Land Expansion Limits: Deforestation concerns have led to moratoriums on new plantations, limiting future growth.
These factors are expected to constrain production growth to just 1% annually, far below historical averages.
2. Biodiesel Demand Surge: The Indonesia Factor
Indonesia’s biodiesel mandates are absorbing a growing share of palm oil production. In 2025, the government increased the biodiesel blend to 40% (B40), with plans to introduce B50 by 2026. This shift:
- Diverts Supply from Exports: Indonesia’s palm oil exports are projected to fall from 29.5 million metric tons in 2024 to 20 million by 2030, tightening global supply.
- Raises Domestic Prices: More demand for biodiesel means higher local palm oil prices, reducing the price advantage over soybean and sunflower oil.
3. Market Implications: Rising Prices & Alternative Oils
With supply constraints and surging biodiesel consumption, palm oil prices are set to remain elevated in 2025 and beyond. Key impacts include:
- Higher Prices: Malaysia’s benchmark crude palm oil futures are projected to average $942 per metric ton in 2025, a 4.5% increase.
- Demand Shift to Alternatives: Buyers may turn to soybean oil (Brazil, Argentina) and sunflower oil (Ukraine, Russia) as substitutes. However, limited supply means these oils may also see price spikes.
- Inflationary Pressure: Rising vegetable oil prices could worsen food inflation in major importers like India, China, and the EU.
A New Normal for Palm Oil?
The days of cheap palm oil may be over. Unless production sees a significant boost or biodiesel mandates are adjusted, prices are unlikely to return to previous lows. This structural shift could have far-reaching effects on food, biofuels, and global trade.
📌 What are your thoughts on this shift? How do you see industries adapting to higher palm oil prices?
Sources:
COMMODITIES 2025: Rising biodiesel demand, tighter supplies to fuel palm oil market in 2025. (2025, January 3). S&P Global Commodity Insights. https://www.spglobal.com/commodity-insights/en/news-research/latest-news/agriculture/010325-commodities-2025-rising-biodiesel-demand-tighter-supplies-to-fuel-palm-oil-market-in-2025
Netmore. (2024a, March 4). Malaysian crude palm oil seen up 4pc in 2024 on biodiesel demand, stagnant output. MPOC – Malaysian Palm Oil Council (MPOC). https://www.mpoc.org.my/malaysian-crude-palm-oil-seen-up-4pc-in-2024-on-biodiesel-demand-stagnant-output/
Malaysia rules out raising palm oil’s biodiesel blend to 20%. (2025, February 24). Reuters. https://www.reuters.com/markets/commodities/malaysia-rules-out-raising-palm-oils-biodiesel-blend-20-2025-02-24/
Jadhav, R., Christina, B., & Tang, A. (2025, March 10). The end of cheap palm oil? Output stalls as biodiesel demand surges. Reuters. https://www.reuters.com/markets/commodities/end-cheap-palm-oil-output-stalls-biodiesel-demand-surges-2025-03-09/
