PETALING JAYA: Plantation stocks may be entering a period where the market’s expectations of higher crude palm oil (CPO) prices are increasingly being tested against actual fresh fruit bunch (FFB) production, as investors look for evidence that El Nino will translate into tighter supply and stronger earnings.
Tradeview Capital Sdn Bhd chief investment officer, Nixon Wong, said CPO appeared to be entering a structurally tighter period, which could initially benefit pure upstream planters because of their high operating leverage to palm oil prices.
“Pure upstream names usually re-rate first because investors are buying operating leverage,” Wong told StarBiz.
He said the strongest earnings window for planters could come before production declines become visible, as investors typically position ahead of an expected tightening in supply.
However, Wong said further upside for plantation stocks would increasingly depend on actual production performance at individual companies.
“We do think that current share prices are already pricing in biodiesel and El Nino expectations, meaning further upside depends on actual production losses of the respective names,” he said.
The timing of those production losses is important for investors, as the impact of El Nino on oil palm production is not immediate.
Industry veteran Joseph Tek Choon Yee said oil palm does not react to drought overnight.
“A palm is already forming the bunches that will only be harvested many months later, so when the weather turns very dry today, some of the damage may only appear in the production figures months down the road,” he said.
“Put simply, El Nino can finish before the palm finishes feeling it.”
He said severe water stress could have some earlier effects, but the bigger impact usually comes later as prolonged dryness affects flower formation, the number of female flowers that eventually become fruit bunches and bunch development.
If dry conditions continue into early 2027, he expects the impact on FFB and CPO production to become more noticeable during 2027.
“But we should not assume the story ends there. Some of the biological effects can surface much later, which means there could still be an echo into 2028.”
The weather risk is becoming more prominent, across both Indonesia and Malaysia.
According to MBSB Research, the Asean Specialised Meteorological Centre recorded 15,186 hotspots in Indonesia in August, including 13,260 in Kalimantan, or 87.3% of the total, compared with 265 hotspots in Malaysia.
MBSB Research said the sharp increase in hotspots reinforced signs of worsening dryness ahead of a potentially “very strong El Nino”. “If dry conditions persist, weaker FFB yields could tighten palm oil supply and support CPO prices,” he said.
The research house said the anticipated El Nino cycle was expected to strengthen through October to December, with the most probable peak between November 2026 and January 2027.
However, Malaysia’s plantations have so far shown a more mixed picture.
Malaysian Palm Oil Board (MPOB) data showed Malaysian estate FFB yield averaged 10.83 tonnes per ha in the first eight months of 2026, down 1.5% from 11 tonnes per ha a year earlier.
Peninsular Malaysia recorded a 7.8% drop to 11.29 tonnes per ha, while Sabah and Sarawak combined recorded a 5.8% increase to 10.48 tonnes per ha.
“Current harvests, therefore, do not show a nationwide weather-driven contraction yet,” MBSB Research said.
“However, sustained moisture stress could affect subsequent bunch output, turning today’s rainfall deficits into weaker yields and tighter CPO availability in 2027.”
Malaysian Palm Oil Association (MPOA) chief executive Roslin Azmy Hassan said the extent of any production impact would depend on how severe and prolonged the dry conditions become.
He said prolonged rainfall deficits could affect FFB yields, bunch development and bunch weight, with the impact potentially becoming more noticeable several months later and into 2027.
“For now, we feel it is still too early to put a number on the potential production loss,” Roslin said. “Much would depend on how severe and prolonged the El Nino becomes. The key period to watch will be the next few months, particularly rainfall patterns and FFB yield trends going into 2027.”
Roslin said the immediate impact remained manageable, but “the longer dry conditions persisted, the greater the risk to FFB yields and CPO production, and consequently the stronger the support for CPO prices.”
MPOB has maintained its 2026 CPO production forecast at between 19.5 million and 19.8 million tonnes, compared with a record 20.28 million tonnes in 2025.
Tek said El Nino could bring haze as another source of stress for oil palms whose production effects may only emerge later, as prolonged haze could reduce the sunlight available to palms.
He said there was also a question over pollination, as oil palm depends heavily on the pollinating weevil, Elaeidobius kamerunicus. Severe haze could potentially interfere with its activity, movement or ability to locate flowers, although the extent of the effect had not been adequately quantified in the field, he said.
If pollination suffers, poorer fruit sets could eventually show up in bunch and oil production, he added.
“Of course, not every plantation will be affected equally. Much depends on how long the dry spell lasts, how severe it is, the soil, the age of the palms, local rainfall and estate management,” Tek said.
“The sky may turn blue again before the production numbers turn red.”
The potential tightening of supply comes as CPO prices have already risen sharply this year. The active CPO futures contract was last seen at around RM4,780 a tonne, up almost 19% year-to-date (YTD), after reaching RM5,158 on Sept 8.
Bloomberg’s Malaysia-Indonesia CPO spot price was around RM4,862.86 a tonne, up approximately 15.8% YTD.
Tek said the combination of weaker production and firm demand could tighten the palm oil market materially, if El Nino persisted into early 2027.
“I remain broadly bullish on CPO prices, if El Nino continues and production begins to weaken while demand stays firm,” he said.
However, he cautioned against putting a specific price target on CPO because the market was influenced by several factors beyond weather.
These include Indonesia’s biodiesel programme, global vegetable oil supply, crude oil prices, inventories, currencies and demand from major consuming countries.
Indonesia’s biodiesel programme is particularly important because higher domestic consumption could reduce the volume of palm oil available for export, he said.
“If this happens at the same time that El Nino starts reducing production, the market can tighten quite quickly,” Tek said.
He also noted that higher crude oil prices could improve the economics of biodiesel and support vegetable oil prices, although they could simultaneously raise fertiliser, transport and plantation costs.
“I would stop short of declaring that CPO will hit RM5,000, RM6,000 or any other magic number,” he noted.
“At present, more of the factors seem to be pointing northbound rather than southbound for prices.”
At the end of the day, Tek said, what matters for plantation companies is whether higher CPO prices translate into stronger margins.
“Price may make the headline, but margin ultimately writes the verdict,” he said.
The prospect of tighter supply has also been reflected in local plantation equities.
MBSB Research said pure upstream planters offered more direct exposure to higher CPO prices, with Ta Ann Holdings Bhd
and Sarawak Plantation Bhd among its preferred names.
“Both companies are also predominantly Malaysia-centric, with their Sabah and Sarawak footprint positioning them relatively better against severe El Nino-related disruptions while retaining strong leverage to any upside in CPO prices,” the research house said.
