A recent AMIS market analysis highlights how rising biodiesel mandates in Indonesia and Malaysia, paired with El Niño-driven production risks, are squeezing global palm oil export availability. As a pivotal feedstock for both the food and feed sectors and with Indonesia’s B50 mandate taking full effect in October 2026 tightening palm oil supplies and surging prices are directly shifting demand toward alternative vegetable oils like soy, sunflower, and rapeseed.
International vegetable oil markets are intertwined with developments in energy markets. In many countries, biodiesel blending mandates have become an important source of vegetable oil demand, reflecting broader policy objectives related to energy security, reduced dependence on diesel imports, and support for domestic agricultural production. These policy developments are reinforcing domestic demand and reducing export availability for palm oil in a market that is already exposed to weather-related production risks.
Indonesia’s biodiesel blending programme plays an important role in shaping the global palm oil market, as the Southeast Asian country accounts for half of global export volumes. Reports in January 2026 that the government had shelved plans to raise its blending mandate from B40, a diesel blend containing 40 percent of palm oil-based biodiesel, to B50 initially provided relief to the market. This development suggested a slower increase in domestic utilization than previously anticipated, alleviating concerns over tighter export availability.
However, the escalation of the conflict in the Near East since late February reversed the price dynamics between palm oil and gasoil with the former turning at a discount relative to the latter. As gasoil prices increased relative to palm oil prices, palm oil-based biodiesel became more competitive than conventional diesel, reducing the fiscal burden from subsidizing biodiesel production in Indonesia. The government subsequently announced the introduction of B50 from July, with full implementation expected by October 2026. The higher mandate would increase the volume of palm oil absorbed by the Indonesian domestic biodiesel sector, thus limiting its export availability.
Another development that could directly affect palm oil trade flows emerged in May. The Indonesian government announced plans to channel palm oil exports exclusively through a state agency. Although the government subsequently clarified that the agency would process and monitor rather than directly control exports, the announcement nevertheless prompted some exporters to accelerate shipments, illustrating how changes in export governance can affect market expectations and trade flows even before implementation details are finalized.
Malaysia, the second largest palm oil exporter, accounting for 30 percent of global volumes, also moved toward a higher blending mandate, from B10 to B15, starting in June, which increased the amount of palm oil used by its domestic biodiesel sector – albeit at a smaller scale than Indonesia. While the government has indicated that the additional feedstock requirement can be accommodated without affecting palm oil exports, higher structural domestic utilization could reduce exportable supplies amid an already rather tight global palm oil market.
On the supply side, El Niño could significantly weigh on palm oil production. The phenomenon, expected to persist until 2027, is often associated with below-normal rainfall in parts of Indonesia and Malaysia. Because oil palm yields typically respond to weather conditions with a lag, rainfall shortfalls during 2026 would be expected to affect production primarily in late 2026 and 2027 rather than immediately. Nevertheless, market expectations of future production losses may still affect prices well before any decline appears in official production data.
While higher utilization by the biodiesel sector and expectations of constrained production are anticipated to underpin global palm oil prices, energy market developments could move prices in either direction. Lower energy prices could increase the fiscal burden associated with biodiesel programmes, particularly in Indonesia, potentially affecting the implementation of higher mandates. Meanwhile, as palm oil has traded at a premium to South American soyoil since early 2026, elevated prices could curb import demand or encourage substitution toward other vegetable oils. Whether palm oil prices increase further will depend largely on developments in energy markets, the pace of biodiesel mandate implementation, the impact of weather-related production risks, and the response of importing countries to higher prices.
Developments in the palm oil market have implications beyond the commodity itself. Given palm oil’s dominant role in global vegetable oil trade, tighter palm oil export availability and higher prices can shift demand toward other vegetable oils, including soy, sunflower and rapeseed oils, particularly in major importing countries where substitutions of these oils in food use are flexible.
*This article was originally published by the Agricultural Market Information System (AMIS) on September 11, 2026, under the title "Palm oil: risks, policy developments, and climate uncertainty."