Palm Oil

What it is

Palm oil is extracted from the fleshy fruit of the oil palm (Elaeis guineensis), a tree native to West Africa now cultivated almost entirely in tropical Southeast Asia. It is the world's most produced and traded vegetable oil, accounting for roughly 40% of global vegetable oil supply, with annual output of approximately 78-80 million metric tonnes as of 2025 (USDA FAS). Oil palm produces 4-10 times more oil per hectare than soybean, rapeseed, or sunflower, making it the lowest-cost vegetable oil to produce at scale. Uses span food manufacturing (cooking oil, margarine, chocolate, instant noodles, baked goods), personal care and cosmetics (soap, shampoo), and biofuel. Indonesia and Malaysia together supply roughly 85% of global production. The main importing regions are South and East Asia and the European Union.

History

Commercial cultivation spread from West Africa to Southeast Asia via British and Dutch colonial plantations in the early 20th century. Malaysia's government-backed Federal Land Development Authority (FELDA) industrialised smallholder production from the 1960s, making palm oil a pillar of rural poverty reduction. Indonesia surpassed Malaysia as the world's largest producer around 2006, driven by rapid expansion across Borneo and Sumatra at the expense of tropical rainforest and carbon-rich peatland. The environmental toll prompted the formation of the Roundtable on Sustainable Palm Oil (RSPO) in 2004, a multi-stakeholder certification body. The European Union escalated the trade dimension through its 2018 Renewable Energy Directive, which phased out palm-based biodiesel subsidies, and its EU Deforestation Regulation (EUDR), adopted in 2023, requiring importers to verify deforestation-free supply chains.

Current state

Indonesia leads global output at roughly 57 million metric tonnes per year; Malaysia produces approximately 19 million metric tonnes. Indonesia's domestic biodiesel mandate, raised to a 35% blend (B35) in February 2023 and targeting B40, absorbs an increasing share of domestic harvest and constrains export volumes. In May 2026, Indonesia's President Prabowo Subianto announced that all palm oil exports would route exclusively through a new state entity, Danantara Sumberdaya Indonesia (DSI), with full implementation targeted by January 1, 2027. The announcement sent KPBN crude palm oil tender prices down 5.77% in a single session. Under DSI, every major buyer, including India's largest refiners (Adani Wilmar, Ruchi Soya, Cargill India), must contract through a single government intermediary. India draws 84% of its palm supply from Indonesia and Malaysia combined and is directly exposed to this risk; the full picture is in インドの食用油インフレが2倍に、インドネシアの国有化策がパーム油輸入網を揺さぶる. As of 2024, RSPO-certified production covers roughly 5.1 million hectares across 24 countries, representing about 20% of global supply.

Relationships

The market is a structural duopoly on the supply side. Indonesia sets the price floor and supply ceiling for global trades; Malaysia competes on quality and logistics, and positions itself to gain market share when Indonesian export policy creates uncertainty. China and India are the two largest demand anchors, between them absorbing roughly a third of world trade. The EU, historically a significant buyer and the most active regulator, has restructured its relationship with palm oil through biofuel policy and the EUDR; Jakarta and Kuala Lumpur both argue the regulation functions as a non-tariff barrier that advantages European sunflower and rapeseed over a competing tropical crop. India's edible oil policy oscillates between protecting domestic oilseed farmers (via higher import duties) and suppressing consumer price inflation (via duty cuts); India's Prime Minister Narendra Modi's government has shifted this duty three times in four years, with the effective crude palm oil import duty at approximately 16.5% as of mid-2026.

What to watch

• Indonesia's DSI single-gate reform: whether the January 2027 deadline holds and how it affects spot pricing, contract terms, and supply reliability for Asian buyers.
• Indonesia's B40 biodiesel mandate rollout: the share of domestic crop it absorbs directly reduces export availability and supports global palm oil prices.
• EU EUDR enforcement: after repeated implementation delays, full enforcement would require every European palm oil importer to submit georeferenced, deforestation-free supply-chain documentation.
• Malaysia's market share: Kuala Lumpur is positioning to capture buyers who cannot navigate DSI; MPOB monthly export figures will reveal whether the shift materialises.
• RSPO certification rates: whether the 20% certified-supply share expands as EUDR compliance forces supply-chain documentation.