The El Niño cycle causes less rainfall in Southeast Asia and Australia and thus results in declining production of agricultural commodities (including palm oil) in countries such as Indonesia, Vietnam and Thailand (moreover reduced rainfall can lead to increased forest fires).

Government official Herdrajat Natawijaya said that chances of a new El Niño cycle in the second half of 2014 are big, but this forecast is still subject to change over the next three months. Executive Director at the Indonesian Palm Oil Association (Gapki) Fadhil Hasan added that the impact of El Niño on the production of Indonesian palm oil will be felt much harder next year.

Indonesian Palm Oil Production and Export:

    2007   2008   2009   2010   2011   2012   2013   2014¹
(million metric tons)
  16.8   19.2   19.4   21.8   23.5   26.5    27.0    25.0
(million metric tons)
   n.a   14.2   15.5   15.6   16.5   18.1    21.2    21.1
(in USD billion)
   n.a   15.6   10.0   16.4   20.2   21.6    19.0    18.9

¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture

In the first half of 2014, Indonesia exported 9.7 million tons of CPO. Gapki expects that this will improve in the second half to 11 million tons, implying that Indonesian CPO exports in 2014 will most likely fall below last year’s result of 21.2 million tons. Palm oil exports from Southeast Asia’s largest economy are expected to decline due to reduced production but also due to increased domestic consumption of palm oil in the context of Indonesia’s biodiesel program. In 2014, one million ton of palm oil is expected to be absorbed by this program (up from 600,000 tons in 2013). In total, domestic consumption of palm oil will be about 10 million tons in 2014.

Furthermore, CPO exports from Indonesia have declined due to reduced demand from India and the USA. In the first half of 2014, India only imported 2.12 million tons of Indonesian CPO, a 37 percentage point decline from 3.39 million tons in the same period last year. Exports to the USA fell 27 percent to 26,500 tons in June 2014 from 36,000 tons in the previous month. As a result of reduced demand the CPO price will probably not exceed the range of USD $850-900 per ton in 2014.

Gapki is pessimistic that Indonesia’s long-term target of producing 40 million tons of CPO per year from 2020 will be achieved as productivity is not optimal. The government wants to increase the role of CPO in the domestic economy as global CPO demand rises by about five million tons per year. Indonesia is currently the largest producer and exporter of palm oil worldwide, followed by Malaysia. Together, these two countries account for around 85 to 90 percent of the world's total palm oil production.