Palm Oil Market Volatility: Navigating Profit-Taking, Supply Dynamics, and Biodiesel Demand Shifts in 2025

The palm oil market in 2025 is a mosaic of contradictions: tightening global supply from export restrictions, surging domestic demand for biofuels, and currency-driven price volatility. For investors, this volatile landscape presents both risks and opportunities, particularly as the industry grapples with shifting biodiesel mandates, competitive edible oil pricing, and geopolitical pressures.

Supply Dynamics: Structural Constraints and Policy Levers

Indonesia and Malaysia dominate global palm oil production, accounting for 85% of the market. Indonesia's B40 biodiesel mandate, which requires 40% palm oil in diesel fuel, has redirected 2–4 million metric tonnes (MT) of crude palm oil (CPO) to domestic use. This policy, coupled with a 10% export levy hike, has tightened global supply and elevated prices. Meanwhile, Malaysia's production rose 21.5% in April 2025, driven by improved yields, but challenges like replanting delays and labor shortages threaten long-term growth.

Investors must monitor export policy shifts in both countries. Indonesia's export levies now cost exporters $221/MT—far higher than Malaysia's $140/MT—creating a competitive imbalance. Additionally, the EU's Deforestation Regulation (EUDR) is reshaping export flows, as Malaysia seeks recognition for its MSPO certification to retain access to European markets.

Currency Pressures: The USD/MYR Cross as a Key Lever

Currency dynamics are a critical factor in the palm oil market. The USD/MYR exchange rate has appreciated 11.16% year-on-year to 4.23 as of July 2025, eroding Malaysia's price competitiveness. A stronger ringgit raises production costs for Malaysian producers, compressing profit margins, while a weaker ringgit could boost exports by 10–15%.

Investors should hedge against ringgit strength using forward contracts or MYR-denominated debt. A sustained decline in the USD/MYR rate to 4.30 or higher could signal undervalued entry points for palm oil futures or ETFs like iShares MSCI Malaysia (EWM). However, a weaker MYR may also inflate input costs, creating a double-edged sword for producers.

Edible Oil Competition: Soybean Oil's Shadow

Palm oil's pricing advantage over soybean oil has been a key tailwind. As of July 2025, palm oil trades at a 9.4% discount to soybean oil, a historically attractive spread for importers like India. However, Brazil's record 2025 soybean harvest of 150 million MT has depressed soybean oil prices, intensifying competition.

The soybean-palm oil price differential is a critical metric for investors. A narrowing spread could indicate overbought conditions in palm oil futures, while a widening discount may signal undervaluation. Additionally, U.S. biofuel policies, which exclude foreign feedstocks from tax credits, are boosting domestic soybean oil demand, indirectly pressuring palm oil prices.

Biodiesel Demand Shifts: Policy-Driven Tailwinds and Headwinds

Biodiesel remains a linchpin for palm oil demand, but the landscape is evolving. In the U.S., the Renewable Fuel Standard (RFS) and California's Low Carbon Fuel Standard (LCFS) are driving renewable diesel growth. Meanwhile, the European Union's RED III is phasing out palm oil-based biofuels by 2030, favoring waste-based feedstocks like used cooking oil.

Indonesia's B40 mandate, however, is a bright spot. The policy is projected to boost domestic demand for 2 million MT of palm oil in 2025, stabilizing prices and reducing reliance on volatile export markets. In contrast, India's ethanol blending targets (E20) are prioritizing sugarcane-based ethanol over palm oil, limiting its role in the Indian market.

Near-Term Investment Risks and Opportunities

The palm oil market's volatility demands a nuanced approach. Key opportunities include:
1. Undervalued entry points: A weaker MYR or widening soybean-palm oil discount could signal attractive buying opportunities in palm oil futures or ETFs.
2. Biodiesel-driven demand: Indonesia's B40 mandate and Malaysia's MSPO sustainability efforts position the sector to capture ESG-conscious markets.
3. Geopolitical diversification: Shifting exports to Africa and the Middle East (e.g., Nigeria's Presco Plc) offer growth potential amid EU and U.S. regulatory headwinds.

Risks include:
1. Currency volatility: A stronger MYR could erode Malaysian producers' margins.
2. Commodity oversupply: Brazil's soybean harvest and U.S. ethanol production could undercut palm oil's pricing edge.
3. Policy reversals: Delays in Malaysia's replanting efforts or reduced biodiesel blending in Indonesia could disrupt supply chains.

Conclusion: A Market of Contradictions

The 2025 palm oil market is defined by its duality: structural supply constraints coexist with surging domestic demand, while currency pressures clash with competitive edible oil pricing. For investors, the key lies in balancing macroeconomic signals with technical indicators. Monitoring the USD/MYR exchange rate, soybean-palm oil spreads, and biodiesel policy developments will be critical.

In this complex environment, disciplined investors who can navigate policy-driven shifts and currency dynamics may find the palm oil market a compelling long-term opportunity—provided they hedge against near-term volatility and stay attuned to the interplay of global demand, sustainability trends, and geopolitical currents.