Floods in Major Growing State Dent Malaysia Palm Oil Output

Heavy rainfall and floods in Sabah are expected to sharply reduce Malaysia's palm oil output this month. Prolonged rain over the past four weeks has triggered frequent flooding across plantations, especially in low-lying areas. Malaysia is the world's second-largest palm oil grower, and Sabah and Sarawak are the country's top two producing states.

The floods have submerged young palm plants and disrupted harvesting and transportation. Sabah and Sarawak together account for about 44% of national production. More than 5,800 people had been evacuated as a result of the flooding in Sabah as of Friday noon local time.

Industry body forecasts a 15-17% production decline in February. This would cut into Malaysia's bulging stockpiles and lend support to benchmark palm oil futures in Kuala Lumpur. Prices are headed for a decline of nearly 5% this month, which would be the biggest since last April.

Why Did This Happen?

Heavy rainfall has caused widespread flooding in Sabah and Sarawak. Large swathes of Sabah have received rainfall up to 150 millimeters above normal, according to data from the US Climate Prediction Center. Much of Sarawak has seen precipitation up to 100 millimeters above average.

The high water has submerged younger palms and damaged roads. This has disrupted harvesting and the transportation of palm fruit. The floods have created a yo-yo effect, with rain causing flooding followed by water receding and then rain returning.

How Did Markets React?

Benchmark palm oil contract for May delivery on the Bursa Malaysia Derivatives Exchange fell 1 ringgit, or 0.02%, to 4,052 ringgit ($1,042.45) a metric ton at the close. This marks four straight sessions of falls.

Palm oil prices are expected to trade between 4,000-4,300 ringgit per metric ton in March. The Malaysian Palm Oil Council cited seasonal declines in production and stocks as supporting factors. Prices remained firm above 4,000 ringgit throughout January.

Malaysia's palm oil exports for the first 20 days of February fell 9% compared to the same period in January. A steeper decline than expected would cut into Malaysia's bulging stockpiles.

What Are Analysts Watching Next?

Analysts are watching the impact of the floods on Malaysia's stockpiles and benchmark palm oil futures. The floods may reduce Malaysia's stockpiles and support benchmark palm oil futures.

Indonesia's land crackdown is also affecting palm oil producers. First Resources Ltd. paid $5.6 million in connection with land it was required to hand to the Indonesian government.

The Indonesian government has seized more than 4 million hectares of plantations. President Prabowo Subianto is looking to double that area this year. Companies are being fined for alleged breaches of their forestry permits.

The floods in Sabah and the land crackdown in Indonesia are creating uncertainty in the palm oil market. These events could affect global palm oil supply and prices. Traders and analysts are closely monitoring the situation to assess its impact on the market.

The Malaysian currency is at a multi-year high against the U.S. dollar. A stronger ringgit is weighing on the export competitiveness of palm oil and overseas buying interest in ringgit-denominated futures.

The Malaysian Palm Oil Council expects global import demand for palm oil to overtake soybean oil in Q1 2026. This is due to improved price competitiveness and strong Malaysian exports in the first quarter.

The March palm oil price outlook is range-bound due to these factors. The council forecasts that crude palm oil prices will trade within a specific band per metric ton next month.

The industry is also watching the impact of the floods on Sabah's production. A 15-17% decline in February would be a significant drop. This could affect the global palm oil market and create volatility.

The situation in Sabah and the land crackdown in Indonesia are creating a complex market environment. These factors are influencing prices, supply, and demand for palm oil. Traders and investors are closely monitoring the developments to make informed decisions.