Palm Oil's Price Plunge: A Buying Opportunity or a Storm Ahead?

Malaysia's July palm oil reference price has tumbled to RM3,926.59, a sharp drop from earlier highs, while the government slashed export duties to 8.5%. This duo of moves signals a critical inflection point in the palm oil market. Let's dissect whether this is a fleeting dip or the start of a new upward trajectory—and where investors should stand.

The Oversupply Elephant in the Room

The price cut and duty reduction are clear warnings of growing inventories and rebounding production. Data shows Malaysia's palm oil stocks hit an eight-month high of 1.99 million tonnes in May, up 6.65% from April. Meanwhile, May's production surged by 5.05% to 1.77 million tonnes, marking three consecutive months of growth.

This oversupply is squeezing prices. But here's the twist: the 8.5% export duty—down from 10%—is a lifeline to boost exports. By lowering the cost to ship palm oil abroad, Malaysia aims to offload excess inventories and stabilize prices. Yet, this strategy hinges on global demand staying robust.

Demand's Double-Edged Sword: Biofuels vs. El Niño

The palm oil market is a high-wire act between biofuel mandates and climate risks.

1. Biofuel Demand: A Lifeline or a Mirage?

Indonesia's B40/B50 biodiesel mandates (targeting 50% palm oil blends by early 2026) are a game-changer. By 2026, Indonesia aims to eliminate diesel imports entirely, requiring an extra 5 million metric tons of CPO annually. This shift will siphon CPO from global markets, creating a vacuum that Malaysian and Thai producers could fill—if they can navigate supply constraints.

2. El Niño's Shadow: A Supply Shock in 2025?

While the current oversupply is real, the 2027 El Niño forecast looms large. Historical data shows palm yields drop 15-20% during severe droughts, like the 2015-16 crisis. Even if 2025 escapes the worst, the market will price in risk premiums as we near 2027.

Tax Policy: A Balancing Act

Malaysia's tax cuts aim to favor exports, but they risk undermining domestic refining. Lower duties make Malaysian palm oil cheaper abroad—a boon for exporters—but could depress local refining margins. Meanwhile, Indonesia's 10% CPO export tax (up from 7.5%) is doing the opposite: retaining supply for biodiesel. This creates a global seesaw: lower Malaysian exports costs vs. Indonesia's supply retention.

The key question: Will Malaysia's duty cut outpace Indonesia's supply squeeze? Early signs suggest yes. In May, Malaysian exports jumped 25.6% to 1.39 million tonnes, the highest since November 2024.

Is This a Buying Opportunity?

The answer hinges on two factors:
1. Short-Term Oversupply vs. Long-Term Scarcity: Current inventories are high, but El Niño and biofuel demand could tighten supplies by late 2025.
2. Price Floor Potential: The RM3,900 level has been a historic support zone. A breach might signal deeper oversupply, but staying above it suggests buyers are accumulating.

My Call: This is a buy the dip moment. While oversupply pressures are real, the structural tailwinds of biofuel mandates and climate risks will keep prices anchored above RM3,900. Investors should take positions in palm oil ETFs (e.g., DBA) or upstream producers like FELDA GROWTH (KLSE:FELDA) or IOI CORP (KLSE:IOICORP).

Final Take

The Malaysian palm oil market is caught in a tug-of-war: immediate oversupply vs. long-term scarcity. The tax cuts and price drop are short-term corrections, but global biofuel demand and El Niño risks will drive prices higher by late 2025. This isn't a cyclical dip—it's the start of an upward trajectory, and now is the time to plant your flag.

Stay aggressive on palm oil!

Data sources: MPOB, Fastmarkets, Indonesian Ministry of Energy, NOAA climate forecasts.