Palm Oil Rebound: Is Demand Revival a Sustainable Catalyst for Long-Term Gains?

The global palm oil market is experiencing a renaissance, driven by a confluence of short-term recovery and structural demand drivers. From 2023 to 2025, the industry has grown at a compound annual rate of 5.3%, with the market valued at USD 76.4 billion in 2025. But as investors weigh the potential for long-term gains, the question remains: Is this revival sustainable, or is it a fleeting rebound amid shifting policies and supply-side constraints?

The Dual Engines of Demand: Food and Biofuel

Palm oil's resurgence is anchored in two sectors: food and biofuel. The food and beverage industry remains the largest consumer, accounting for 65.98% of market revenue in 2024. This dominance is fueled by palm oil's versatility in frying, baking, and as a stabilizer in processed foods. In Asia-Pacific, where 71% of global consumption occurs, rising urbanization and a growing middle class are driving demand for convenience foods. Meanwhile, palm oil's role in biofuels is expanding. With governments like Brazil's pushing for sustainable alternatives under programs like RenovaBio, palm oil's high yield and cost-effectiveness make it a preferred feedstock. By 2030, the biodiesel market is projected to grow at 8.1% annually, with palm oil capturing a significant share.

Yet, this dual demand creates a tension. Palm oil's use in biofuels competes with its role in food production, risking supply shortages. For instance, Indonesia's export levies and domestic market obligations have already disrupted flows, highlighting the fragility of balancing these sectors.

Policy Shifts: A Double-Edged Sword

The European Union's Deforestation Regulation (EUDR), effective December 2025, has reshaped the market. By requiring deforestation-free and traceable palm oil, the EUDR has accelerated demand for certified sustainable palm oil (CSPO). As of 2025, 88% of palm oil entering Europe is RSPO-certified, a standard that includes biodiversity protection and fair labor practices. While this boosts market access for compliant producers, it also raises costs for smaller players.

In contrast, countries like India and Malaysia are leveraging sustainability frameworks to maintain competitiveness. Godrej Agrovet's IPOS certification and IOI Corporation's 40% GHG reduction via biogas and reforestation underscore how sustainability can become a competitive advantage. However, the 2025 Palm Oil Barometer warns that smallholders—responsible for 25–30% of global production—remain marginalized. Their net income is near zero as a percentage of the value chain, despite producing a third of the world's supply.

Supply Constraints and Price Volatility

Short-term price spikes in 2025—Malaysia's palm oil hit USD 982/MT, Indonesia's USD 911/MT—reflect supply-side pressures. El Niño-driven droughts in Malaysia reduced fresh fruit bunch yields, while labor shortages and rising transportation costs exacerbated bottlenecks. These factors highlight the vulnerability of the supply chain to climate and geopolitical shocks.

Moreover, the push for sustainability is not without unintended consequences. A 2025 study found that RSPO certification in Malaysia led to reduced plantation efficiency, suggesting that environmental criteria may inadvertently lower productivity. This raises questions about the long-term viability of certification programs if they compromise output.

The Investment Case: Balancing Risks and Opportunities

For investors, the palm oil sector presents a paradox: strong demand growth versus structural risks. Key players like Wilmar International and Sime Darby Plantation are navigating this duality by investing in ESG initiatives. IOI Corporation's Gold ESG Award in 2024, for instance, reflects a strategic pivot toward sustainability, which could unlock premium pricing in markets like the EU.

However, smaller producers and smallholders face a steeper climb. The 2025 Palm Oil Barometer advocates for “Procurement for Prosperity,” a model that prioritizes fair pricing and smallholder inclusion. While this could stabilize supply chains, it requires capital-intensive investments in infrastructure and training—areas where private equity and green bonds may play a role.

Data-Driven Insights for Investors

To gauge the sector's health, investors should monitor key indicators:

These metrics reveal whether companies are capitalizing on demand trends while managing sustainability costs. For example, Wilmar's stock has outperformed the agribusiness index by 12% in 2025, reflecting investor confidence in its ESG strategy.

Conclusion: A Calculated Bet on Sustainability

The palm oil rebound is underpinned by robust demand in food and biofuel sectors, but its sustainability hinges on navigating policy shifts and supply constraints. For investors, the path forward lies in supporting companies that balance productivity with environmental stewardship. Those that fail to adapt to ESG standards risk losing market access, while innovators in sustainable practices could capture long-term value.

In this evolving landscape, the question is not whether palm oil will rebound—but whether the industry can transform its rebound into a model of resilience. For now, the data suggests that the answer lies in a delicate equilibrium between growth and sustainability.