JAKARTA – The Indonesian palm oil industry is expected to face four big challenges in 2027. The four big challenges are the potential decrease of Crude Palm Oil (CPO) production due to El Niño, significant increase of domestic demand, the shift of export trade regulations to a new governance framework, and the increasingly stringent traceability standards on the global stage.
The Indonesian Palm Oil Association (GAPKI) projects that palm oil production will fall to 53.69 million tons by 2027 due to the impact of El Niño on plantations. This situation is expected to erode palm oil exports, thereby causing volatility in the global market.
GAPKI Chairman Eddy Martono estimates that the impact of El Niño on production will not be significantly felt this year. However, the effects are expected to become more pronounced by 2027.
“There is no significant impact this year, but next year (2027), production could drop by 4–5 million tons,” Eddy told Sawit Indonesia magazine recently.
In his presentation at the ASPEBINDO Bioenergy Business Summit 2026, Eddy Martono outlined a projected 8.7% decline in palm oil production—driven by El Niño—to 53.69 million tons in 2027, down from 58.8 million tons in 2026.
“We are monitoring El Niño around the clock because of its impact on palm oil production. However, if production remains unaffected by El Niño, it could reach 59.5 million tons in 2027,” he explained.
This decline encompasses the production of both crude palm oil (CPO) and palm kernel oil (PKO). Due to the nature of the oil palm plant, the impact of drought is not always immediately reflected in production figures when the El Niño phenomenon occurs. Disruptions in water availability can affect physiological processes, flower formation, and fruit bunch development—effects that may only become apparent in the months that follow.
Significant Dilemma
Tungkot Sipayung, Executive Director of the Palm Oil Agribusiness Strategic Policy Institute (PASPI), emphasizes that the government faces a significant dilemma. The primary challenge lies in choosing between boosting exports to capitalize on global Crude Palm Oil (CPO) prices—projected to reach between US$1,650 and US$1,720 per ton—and prioritizing domestic food and energy security. An overly aggressive export strategy risks triggering cooking oil shortages and jeopardizing the B50 mandate targets, whereas overly restrictive export policies could result in a loss of foreign exchange earnings.
The required strategy involves identifying drought-tolerant plantations and implementing innovative best practices to maintain productivity amidst the climate crisis. Data from the Indonesian Palm Oil Association (GAPKI) indicates production growth in the first half of 2026, with total CPO and Palm Kernel Oil (PKO) production reaching 30,284 thousand tons—an increase of approximately 15.82 percent compared to the same period the previous year.
However, this growth is deceptive, as it is accompanied by a surge in domestic consumption and exceptionally high export demand. By June 2026, domestic consumption had risen to 2,201 thousand tons, driven largely by the biodiesel sector. This confirms that Indonesia’s CPO stocks remain in a vulnerable position, despite the apparent rise in production figures. Moving forward, precise stock management will be crucial to prevent a recurrence of the cooking oil crisis while simultaneously advancing the energy transition agenda through the B50 program.
Palm exports enter new system
The next challenge stems from changes in export governance. Starting in 2027, exports of strategic commodities such as palm oil will be channeled through PT Danantara Sumberdaya Indonesia (DSI). The company started operations on June 1, 2026, with a mandate to strengthen the governance and transparency of trading strategic commodities, which include palm oil.
DSI’s Director of Legal and Compliance, Ivan Ferdiansyah Baely, stated that the company is currently establishing end-to-end export visibility.
This process entails the integration, verification, and reconciliation of transaction data. DSI also examines price reasonableness, potential under-invoicing, transfer pricing, and discrepancies between transaction prices and international benchmarks.
Data regarding price, volume, quality, destination countries, and transaction settlement is expected to become increasingly transparent within a unified system. However, this new mechanism must also ensure certainty for exporters, buyers, and investors.
Simultaneously, Indonesia’s palm oil industry faces demands for traceability in global markets—particularly the European Union—driven by the European Union Deforestation Regulation (EUDR).
Palm oil products entering these markets must be proven legal and deforestation-free, with full information regarding their production origins.
Geolocation data plays a crucial role, as products must be traceable back to their specific points of origin.
- Fadhil Hasan, Head of the Foreign Affairs Division at GAPKI, noted the significant position palm oil holds in the global vegetable oil market.
According to USDA FAS data from July 2026, palm oil accounted for approximately 34.2% of global vegetable oil production in the 2025/2026 period—surpassing soybean oil, which stood at 30.3%.
Given this substantial contribution, the ability to meet sustainability standards is a critical factor in maintaining market access.
These requirements are not merely an issue for large plantation companies.
Independent smallholders also face challenges in meeting requirements regarding land legality, geolocation data, certification, plantation registration, and access to processing mills.
According to Fadhil, independent smallholders contribute approximately 35%–40% of global palm oil production. However, only about 8% of their supply is certified.
This situation places farmers at risk of facing difficulties as traceability standards become increasingly stringent.
Indonesia already possesses various databases and instruments for plantation legality. However, systems such as SIPERIBUN and e-STD-B, along with data on traded products, still need to be integrated to establish a comprehensive traceability system.
Documentation regarding legality, labor practices, and the principle of Free, Prior, and Informed Consent (FPIC) at the independent smallholder level also requires further improvements.
