(Bloomberg) — The outlook for Indonesia’s palm oil crop has darkened as dry weather and aging trees hit production in the world’s largest growing country, likely leading to a tightening of global supply and continued high prices.

Most read by Bloomberg

Production of the tropical oil is expected to be flat this year or up to 5% lower than in 2023, according to forecasts by the Indonesian Palm Oil Association and the Indonesian Palm Oil Board. The industry associations representing producers and refiners had both predicted an increase earlier this year.

The US estimates that global palm oil reserves are heading for their lowest level in three years. Malaysia, the world’s second-largest producer, is also struggling with supply shortages due to old trees and a labor shortage. The tropical oil is used in a wide range of products, from soap to ice cream to fuel.

Indonesia produced a record 54.84 million tonnes of palm oil in 2023, according to the country’s palm oil association, after three years of declines. Industry association Gapki estimated production this year at 52 to 53 million tonnes.

About a third of Indonesia’s main palm oil-producing areas, including Sumatra and parts of Kalimantan, recorded lower-than-normal rainfall in July, said M. Hadi Sugeng, secretary-general of Gapki. That trend is expected to continue this month, he added. The group forecasts production will remain stable or decline by 5% this year, compared with a 5% forecast in February.

According to a report earlier this month, the U.S. Secretary of Agriculture forecast that Indonesian palm oil production fell by 2 percent from January to June compared to the same period last year. The drought caused the trees to develop more male flowers and produce less fresh fruit, it said.

Benchmark palm oil futures were 1.1 percent higher at 3,966 ringgit at midday in Kuala Lumpur, extending gains for the fifth session – the longest rally since early July. Concerns about tight supply are supporting prices, said Paramalingam Supramaniam, director at Selangor-based broker Pelindung Bestari.

Old plantations

Tree stunting continues to be a problem for the industry. Many of the country’s smallholder farmers have plantations that are more than 25 years old and urgently need to be renewed to increase production, says Sahat Sinaga, acting chairman of the Indonesian Palm Oil Association.

The story continues

Fresh fruit production has fallen from 830 kilograms to just 700 kilograms per hectare on some plantations, Sinaga said. The board estimates Indonesian production will fall 3 percent this year, compared with an increase forecast in January.

“I am deeply concerned. Indonesia’s fame in palm oil cultivation could fade if no one recognizes this problem,” Sinaga said, referring to the aging plantations.

(Updated with palm oil prices in the seventh paragraph.)

Most read by Bloomberg Businessweek

©2024 Bloomberg L.P.