InfoSAWIT, JAKARTA – Indonesia’s palm oil industry is once again facing a major test of resilience as one of the country’s strategic economic sectors. After years of navigating geopolitical tensions, volatile commodity prices, and changing domestic policies, the industry is now confronting another challenge: climate.

The El Niño phenomenon is projected to contribute to a prolonged dry season extending into early 2027, creating consequences that cannot be underestimated.

Drought is already affecting plantation areas and could spread into various aspects of social and economic life, including public health. For the palm oil industry, the risks are multidimensional.

The threat of plantation fires is increasing, concerns over the industry’s association with forest fires may resurface, and, most importantly, prolonged water stress could trigger a systemic decline in national palm oil productivity.

Palm Oil Production Faces a Delayed Climate Impact

For the crude palm oil (CPO) industry, climate is not merely a supporting factor. It is one of the key determinants of productivity.

Oil palm has a biological characteristic known as a lagged effect, meaning the impact of prolonged drought is not necessarily reflected immediately during the dry season. Water stress can affect flowering and fruit formation around nine to 24 months later.

As a result, if El Niño intensifies during the middle of 2026, the impact on national palm oil production could become more visible throughout 2027.

This makes early preparation essential.

The government, businesses, and communities need to assess the potential effects of drought by studying historical patterns and mapping forest and land fire risks that frequently accompany El Niño cycles.

Such assessments can provide a foundation for policies aimed at strengthening the resilience of both independent smallholders and plantation companies as climate-related risks become increasingly complex.

Lessons from Previous El Niño Events

Indonesia’s palm oil industry has faced El Niño several times, with each cycle offering important lessons for future management.

The 1997–1998 El Niño was among the most severe episodes. Extreme weather combined with land-clearing practices that were less organized at the time contributed to major fires across Sumatra and Kalimantan.

The consequences extended beyond environmental damage. Fresh fruit bunch (FFB) productivity reportedly declined by around 15–20% in the following year.

The experience became an important turning point in the development of fire-control policies, including the implementation of a zero-burning policy that remains a key principle of sustainable palm oil plantation management.

The next major El Niño episode, in 2015, again demonstrated the scale of the risks facing the industry. Widespread peatland fires occurred, while national CPO production growth was constrained in 2016, declining by approximately 3–5%.

When El Niño returned in 2023, Indonesia’s mitigation capacity had improved considerably. Satellite-based monitoring, stronger inter-agency coordination, and more consistent law enforcement helped reduce forest and land fire risks compared with earlier periods.

However, one challenge remained: prolonged water stress contributed to stagnant national palm oil production throughout 2024.

The experience of these three El Niño cycles reveals a recurring pattern. Whenever extreme drought occurs, national palm oil production comes under pressure, either immediately or through delayed biological effects.

Fire Risk Threatens Both Production and Reputation

One of the most serious risks is an increase in forest and land fires.

Smoke generated by fires can reduce the sunlight available for photosynthesis, disrupt fruit formation, and decrease the effectiveness of natural pollination.

The consequences are not limited to ecological damage.

A return of widespread haze could revive negative campaigns against Indonesia’s palm oil industry, particularly as global regulations become increasingly stringent. Under such conditions, every fire hotspot represents not only a threat to plantation productivity but also to the international reputation of Indonesian palm oil.

The potential impact of the 2027 El Niño will also extend beyond plantation areas and could affect the broader economy.

Independent smallholders, who account for approximately 40–41% of Indonesia’s total palm oil plantation area, are among the groups most vulnerable to production declines.

Lower output would directly reduce household incomes in rural areas. At the national level, a decline of millions of tonnes in CPO production could reduce export earnings worth tens of billions of US dollars.

Higher CPO Prices May Not Fully Offset Production Losses

A decline in supply would normally be expected to push global CPO prices higher.

However, if Indonesia’s export volume falls while global markets are supplied with substitute vegetable oils such as soybean and canola oil, the benefits of higher prices could be limited.

Progressive export levies and duties could further absorb part of the increase in global CPO prices through fiscal mechanisms.

As a result, stronger international CPO prices would not necessarily translate directly into significant additional income for businesses or smallholders.

Given the strategic importance of palm oil to Indonesia’s economy, the government and industry stakeholders need to prepare mitigation measures that can limit the impact of El Niño, prevent forest and land fires, and maintain national plantation productivity.

At least three policy pillars deserve attention.

Three Policy Priorities for El Niño Mitigation

First, export levies and duties should be reviewed.

The government needs to conduct a deeper assessment of export levies and duties on palm oil products. If national production falls sharply because of El Niño, temporary flexibility or reductions in export-related charges should be considered.

Such measures could provide companies with greater room to maintain cash flow, allowing them to continue financing fire prevention, maintaining plantation infrastructure, and caring for crops during critical periods.

Second, export certainty must remain part of the strategy.

Restrictions on exports could undermine the confidence of international buyers while putting pressure on prices received by farmers.

For that reason, implementation of the Domestic Market Obligation (DMO) should be evaluated and applied proportionally to maintain a balance between domestic supply requirements and the sustainability of export markets.

Third, emergency support should be prepared for smallholders.

The Palm Oil Plantation Fund Management Agency (BPDP) should consider establishing a dedicated funding allocation as an emergency assistance mechanism for smallholder farmers.

The support could be directed toward clean-water infrastructure in drought-prone plantation areas, fertilizer subsidies, stronger sustainable plantation practices, and improved logistical capacity for village-level independent firefighting teams.

Such measures would strengthen farmers’ ability to withstand increasingly severe climate pressures.

El Niño 2027 Will Test Palm Oil Governance

Ultimately, the El Niño threat in 2027 will be more than a test of the resilience of oil palm trees. It will also test the maturity of Indonesia’s palm oil governance.

Over the past several years, the industry has demonstrated its commitment through various mitigation measures, ranging from stronger fire-prevention systems to improved conservation practices.

Yet the industry’s ability to withstand climate risks will not depend solely on the preparedness of businesses.

Government macroeconomic policies—particularly those involving fiscal incentives, trade certainty, and protection for smallholders—will determine whether the palm oil sector can continue to serve as one of the pillars of Indonesia’s economy.

The effort to mitigate the impact of El Niño in 2027 is therefore not simply about protecting production figures or maintaining export volumes.

What is at stake is much greater: the livelihoods of millions of smallholder families, economic stability in palm oil-producing regions, and Indonesia’s position as the world’s largest vegetable oil producer.

Protecting the palm oil sector from climate risks ultimately means protecting Indonesia’s economic resilience in an era of increasingly unpredictable climate conditions. (*)

By Edi Suhardi, Sustainability Analyst

Disclaimer: This article represents the personal opinion of the author and is entirely the author’s responsibility. It does not represent the views of InfoSAWIT.