El Nino conditions have been highlighted. According to the U.S. Climate Prediction Center forecast dated 12th March 2026, La Niña is expected to transition to ENSO-neutral conditions in April 2026 and continue through May–July 2026 (55% probability). Thereafter, El Niño is expected to emerge in June– August 2026 (62% probability) and persist through at least the end of 2026. For context, ENSO is a global climate phenomenon driven by changes in tropical Pacific Ocean temperatures and atmospheric circulation. El Niño typically brings hotter and drier conditions, while La Niña is associated with cooler and wetter weather. Both extremes can be adverse to oil palm yields: El Niño through heat and moisture stress, and La Niña through excessive rainfall, flooding and harvesting disruptions.
Historical analysis suggests that monthly average FFB yields tend to be highest during neutral conditions and lower during both El Niño and La Niña periods (EN-LA). We also find that El Niño and La Niña events with a three-month lag show similar patterns in average FFB yields. Interestingly, CPO returns under 3-month lagged El Nino events remain inconclusive with monthly returns being similar to Neutral conditions. While concurrent EN-LA periods suggest differences in returns relative to neutral conditions, this relationship is not observed in lagged periods, contrary to conventional wisdom. Thus, we believe that the impact of EN-LA -if any- is primarily on yield risk. As such, a shift toward El Niño conditions later in CY26-27 could pose downside risk to FFB yields, which in turn would be supportive of CPO prices through tighter supply. For the time being, we make no adjustments to yields assumptions for the stocks under our coverage. Nevertheless, we will continue to monitor RONI updates in the coming months.
Continued Middle East conflict. Tensions involving the U.S., Israel, and Iran appear likely to persist, supported by continued Iranian retaliation and increased U.S. military presence. Concurrently, diplomatic progress appears limited, with no parties engaged in direct, credible negotiations beyond unverified social media claims. This is in addition to President Trump’s deadline of a 4-week war which had just lapsed which was stated in early March. Taken together, we now believe that the conflict is more likely to persist beyond 2QCY26 unless there is a real diplomatic channel, a verified halt in attacks, or a visible reduction in military escalation. As noted in our previous sector report, with oil prices remaining sensitive to geopolitical developments, CPO prices should continue to be supported via the correlation channel.
Elevated fertilizer input prices. Since the start of the conflict, urea prices have increased by 30–55% (Figure 3) and remain dependent on geopolitical developments in the Middle East. Said prices have raised concerns over potential margin compression for plantation players. We opine that current levels of elevated fertilizer prices could introduce FFB yield risk with a lag of 6-12 months, should Malaysian palm oil planters delay usage or trim application rates. Across the plantations under our coverage, we understand that fertilizer supply has largely been secured near the start of the year. Meanwhile, Sarawak Plantations Berhad has secured approximately 50% of its expected CY26 requirements to date.
We upgrade the sector to Overweight. We previously maintained a Neutral stance in the sector owing to geopolitical uncertainties and a balanced demand-supply outlook. At this juncture, considering the persistence of Middle East tensions, elevated energy prices, and the potential rollout of Indonesia’s B50 mandate in 2HCY26, we believe it is prudent to review our CPO price assumptions. Reflecting current CPO price levels amid ongoing geopolitical tensions, we expect 2QCY26 CPO prices to average RM4,600 before moderating to RM4,400 in 2HCY26. Based on the average of MTD March prices of RM 4,356, this brings our average CY26 CPO price assumption to RM 4,400. The moderation in our assumptions is driven by seasonal production growth during the period. However, approaching 2HCY26, we continue to observe RONI readings for increasing signs of El Nino events. Following our higher CPO assumptions, we have revised earnings for the stocks under our coverage and upgraded our calls to BUY for SD Guthrie (TP: RM6.96, PE: 19.8x), Hap Seng Plantations (TP: RM2.80, PE: 12.5x), Kuala Lumpur Kepong (TP: RM26.40, PE: 18.5x), and Sarawak Plantations Berhad (TP: RM3.81, PE: 10.1x).
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.016085 | 4.043244 |
| EUR | 4.629771 | 4.633392 |
| CNY | 0.582367 | 0.582825 |
| HKD | 0.512520 | 0.516114 |
| SGD | 3.113561 | 3.134881 |