The data, released during the midday break, showed that March end-stocks were down 4.6 percent from February at 2.92 million tonnes, while output rose 8.3 percent to 1.67 million tonnes.
Meanwhile, exports surged by 22.4 percent from February to 1.62 million tonnes.
The benchmark palm oil contract for June delivery on the Bursa Malaysia Derivatives Exchange was down 1.9 percent at 2,170 ringgit ($528.62) a tonne at midday.
It earlier fell as much as 2.6 percent to 2,155 ringgit, the lowest level since April 2.
"The official data is bearish as production was expected to be lower," said one Kuala Lumpur-based trader, adding that this also contributed to higher than expected inventories.
A second trader said the market fell in the afternoon as the MPOB data showed a higher production trend.
In related oils, the Chicago May soybean oil contract was down 0.7 percent and the May soyoil contract on the Dalian Commodity Exchange rose 0.2 percent.
The Dalian May palm oil contract, meanwhile, slipped by 0.4 percent.