JAKARTA: Strong production of south East Asian palm oil is the best hope of boosting cooking oil supplies as competitor soy oil gets soaked up to make bio fuel, its attraction redoubled by unrest in Libya that has driven crude oil to more than $100 a barrel.
Vegetable oil markets had braced for a fall in palm oil prices in the second half of 2010, on expectations of strong output from top producer Indonesia, as it harvests a bigger acreage, and as No.2 supplier Malaysia improves yields.
But the new threat of unrest in Libya disrupting crude oil supplie Save s has brightened bio fuel's allure, which could prompt farmers in the Americas to channel soy oil into the energy sector to profit from high prices and demand.
Palm oil will then have to fill the food gap as countries from Bangladesh to Egypt buy more of the edible oil to rein in soaring food prices and fend off civil unrest.
Markets will price this in. Malaysian palm oil has dropped nearly 3 percent this year, although rising food demand could wipe out the losses in the first quarter. US soy oil got a head start with a rise of 1.5 percent, thanks to its appeal for bio fuel use, and could strengthen.
"Looking ahead, it appears likely that there will be an increasing onus on palm oil to help ease the current tightness in world vegetable oil supplies," said Anne Frick, senior oilseed analyst with Prudential Bache Commodities.
"Consumption of vegetable oils, particularly soybean oil, in industrial usage is increasing," she added.
Estimates from the US Department of Agriculture (USDA) reflect this view. Palm oil's global ending stocks in the year to September will hover at 3.15 million tonnes, the tightest in seven years, but 14 percent higher than soyoil's balance.
The dynamics between palm oil and soy oil, which compete for use in cooking oil, margarine and bio fuel, will dominate the Bursa Malaysia Palm Oil Conference this week that draws in nearly 2,000 delegates from the global edible oils industry.
FOOD VERSUS FUEL AGAIN?
Crude oil prices at more than $100 a barrel, accompanied by record world food prices, will rekindle a debate over using food crops to make fuel when millions around the world go hungry.
Palm oil is unlikely to be in the picture for now.
"For palm oil to be competitive as the feed for bio fuels, there would have to be a strong push for palm oil usage in bio fuels from producing countries," said Chen Xin Yi, analyst with Barclays Capital in Singapore.
In contrast, the surge in crude oil makes soy oil-based fuel competitive with help from tax credits for blending in the United States and aggressive biodiesel expansion in Brazil and Argentina.
The bio fuel push to limit reliance on expensive oil could lift domestic soyoil consumption in these top three soy exporters by 7.1 percent, to 21 million tonnes in the current marketing year, Reuters calculations from USDA data show.
That leaves palm oil to cover the gap left in the global edible oil market that might exceed the USDA forecast of 4.5 percent growth as the global economy recovers and governments attempt to leash soaring food inflation.
"Palm will average 3,000 ring get this year, even though we have ample production because there is uncertainty in soy," said Sabri Ahmad, group President of Malaysia's Felda Global Group, the world's largest operator of oil palm estates.
NO ROOM FOR WEATHER SHOCKS?
Expectations that palm oil can bridge the supply gap come as Malaysian officials bank on well-distributed rains and at least 1,900 hours of sunshine this year to lift output by 3.6 percent to 17.6 million tonnes.
Excessive rains brought by the La Nina weather phenomenon in the last four months might have disrupted palm oil output but this will refresh the trees that suffered earlier from a dry spell in 2009.
"Second-half production should be better," said Michaela Kuhl, Frankfurt-based analyst with Commerzbank. "La Nina's high point is in the past. What was very bad over the last month, might prove not too bad for the near future."
Indonesia is gunning for a jump of 7 to 9 percent, to 22 million tonnes in 2011, confident of half a million hectares of oil palm estates coming into maturity three years after record estate expansion in the earlier price boom.
But with palm oil and soy oil's stocks to use ratio at multi-year lows, there may be no room for weather-related supply shocks as prospects for bio diesel demand grow.
Production of soybean for crushing in Brazil could be a new record on favourable weather and timely rains have increasingly brought relief to Argentina's parched crops.
"In the past, there have been several occasions when there were late season crop losses from excessive rainfall in Rio Grande do Sul (main Brazil soy state), and Paraguay's crop is currently facing this risk," Prudential Bache's Frick said.
The markets are also eyeing bumper US soy plantings this spring but the government says the harvested crop may fail to replenish sparse stocks, keeping grain and vegetable oil prices on the boil.
"There is a lot of uncertainty usually until that time (June) how big is the crop going to be, what the yield is," said Reinier Kelder, vice president of procurement at Dutch food group CSM, the world's largest bakery supplier.
"I expect quite a lot of (price) volatility and uncertainty, certainly for the next three to four months," he said.
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