27/09/2008 (Bloomberg) - Palm oil prices have ``bottomed'' and will be supported by falling supplies of rival soybean oil and rising demand for biodiesel, Thomas Mielke, chief editor of OilWorld, a trade publication, said.

``Palm oil prices are currently undervalued,'' he told a conference in Mumbai today. ``Prices have bottomed, or are near the bottom of the cycle.''

Palm oil, the world's most consumed vegetable oil, can be mixed with regular diesel to stretch fossil fuel supplies. The price of the tropical oil has fallen by half from a record in March amid concerns that global supply may exceed demand.

Global palm oil production will increase 5.7 percent to 44.7 million tons in the year to September 2009, lagging behind a 7.3 percent gain in consumption, said Mielke.

``The use of soybean oil for biofuels will rise in the U.S., Brazil and Argentina, which means their supplies of soybean oil to the world market will fall'' by as much as 3.8 million tons, he said. Palm oil, a substitute, can fill this gap, he said.

Indonesia's palm oil production may grow 9.4 percent to 18.6 million tons this year and slow in 2009, said Derom Bangun, head of the Indonesian Palm Oil Association, at the Mumbai conference. In 2007, production grew 6.9 percent to 17 million tons, he said.

Malaysia may produce 17.6 million tons in the year ending September 2009, said Mielke. Indonesia may increase output by 2 million tons to a record 20.7 million tons in the period.

Alternative Fuels
Vegetable oils made from soybeans, corn, rapeseeds and oil palms, used mostly in food, are increasingly being used to make alternative fuels to reduce the cost of fossil energy. Crude oil rose 2.4 percent this week to $106.89 a barrel in New York.

December-delivery palm oil rose 1.5 percent to 2,313 ringgit ($673) a ton on the Malaysia Derivatives Exchange on Friday. The futures have gained 2.4 percent this week, the first weekly gain in more than a month.

Palm oil may trade between 2,700 and 2,900 ringgit, Mielke forecast Sept. 4. Prices may rise to average $1,120 a ton in the year to June 2009, up from an average $1,041 in the previous year.

The tropical oil may trade between 2,200-2,300 ringgit a ton for remainder of the year, said James Fry, managing director at LMC International, a commodity and biofuel research company, at the conference today.

Soybean oil will probably trade between $750 and $1,000 a ton between now and January, said Nicolas Backer, a trader with Nidera Handelscompagnie B.V., based in Rotterdam. He has traded edible oils for six years.

Prices may reach as high as $1,200 a ton next year if the new crop in South America is damaged by the worst drought in at least two decades, he said at the conference.

``If there's a crop failure, we could have a bull market of $1,400 a ton,'' he said.

Soybean oil traded in Chicago gained 1.1 percent to 47.93 cents a bushel, or $1,057 a ton.