13/04/2009 (Times Online) - Permanently changed diets in China and the world's unrelenting appetite for fried food may defy the global recession and trigger a “stagflation” surge in the price of edible oils, commodity traders in Asia have said.

Fears are growing that food oil markets everywhere will be squeezed by a global supply shortage that arises from a combination of environmental and financial blows for farmers in the United States, South America and Asia.

Market prices have already begun to reflect those concerns, and they have already begun to draw money from speculators back into food markets after months of absence, traders in Kuala Lumpur told The Times.

The market surge may also be driven, traders said, by the growing sense that government economic stimulus packages — including China's huge $586 billion (£398 billion) spending splurge — will cause demand for certain foods to fall less rapidly than it has for a vast range of other consumer goods. China annually consumes twice as much vegetable oil as it did a decade ago, and analysts believe that the taste for it is now sufficiently established to survive the downturn.

Food market analysts are forecasting that, just a year after soaring inflation in rice and wheat markets threw governments around the world into panic, production of some oils may soon fall below demand, potentially forcing prices higher. Diminished access to credit means that, from Brazilian soy fields to Indonesian palm plantations, less acreage is being planted and less fertiliser is being applied.

Palm oil futures have leapt by more than 28 per cent since January, with more rises expected as trading enters the most critical phase of the year, in which farmers reveal their planting intentions and governments reveal the size of their soft commodity stockpiles. Futures prices surged by another 8 per cent last week, and spot prices of palm oil on the closely watched Kandla market in India jumped 5 per cent in yesterday's trading.

The main focus of attention was a keenly awaited report on Friday about Malaysia's stocks of crude palm oil — a key gauge of the balance of supply and demand between the world's production centres of edible oils and the world's kitchens. The reported 13 per cent fall in March cut Malaysian stocks to a 20-month low, pointing to strong demand from both Chinese diners and Italian electricity generators, both of which have continued importing large volumes of palm oil through the downturn.

Opinions are split on how long the rally will last. Experts in Oil World, a German analysis firm, believe that global palm oil consumption for the year to October will rise substantially from last year and will outstrip supply by about a million tonnes.

This, said Thomas Mielke, Oil World's chief analyst, will produce knock-on demand for soya bean oil, rape seed oil and sunflower seed oil. He said: “The recent rally was justified and the next three or four weeks will be critical. The financial crisis is not only impacting consumers, but the producers, too. The lack of credit is a problem for farmers everywhere and it is forcing them to cut back on fertiliser.”

At a recent shipping conference in London, Fred Doll, an industry veteran, said that sea-borne vegetable oil trade would rise to 62 million tonnes this year, from 55 million last year — a doubling of the levels seen eight years ago before the start of explosive growth in China and India and millions of households got their first taste of fried foods.

Felicia Taniyono, of UBS, said that palm oil prices would remain strong only for another quarter, and that global demand would weaken at the end of the year.

The recent strength of demand for palm oil has been bolstered by factors elsewhere that have affected production of soya bean oil — the chief cooking alternative in many Asian countries. Argentina's output has been hit by drought, and some observers expect further contraction of South American supply as strikes by farmers make their mark.