29/12/06 (Busienss Times)  -  PALM oil futures surged to their highest since January 1999 as heavy rains in Indonesia and Malaysia, the two largest producers, may further curb output at a time of year when production naturally dips.

Plantations in parts of the two nations had been affected by flooding, cutting production, Derom Bangun, executive chairman of the Indonesian Palm Oil Producers Association, said in a telephone interview yesterday, without giving an estimate of the shortfall.

Output from the vast estates where the commodity is grown normally drops each November and December, to pick up again in February or March, he said.

The disruption comes as demand for palm oil, mostly used in cooking, is surging as economic growth in Asia spurs consumption, and higher crude prices boost its allure as an alternative fuel.

Palm oil futures have surged 44 per cent in the past year.

Palm oil for delivery in March on the Malaysia Derivatives Exchange gained RM37, or 1.9 per cent, to settle at RM2,032 a tonne. That's the highest close since January 22 1999 when the contract closed at RM2,057.

"Floods in plantations in Indonesia and parts of Malaysia are one reason for the recent surge," Derom said.

"The disaster happened as production slows down, so it has really affected sentiment."

According to forecasts from Oil World trade publication in September, Malaysia may produce 15.9 million tonnes of palm oil this year and 16.4 million tonnes next year.

Indonesia, which is set to overtake Malaysia as the top producer, may gather 15.8 million tonnes this year, and 17.5 million tonnes in 2007, it said. - Bloomberg