17/03/2008 (Guardian Unlimited, UK), Amsterdam - Vegetable oil markets have enough support to remain firm this year with rapeseed and palm oil likely to outperform, which could put pressure on the food industry to increase prices further, analysts say.

Prices of vegetable oils have pulled back in recent weeks after surging to all-time highs in February and early March on major Chinese and European buying and a flood of fund investments in commodity markets.

The food industry relies on vegetable oils such as palm and rapeseed for products ranging from salad dressings and margarine to biscuits and cakes, and many firms have already raised retail prices as they feel the pinch from surging raw material costs.

And while demand for vegetable oils from the European biodiesel industry is dampened by profitability problems, analysts said the animal feeds industry was using more oilmeals to compensate for higher grains prices.

"In the short to medium term, there is enough support for vegetable oil prices to increase a bit further," said Dirk Jan Kennes from Rabobank's Food & Agribusiness Research and Advisory division.

He expected volatility in the vegetable oil markets and the high price trend to continue until 2010.

Some analysts saw the potential for palm oil to outperform other oils as it is still the best bargain, while rapeseed oil stood to benefit from the food industry's search for healthier ingredients.

"Palm and rape oil are two that have the potential to creep up further," said one European vegetable oils analyst.

"Palm oil looks cheap against soy and rape oil is at a small premium to soy and a reasonably good discount to sun so it looks relatively good value."

FLEXIBLE
Food businesses have favoured palm oil because it can be used in a wide range of products and is a solid fat at room temperature so it can help to give form to products like cakes.

"Palm oil is wonderfully flexible, you can use it for lots of different things whereas some of the other oils have a limited range of use," said a spokesman for consumer products group Unilever.

Food industry experts added however that new efforts to reduce saturated fats in foods ranging from biscuits to crisps were likely to increase demand for rapeseed oil, which has a lower saturated fat content compared to many other oils.

"You may generally see a move to an increasing use of rapeseed quite simply because of its lower saturated level," said Adam Thomas, a product development manager for vegetable fat manufacturer AarhusKarlshamn.

"A lot of the proposals to reduce saturates for whatever reason will tentatively incur cost, the bottom line is the consumer will have to pay for that."

FURTHER TIGHTENING
Experts said rapeseed oil prices are also likely to be supported due to potentially tighter supply.

"There has been far less rapeseed planted in Europe, because farmers jumped into wheat," said Heike Hintze-Gharres, senior economist at Britain's Home-Grown Cereals Authority.

Farmers are growing more wheat this year in response to surging global prices in 2007 which were driven by weather-hit crops and demand from China, India and the bioethanol industry.

"When you look at the long-term trend, the oilseed has not been as critical as the wheat, but you need good crops to avoid a further tightening of stocks. You need to ensure a bigger crop to avoid a really tight situation," said Hintze-Gharres.

Analysts said demand for vegetable oils from the biodiesel industry in Europe was weakening due to lower production levels as businesses face higher taxes in some countries and competition from cheaper imports.

But demand from animal feed compounders was growing as they sought to diversify feed ingredients due to the cost of grain.

"The animal feed industry is struggling with high grain prices and is trying to shift away from grains into oilseed meals," said Kennes.

"That has resulted in very low stocks of oilseeds and there is no real flexibility at times of demand spikes."-Reuters-