12/03/2008 (Food Navigator) - Coconut oil prices are set to stay high this year, pushing food makers to look at innovative ways of reducing their costs.

Coconut oil, used in margarine, shortening, coffee whitener and popcorn, has hit record prices in recent weeks, driven by the global trend across vegetable oils. Strong demand in emerging economies as well as growing use to make biofuels is keeping supply tight.

Yvonne Augustin, executive director of the United Coconut Associations of the Philippines, told FoodNavigator.com: "The vegetable oils market right now is really bullish. Coconut oil has spillover strength from this market."

Coconut oil competes with palm oil as both have the same chemical composition and high lauric fatty acid content. Palm oil has been cheaper than coconut oil as it is available in much greater supply, largely grown on plantations rather than the smallholdings where most of the world's coconuts are produced.

But with tightening around soy and palm oil, coconut oil began increasing strongly last year, reaching an average price of $800 per tonne in November compared with just $536 at the same time the prior year. The highest CIF price offered for a nearby position on coconut oil recently reached $1620 per tonne.

The price was also impacted by lower production last year in the Philippines, the world's biggest coconut oil exporter, and increased use domestically for both cooking oil and biofuels. The Philippines government brought a new biofuels act into force last year requiring 2 per cent of all diesel to be made with coconut-based biofuel within the next two years.

While Indonesian output, the second biggest exporter, was higher last year, global stocks remained low.

High prices are expected to increase production this year but there is also rising demand from both the food industry and industrial users such as the surfactants sector and biofuels.

The Jakarta-based Asia Pacific Coconut Community (APCC) expects demand in the EU and USA to increase by 4 per cent in the first half of 2008 to reach 1.3 million tonnes. In the EU, demand from the food industry is rising faster than the industrial sector, at a rate of 4 per cent each year.

"We anticipate growing demand in the food industry because of trans fats," said UCAP's Augustin.

There is also high demand in China. APCC predicts the booming economy to import 13 per cent more than last year during the first six months of 2008 to 74,000 tonnes, mostly for use in food.

As a result, Romulo Arancon, executive director of the APCC, expects prices to remain "unprecedently high for at least the next six months or even a full year". He said export prices out of Rotterdam would likely be in the range of $1,100 to $1,300 CIF over the next year.