30/12/2011 (Reuters) - Malaysian crude palm oil futures dropped on Thursday in cautious year-end trading, butlosses were limited by worries that heavy rains may hit production in second-largest producer Malaysia.

Weaker global markets also prompted investors to book profits as palm oil eased from a 5-week high on Wednesday, adding to its 16.7 percent loss this year. 

Palm oil is set to post its first annual decline since 2008, weighed down by concerns the euro zone debt crisis could stall economic growth and commodity demand. 

"There's light profit-taking in the market, but it's going to be a wait-and-see game on the severity of the rainfall," said a dealer with a foreign commodities brokerage in Malaysia.

Benchmark March palm oil futures on the Bursa Malaysia Derivatives Exchange settled 0.9 percent lower at 3,155 ringgit ($1,000) per tonne. Prices touched 3,205 ringgit on Wednesday, a level unseen since Nov. 22.

Traded volumes for palm oil futures stood at 15,694 lots of 25 tonnes each, much thinner than the usual 25,000 lots as traders were unwilling to take postions ahead of the new year holidays.

But despite the loss, some traders were bullish on palm oil's outlook for next year.

"The bulls have both technical momentum and weather vagaries to propel prices higher. Against the backdrop of tight production prospects and slippage in South American crop, prices should be supportive in first quarter next year," said a trader with a local commodities brokerage in Malaysia.

"Any drop in prices is certainly a buy at least until first quarter 2012," he added.

On the weather front, the Malaysian weather office warned heavy rains could trigger floods in low-lying areas in the key oil palm growing states of Pahang, Johor and Sabah, accounting for almost 60 percent of national palm oil output.

While there have not been any reports of a disruption in deliveries of crude palm oil to refineries and ports, traders are watching the weather development closely, especially as palm oil production in Malaysia is in the seasonally low-yield phase.

But slowing exports may provide relief to any tightness in stocks as cargo surveyor data on Tuesday showed Malaysia's palm oil exports fell 11 percent in the first 25 days of December.

In related markets, oil held above $107 a barrel on Thursday as investors looked ahead to a U.S. supply report expected to show a drop in crude stocks and as Iranian threats to halt a vital oil trade lent support.

U.S. soyoil for January delivery fell 0.6 percent amid weaker global markets while the most active Sept 2012 soyoil contract on China's Dalian commodity exchange was almost flat.

  Palm, soy and crude oil prices at 1002 GMT
                                                                     
  Contract                      Month    Last   Change     Low    High  Volume
  MY PALM OIL                JAN2    3163    +6.00    3160    3167     328
  MY PALM OIL                FEB2    3148   -37.00    3140    3177    1481
  MY PALM OIL               MAR2    3155   -30.00    3139    3178    8394
  CHINA PALM OLEIN   MAY2    7966    -6.00    7940    7986   40116
  CHINA SOYOIL           SEP2    8968    +2.00    8938    8978  173922
  CBOT SOY OIL            MAR2   51.84    -0.32   51.75   52.07    5549
  NYMEX CRUDE          FEB2   99.74    +0.38   99.24   99.86    8651
                                                                    
  Palm oil prices in Malaysian ringgit per tonne
  CBOT soy oil in U.S. cents per pound
  Dalian soy oil and RBD palm olein in Chinese yuan per tonne
  Crude in U.S. dollars per barrel

  ($1 = 3.1655 ringgit)