Prices of vegetable oils will be underpinned this year by the biggest shortfall in production in at least a decade, as healthy consumption by biodiesel plants swallows up rising supplies.

While output of vegetable oils will grow by 3.8% this year, demand will rise faster, by 4.5%, leaving the market on course for an 800,000-tonne deficit in 2009-10, Rabobank said.

The shortfall, the first for three years and the biggest since at least the 1990s, will leave the market's stocks-to-use ratio - a key measure of market tightness and therefore of price expectations - at 10.5%, down half a percentage point on the season before.

The bank said it saw "limited downside" for vegetable oil prices.

It added: "Vegetable prices remain in a demand-driven uptrend and we believe any significant will be met by active buying as importers and end users look to increase coverage."

Palm oil vs soyoil 

The report singled out prospects for palm oil prices as particularly firm, supported by a slide of 1.3 percentage points in its stocks-to-use ratio in 2010.

Meanwhile, import demand will remain strong, with India suffering a 15% slide in its Kharif oilseed harvest, and Chinese consumption supported by economic growth.

And palm will suffer relatively weak competition from soyoil, whose export availability will be held back by robust demand by biofuel plants in all three main exporting countries – Argentina, Brazil and the US.

The Argentine government has introduced a mandate of 5% of biodiesel in transport fuel and 20% in the fuel used by power stations.

In the US, clearance by environmental authorities of soy-based biodiesel's green credentials will revive consumption, with a $1-a-gallon tax credit on blenders also likely to be reintroduced.

"Total soyoil exports from the three major exporters are likely to stagnate at about 7.8m tonnes," Rabobank said.

'Better supported'

The bank added that given the huge increase in global supplies of soybeans, it had a "bearish view of soybean prices, and towards those of most competing oilseeds, throughout 2010".

"However, given the tightness experienced in the vegetable oil market, and particularly palm oil, throughout the rest of 2010, vegetable oils should be better supported."

Palm oil for May delivery closed up 1.4% at 2,631 ringgit a tonne in Kuala Lumpur on Monday, its highest close since January 6.

Chicago soyoil for March ended Globex trading 0.9% higher at 38.85 cents a pound, while May rapeseed was E1.25 higher at E297.50 in afternoon trade in Paris.