Palm oil prices, which have dipped more than 18% from two-year highs in February, should nonetheless hold at "good levels", supported by a potential shortfall in production, REA Holdings said.

The London-listed plantations and coal group highlighted the growth in demand for palm oil provided by population expansion and developing-country economic growth, besides the improved economics of converting vegetable oils into biofuels provided by elevated energy costs.

Yet the weather extremes fostered by El Nino and La Nina weather patterns on the main producing countries, Indonesia and Malaysia, had held back output of palm oil. Malaysia's output will, unusually, fall in 2010-11, US Department of Agriculture officials believe.

"For 2011, consumption may outstrip production," REA, whose operations are based in Indonesia, said.

"With stocks low and the annual oilseed crops competing for land with wheat and corn, which are also at high prices and in strong demand, palm oil prices could reasonably be expected to remain at good levels throughout 2011 unless geo-political factors materially disrupt the world economy."

Palm oil and kernel oil prices look "set to remain at, or near, current levels for a while longer", putting teh group on course for "another good year".

More sun required

However, shares in the group tumbled 7.0% after it revealed a palm oil extraction rate for the first four months of 2011 of 22.5% , which it termed a "little disappointing".

The decline from a rate of 24.3% last year, and below a target of 24.0%, reflected the level of overcast weather during the crucial last 10 days of palm fruits' ripening period, when sunshine is needed for the synthesis of oil.

"The issue is the oil in the fruit when it arrives for processing," John Oakley, the REA managing director, told Agrimoney.com.

"If the wretched sun does not come out, there is not much you can do. This is agriculture."

The group's crop of the fruit itself, at 191,530 tonnes during the four months, was in line with expectations.

Market reaction 

The relatively low extraction rate ties in with a trend in many other producers too, with Malaysia's rate averaging 19.7% in the January-to-March period, one percentage point lower than a year before.

REA shares closed 7.3% lower at 700p.

Palm oil closed down 1.1% at 3,195 ringgit a tonne in Kuala Lumpur, for July delivery, a five-month low for a benchmark contract.