European sun oil prices have come under pressure in the past month from a sharp recovery in world sunseed supplies after shortages caused by poor harvests last year, traders said on Thursday.
But they expect the decline to be limited because of strong demand from food producers who are switching to sunoil to compensate for short supplies of rape oil over fierce competition with Europe's expanding biodiesel industry.
"I think we've seen enough of the downside for now," one vegetable oil trader said. "There is very good buying interest from food producers."
EU sunoil was quoted at $605 per tonne ex-tank on Thursday for January-March 2006 and Apr/Jun'06 deliveries, compared with $617 and $615 per tonne, respectively, a month ago, and $657 and $650 two months ago.
Strong demand for rape oil in Europe from biodiesel makers created a fierce competition with food producers like Anglo-Dutch Unilever, who are concerned about getting enough oil and have started looking at alternatives.
"Edible oil consumers can hardly cover their requirements for rape oil and has started to switch to sun oil and soya oil, also for price reasons," industry publication Oil World wrote earlier this months.
Soaring crude oil prices had made biodiesel produced of vegetable oils even more attractive in the EU, where tax incentives have already stimulated green fuels.
Rape oil - the product most used by the biodiesel industry because of its availability and quality - gained over 100 euros in the last two month as biodiesel makers were signing long-term supply contracts and seeds processing capacity reached its limit.
Traders said the drop in sunoil prices in the past two months had increased the food industry's interest, which was likely to raise imports as the EU is unable to meet its consumption needs with domestic production.
Oil World has forecast an increase in EU's 2005/06 sunoil imports by 140,000 tonnes to one million tonnes. The rise in imports is party due to poor crop in Spain, which suffered a sever drought this year.
Shortages caused by last year's poor sunseed harvest in western Europe as well as in its traditional main supplier, eastern Europe, have kept sunoil firm throughout the 2004/05 season with prices jumping over $700 a tonne.
Ukraine and Russia, EU's key suppliers, expect a sharp recovery in sunseed crops this year due to favourable weather, with the Ukrainian harvest likely to reach a record 4.6 million tonnes from 3.05 million last year.
This will allow Ukraine to boost its sunoil exports to one million tonnes in 2005/06 from 642,000 tonnes the previous season, the national sunoil producers association has said.
Russia, which became a net sunoil exporter in 2004/05, is likely to produce an all-time high 6.0-6.4 million tonnes of sunseed this year from 4.8 million last year, according to independent research organisation SovEcon.