Palm oil output and stocks, already lagging robust demand due to rains in top Southeast Asia producers, could be made worse should the cooking ingredient become the next target for emerging markets seeking to buy big and dampen adverse effects of booming world food prices.

As governments from India and Thailand to Egypt act to quell soaring food inflation and public anger, world cooking oil supplies look uncertain as the impact of dry weather and social unrest in the Argentine soy crushing sector lingers.

A scramble for palm oil may see world consumption outpace production, going beyond a supply deficit of 246,000 tonnes as seen in U.S. Department of Agriculture data in the current marketing year to September.

This scenario is set to further boost benchmark Malaysian palm oil futures that hit a three-year high on Wednesday and might bring the market well above the 4,000 ringgit level soon.

The increase in CPO (crude palm oil) prices is real. It is inline with the increase in rice and any other food price, said Leonardo Gavaza, analyst at Bahana Securities.

The Egyptian demonstrations will make some countries think about the kind of initiative to buy directly all commodities, to maintain their own inflation. The government of Indonesia is already pushing plantation companies to increase production.

Global food prices hit a record high in January, the U.N. Food and Agriculture Organisation said on Thursday, adding that prices, already above the 2008 levels which sparked riots, were likely to rise further.

Concerns of a food supply squeeze spread to cooking oil when rains this week triggered floods in Malaysia, the world's No.2 palm oil producer, submerging estates and cutting off roads that slowed deliveries.

In the same week, Thailand, usually self-sufficient, announced plans to buy 120,000 tonnes of crude palm oil to ease a domestic cooking oil shortage, a move that may spur other bigger importers to stock up.

The demand that we're seeing is food-driven, not fuel or speculation like we saw back in (the highs of) 2008, said a palm oil analyst, referring to when the vegetable oil hit a record 4,486 ringgit per tonne along with other commodities.

Egypt, a palm oil importer, was also rocked by civil unrest related to soaring food prices and top trader Cargill reported of more food stockpiling in the region.

We are bullish and at the cross roads, said Abah Ofon, a Singapore-based analyst with Standard Chartered bank. We have social tensions in Argentina affecting oilseed imports and there is the threat of floods hanging over Malaysia and Indonesia.

Such news will trigger higher prices and if not handled carefully, it can cause a voter backlash to various governments of big importing countries.

SCRAMBLE ON?

Traders will focus on the next moves by India and China as the world's top two palm oil buyers use monetary policy tools and food cost measures to rein in rising inflation.

Consumption of vegetable oils appears to still grow strongly in India and China, although there can be no doubt that poor consumers in these and other countries are hurt severely by the current prices, Thomas Mielke, editor of OilWorld, said in a note.

China, the No. 2 buyer, could rely on a cheaper, bumper Brazilian soy crop and order more U.S. soy to process into cooking oil, limiting its edible oil imports and inflation that a Reuters poll pegged at 30-month high in January.

Although Indian officials expect a strong rapeseed crop to cut palm oil imports, the world's top buyer could import more as the government has pledged to continue duty-free imports of crude edible oils ahead of elections in key states this year.

India will hold off buying for the next three weeks or so, since we are covered for January and most of February, said Sandeep Bajoria, chief executive of Mumbai-based trading firm Sunvin Group.

But if the prices continue to go higher for a longer time, we will be forced to buy, he said, adding that South Asian country imports half a million tonnes monthly from mostly Indonesia.

India's food inflation has remained in double digits for most of last year but analysts say it is rooted in factors like bad weather damaging food staples and soaring global prices that cannot be remedied by raising interest rates.

PRODUCTION SHORTFALL

Floods in palm oil producing Malaysia is the latest in a string of weather events, starting from Russia's drought last summer to recent floods in Australia that curbed wheat supplies and fed a buying frenzy for food staples.

The floods are starting to recede, government officials say, but planters are concerned that palm fruits' prolonged exposure to moisture will affect yield quality.

Planters say Malaysian stocks may fall by 10-15 percent in January and by an extra 5-8 percent in February.

Inventories slipped to a five-month low of 1.6 million tonnes, data from a Malaysian industry regulator showed.

Tight stocks have prompted buyers to shift to top producer Indonesia where higher maturing acreage can offset the impact of heavier rains on yields although supply will get tight.

There is a sustained level of support for prices because we still see a lot of production short-fall, said one palm oil analyst.

The weather problems are going to persist, especially in Malaysia.

Extreme weather has lingered in South America. The impact of drought on Argentina, the No.1 soyoil producer, has prompted the country's biggest grains exchange to cut its forecasts on the soy crop despite recent widespread rains.

The government ordering Argentine grain workers to suspend their week long strike, which paralyzed crushing plants and shipments, may give relief but some disagree.

Argentina is a wild card and strike action can go on for days, weeks, said a regional vegetable oil trader in Singapore.

What has changed is everything is happening at the same time, including palm oil. It's a battle to get the cheapest price now.