Nov. 3 (Bloomberg) -- Palm oil futures traded near the highest level in more than two years as tight global oilseed supplies and a gain in crude oil prices increased the appeal of the tropical commodity as a biofuel feedstock. The January-delivery contract on the Malaysia Derivatives Exchange climbed as much as 0.5 percent to 3,106 ringgit ($1,006) a metric ton, equalling yesterday's high, before trading at 3,101 ringgit at 4:25 p.m. in Kuala Lumpur. A weaker dollar and rising crude oil prices are providing support to soybean prices and holding palm oil near a 27-month high, the China National Grain & Oils Information Center said today in an e-mailed report. "The major risk on the supply side is to be seen in the weather in major agricultural areas of South America" from now until March, said an OilWorld monthly report received by clients yesterday. "A severe drought similar to that two years ago would significantly reduce oilseed and grain production in South America," the industry publication said. Soybean farmers in Brazil's Mato Grosso state, which accounts for about 30 percent of the nation's crop, finished planting about 31 percent of the planned area as of Oct. 28, a farm research institute said. This time last year, growers had completed 51 percent of planting, the Mato Grosso Institute of Agricultural Economics said. World production of eight major oils will rise 3.9 percent in the 2010-2011 season, less than the 4.9 percent increase in the previous season, OilWorld said. Stronger Crude Palm oil is being supported by crude oil and a weaker dollar, Yaw Chee Ming, managing director of Glenealy Plantations (Malaya) Bhd., said in a statement in Kuala Lumpur today. Crude for December delivery rose for a third day, gaining as much as 0.7 percent to $84.50 in New York, the highest level since May 4, after an industry report showed U.S. oil inventories fell and on expectations the dollar will decline. The Dollar Index was little changed against six major currencies, after dropping to the lowest since Oct. 15 yesterday before an anticipated plan by the Federal Reserve to buy more government debt to support the economic recovery. "Everybody is keenly awaiting the outcome of the Federal Reserve meeting as it may impact the entire financial market," said Veeresh Hiremath, associate chief analyst at Karvy Comtrade Ltd. "Vegetable oil market supplies are tight, with weather aberrations in major producing countries." Declining Stockpiles Inventories of soybean oil and palm oil will drop 12 percent in the coming year, the most in 17 years, as demand from China and India expands, according to the U.S. Department of Agriculture. Soybean oil prices have jumped 22 percent this year in Chicago as a lack of rain in the center-west of Brazil is delaying planting in a region that grows 47 percent of the country's crop, the world's second-largest behind the U.S. "A tighter global vegetable oils outlook" and the "disruption in oilseeds production in India due to inclement weather would further boost palm oil," Glenealy's Ming said. Palm oil prices may trade between 3,000 ringgit and 3,200 ringgit in the next 15 days, Karvy's Hiremath said. Soybeans in Chicago for January delivery gained as much as 0.6 percent to $12.41 a bushel and last traded little changed at $12.3575. Soybean oil for December delivery rose 0.2 percent to 49.60 cents a pound, making it $90.296-a-ton more expensive than palm oil. In China, the biggest importer of soybeans, Dalian soybeans for September delivery dropped 0.6 percent to 4,415 yuan ($662) a ton. Palm oil for September delivery in Dalian fell 0.3 percent to 8,638 yuan a ton and September-delivery soybean oil rose 0.2 percent to 9,568 yuan a ton. CME Group Inc.'s January palm oil contract, pegged to the Malaysian benchmark price, advanced as much as 0.6 percent to $1,004.25 a ton, the highest level since the contract began trading in May. --With assistance from Ranjeetha Pakiam in Kuala Lumpur. Editors: Matthew Oakley, Jake Lloyd-Smith.

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