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* India seen buying more wheat, record volumes of vegoils
* Global biodiesel consumption to rise on U.S., Indonesia moves
* Argentina's export tax cuts will cap gains in soybean prices
By Naveen Thukral
SINGAPORE, Dec 18 (Reuters) - After suffering a market drubbing this year, agricultural commodities could see some green shoots of recovery in 2016 as higher consumption, biofuel mandates and unfriendly crop weather drive up wheat and vegetable oil prices from multi-year lows.
Yields for both farm commodities are already on the wane, with dryness linked to an El Nino weather event and unseasonal rains covering key growing areas in the Black Sea region, Southeast Asia, India and Australia.
Responding to the threat to supply, benchmark wheat prices Wc1 have risen 7 percent from their lowest since June 2010 hit earlier this month, while palm oil futures 1FCPOc3 have surged almost 30 percent from a six-year trough plumbed in August.
"We could easily see a 10 to 20-percent rally in wheat prices," said Paul Deane, senior agricultural economist at ANZ Bank in Melbourne. "The market at some point in the next three months is likely to get excited over the Black Sea and Indian crops, you could get a bit of spike."
India, which accounts for more than 10 percent of the global wheat output, is set to see a second consecutive annual drop in production next year. Traders have started talking about higher imports after the country in 2015 made its largest purchases in more than a decade. urn:newsml:reuters.com:*:nL3N10752N
But the wheat market's gains may not be sustainable, ANZ's Deane cautioned, given the stocks built up from bumper global harvests over the past four years.
"It is going to take a major weather event somewhere to get the market going, that could be a year or two down the track."
For now, however, the El Nino will underpin prices, with production in the world's No.4 exporter, Australia, down by 15 percent this year due to the weather event.
PALM OIL PRICES TO RISE
The El Nino, or a warming of sea-surface temperatures in the Pacific, usually leads to dry weather across Asia, unhinging supply chains of commodities. Wheat and palm oil prices had soared more than 40 percent in 2010, partly due to an El Nino.
Oil palm trees take about nine months to show stress due to drought, indicating that the impact of the current El Nino on yields in top producers Indonesia and Malaysia will be evident in the second half of 2016, analysts said.
This will buoy prices because around the same time India will be hungry for more edible oil and Indonesia will be using larger volumes of palm oil to make biodiesel, they added.
"We are bullish on vegetable oil, our view is India will be importing record volumes because they have issues with their rapeseed crop," said Adam Davis, a senior analyst at Merricks Capital, a Melbourne-based fund that manages $350 million.
"Increases in biodiesel demand in Indonesia and changes in U.S. legislation will mean more use of vegetable oil."
Indonesia has been pushing for greater use of biodiesel to cut its fossil fuel import bill and create more demand for palm oil, while a renewal of a U.S. biodiesel tax credit would lead to a rise in soyoil uptake for blending purposes in the country.
But slowing economic growth in major vegetable oil consumer China and a move by big soybean producer Argentina to reduce export taxes are likely to keep a lid on prices.
"China's pace of soybean imports has been strong in the past few years. It might take a breather next year," said Deane.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ GRAPHIC: Chicago wheat prices vs speculator short positions
http://reut.rs/1OxywYw GRAPHIC: Palm oil prices & open interest
http://reut.rs/1OxyNe5
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