KUALA LUMPUR: Malaysian palm oil futures dived to their lowest in nearly three years on Tuesday, as slowing demand from Asia coincided with a drop in the edible oil's appeal as a substitute for soy oil, with the U.S. soybean harvest progressing at a record pace.

Palm oil's decline follows the weakness in the Chicago soybean complex, which tumbled to a three-month low during Asian hours on Tuesday on U.S. harvest pressure. Palm oil has lost more than 29 percent since the start of the year.

Lacklustre palm oil shipments, despite the Malaysian government increasing a tax free export quota for crude palm oil, is now certain to boost stocks in September above the ten-month high logged in August.

"There is nothing to do but sell. Everything is working against palm oil, from fundamentals to other global markets," said a trader with a foreign commodities brokerage in Malaysia.

"I suspect there may be a bounce tomorrow but everyone is short-selling for now and the general trend is for the market to go lower in the weeks to come."

The benchmark December contract on the Bursa Malaysia Derivatives Exchange dropped 8.7 percent - its steepest daily drop since the 2008 financial crisis - to 2,250 ringgit ($737) per tonne, a level unseen since November 2009.

It later closed at 2,255 ringgit per tonne.

Total traded volumes jumped to 49,867 lots of 25 tonnes each, nearly double the usual 25,000 lots as dealers aggressively sold off the market.

Reuters market analyst Wang Tao said technicals showed palm oil would rebound to 2,500 ringgit per tonne, as its fall may temporarily stop around a support at 2,407 ringgit, but that rebound would little affect the current downtrend.

Palm oil exports in September hovered around 1.4 million tonnes, barely moving from a month ago. Malaysian plantation officials and traders now say stocks could easily hit 2.5 million tonnes, with October shaping up to be a peak production month.

"The government has issued about 3.5 million tonnes of tax free crude palm oil export quota for this year and it was supposed to finish in September," said another Malaysian trader.
"If it has really been completed, we are in trouble. Stocks are going to shoot up," he added.

Brent crude oil slipped to around $112 a barrel on Tuesday as investors weighed a weaker outlook for fuel demand and sluggish economic growth against the risk of possible supply disruptions.

In other vegetable oils markets, U.S. soyoil for December delivery dropped 1.4 percent in Asian trade. The Dalian Commodity Exchange remains closed for a holiday in China and will resume trading on October 8. - Reuters