25/02/2008 (The Hindu Business Line), Mumbai - It is not unusual for vegetable oil prices to spike days ahead of the global industry’s calendar event — Palm and Lauric Oils Price Outlook held in Kuala Lumpur at this time of the year. We have seen it happen in the past. This year is no different. The market for both palm and soya oils has reached the stratosphere, with prices continuing to record new highs from time to time.
Without doubt, the global vegetable oil market is moving on factors much beyond the mundane demand-supply fundamentals that tradition-bound traders usually watched. Rising crude prices, biofuels demand in general (and biodiesel in particular), competition from other crops for acreage, continuing government support to encourage bioenergy (US, EU), weakening dollar and overall rise in agricultural commodity prices have all combined to push the market higher.
A new dimension in the form of global warming and climate change threat has been added. Taking advantage of uncertainties amid tightening market fundamentals, funds continue to play a big role in pushing prices higher and create volatility.
Bullish on price
Speculative long positions on bourses are significantly large. Where would the world vegetable oil market go from here? Some analysts are rather bullish about price, going forward. Recently, crude palm oil touched a new high of 3,750 ringgits a tonne (about $1,150); and there are talks of prices touching the psychological 4,000 ringgits a tonne level soon.
In the US, the world’s largest producer of soyabean, beans in the teens is the new mantra. Soyabean is priced upwards of $13 to a bushel, with potential for the market to go up to $15.
Although palm and soya oils are two of the world’s largest traded vegetable oils, other oils have not lagged behind. There has been a rub-off effect on their prices too.
The kind of frenzied activity the market is witnessing at present is unprecedented. It is unlikely to subside anytime soon, given the too many imponderables in the market place and speculative activity that is usually associated with market uncertainty.
The market has already begun to crystal gaze into the next season — 2008-09; and prices are sure to be impacted to some extent by expectations for the ensuing year. Some advance signals about events likely to unfold in the next few months are beginning to manifest themselves. Clearly, area under soyabean in the US is expected to rebound by about 10 per cent and yields are expected to improve from the previous season. This raises the possibility of US soyabean output recover to around 78-80 million tonnes in 2008-09, from 70 million tonnes this year. Worldwide, in 2008-09, soyabean output is projected to expand by 20 million tonnes.
Acreage numbers in the US, weather forecast for India (sometime in April/May) and planting conditions in China will have to be watched closely. By April, South American produce will also flow into the market. The beginning of peak production season for palm oil too coincides with these supplies.
Some supply pressure is likely to develop in the second quarter — April/June. Prices may soften from the current high levels; but no major crash is expected. After that, weather would take over. Second half of July onwards, it would largely be a weather-driven market. Crop prospects in major oilseeds growing countries would influence the sentiment.
Continued high prices are sure to lead to demand compression, especially in price sensitive markets like India. Indeed, for the world market, it is not so much the supply side, but demand side uncertainty that can create a downside risk.
India needs to respond to this emerging scenario. High international vegetable oil prices are here to stay, and cannot be wished away. Internally, there are political compulsions for the government to ensure galloping food prices are reined in. New Delhi cannot afford to ignore the plight of the poor, laid low by rising food prices including edible oil.
This can have damaging consequences in the ensuing elections to State governments as also General Elections.
Prices of wheat, pulses, rice edible oils and similar essential food products have moved beyond the reach of the poor and the needy. The government will be forced to augment supplies; and make edible oils both affordable and accessible to poor consumers.
What the Finance Minister proposes to do to the family budget of the aam aadmi (common man) will be known a few days from now. His degrees of freedom are limited.
It is believed, even within the government, there is inter-ministerial difference of opinion about a further reduction in customs duty on edible oil. It is unclear what has prompted the objection to a duty cut. But in the current juncture, it is both economically sensible and politically expedient to cut the basic duty of customs further, say on crude palm oil to 25 per cent and soyabean oil to 20 per cent; and simultaneously raise the tariff value closer to the market price. This will have a balancing effect.
More important is for the Government to immediately restart edible oil supplies through the Public Distribution System, which may also have a salutary effect on open market prices.