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 Kamar Nor Aini Bt Kamarul Zaman
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 Business Spectator, Australia
 Tariff changes won't cure agriculture inflation

28/03/2008 (Business Spectator, Australia) - Increasing market intervention by national governments through changes in import and export tariffs, presumably to rein in prices, will at best distort trade in agricultural commodities and won't be an effective weapon against inflation, industry participants said Thursday.

Nowhere else is this more apparent than in the case of edible oils, where a slew of such measures have mostly helped revive a rally in prices, much to the disappointment of authorities in importing and exporting countries.

Malaysian crude palm oil futures have risen nearly 15 per cent since the start of the week on expectations of a decline in Indonesian supply and increased demand in countries such as India and China.

The rise in global prices of edible oils has led to a significant reversal in trade policies with producing countries levying or increasing export taxes and consumers such as India and South Korea reducing import tariffs.

In a short span of two weeks, two of world's largest vegetable oil exporters by volume – Argentina and Indonesia – have raised export taxes while India, a major importer, slashed tariffs.

China, another large buyer, has said it will continue to allow low-tariff imports of soybeans for a considerably longer period, while South Korea said it will allow bigger quantities of grains, edible oils and other commodities to be imported under a low-tariff scheme.

The changed policies are in sharp contrast to the trend a few years ago when exporters were seeking greater market access for their agricultural products through lower export tariffs while importing countries were reluctant to oblige even when there were domestic shortages, fearing cheaper imports would hurt local growers.

"Raising export taxes is counterproductive. Under the pretext of protecting their domestic consumers, these countries are simply using export taxes as a revenue raising exercise," says Dorab Mistry, director of Godrej International, a London-based trading company.

Worse still, estimates show domestic consumers often have to deal with even higher prices, while producers end up seeing their revenues drop as they are forced to absorb some of the impact of higher taxes.

Analysts say Indonesia's palm oil export volumes will continue to be robust but high tariffs will artificially push up prices and distort shipment schedules and freight costs.

"Hardly 30 per cent of Indonesia's palm oil is locally consumed and whether one likes it or not, the rest has to be exported," says Fordyanto Widjaja, a Singapore-based industry analyst with Morgan Stanley.

Indonesia's export tax on crude palm oil was increased Tuesday by nearly $US140/ton to around $240/ton.

Fordyanto says if export taxes become increasingly high, they will only boost local and international prices and encourage shipments through illegal channels as was the practice when such restrictions were imposed in 1999.

The benchmark June crude palm oil futures contract on Bursa Malaysia Derivatives ended MYR160 higher Tuesday after Indonesia doubled the export tax on crude palm oil to 20 per cent for April.

"Ultimately, such increase in taxes could also cause a rise in Indonesia's own local prices, (defeating) the domestic objective of controlling inflation," says Penny Yaw, a financial analyst with Citigroup.

Penny's comments, made before the tax hikes were announced, proved right as Indonesian prices have risen in recent days, tracking gains in the futures market.

Distorting Prices, Trade Flows, Shipping Demand

Based on the Indonesian government's calculation method, traders are now anticipating the export tax to be lowered for May, due to the downward correction in prices in early-March, says Pradip Desai, managing director of Palmtrade Services, a Mumbai-based trading company.

This is already prompting exporters to book cargo vessels for early May while previously they were pushing for more shipments in late March, he says.

"The shipping industry doesn't work this way with clustering of shipments in the first or last week of a month for which freight costs go up. It should be allowed its normal average flow of volumes," says Desai.

On the other hand, with India and Indonesia changing their tariff levels, Malaysian producers have raised their prices, leading to a general increase in prices of edible oils, regardless of where it is produced.

Mistry says another trade distortion is that oleochemical products in Indonesia, which aren't taxed, are now enjoying an unfair advantage over their competitors elsewhere.

In Argentina, farmers have gone on strike, protesting the increase in export taxes. With transportation of agricultural commodities from farmgate to ports mostly disrupted, soybean and soyoil buyers are finding it to hard to get their regular supplies.

Traders said China may have to source part of its soybean requirements from the US and substitute soyoil purchases with palm oil.

This is already having an impact on vegetable oil prices. May soyoil futures on the Chicago Board of Trade rose 200 points to end limit-up at 57.77 cents/pound Tuesday.

Earlier this month, Argentina's export tax on soybeans was raised to 46 per cent from 35 per cent while the tax on wheat and corn exports decreased by about one percentage point each.

While on the one hand, when the higher tax has done little to lower edible oil prices even in the domestic market, on the other, the tax changes which favour grains are expected to move more acreage away from soybean cultivation, say analysts.

"The higher tax on soybeans in Argentina is bullish for vegetable oil prices in 2009 because it will discourage expansion in acreage," says Mistry.

Similarly, lower Indian import duty on palm oil has pushed up global prices and the cost of importing the product, says Sandeep Bajoria, chief executive of Sunvin Group, a Mumbai-based trading company.

"Within five days of India cutting the import duty on CPO, Indonesia hiked its export tax, negating any benefit that may have accrued to India," says Davish Jain, chairman, Central Organisation for Oil, Industry and Trade, an umbrella group of local Indian edible oil traders, importers and manufacturers.

Moreover, both measures were equally bullish for prices.

According to Bajoria, since the cut in India's import duty last week, crude palm oil prices have gone up by $110 to $1,235/ton, basis cost, insurance and freight.

Meanwhile, India is witnessing a near complete shift in edible oils imports in favour of palm oil which enjoys a vast tax advantage over soybean oil.

For the past one month, most trading companies haven't bought soyoil at all, says Bajoria.

India imported 1.32 million tons soyoil in the year to October 2007.



Malaysian Palm Oil Board ( MPOB ) Lot 6, SS6, Jalan Perbandaran, 47301 Kelana Jaya, Selangor Darul Ehsan, MALAYSIA.
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