The Hindu Business Line : Correction in global prices won't wean farmers away from oilseeds

AS a reaction to the forecast of a record world oilseeds production for 2004-05, the global vegetable oil market has moved down by $120-150 a tonne under the leadership of soyabean oil.

Much of the fall can be attributed to the role of funds in the soyabean oil market. As soon as the US Department of Agriculture released on May 12 its first forecast of 2004-05 global oilseeds crop, speculators started to liquidate their long positions.

Such a price trend should actually make major importing countries like India happy; but some report suggest otherwise.

The fall in the international price at this time of the year — the planting season — seems to have evoked some concern in India. There have been apprehensions that falling global vegetable oil prices (and in turn domestic prices) may discourage farmers from planting oilseeds and lead to a shift to other crops.These apprehensions are alarmist and wholly unjustified. India's major oilseeds crops are groundnut and soyabean, both of which are kharif crops, planted in June-July and harvested by October. Some groundnut is grown in the rabi season (harvested in April), but it represents only about a fifth of annual groundnut output.

Groundnut and soyabean farmers received remunerative prices from last October onwards. This has enhanced incomes in the hands of farmers. Marketing of almost the entire crop was completed three months ago when prices were still high.

There is nothing to suggest that growers would switch to some other crop merely because prices have corrected down during the planting season.

Commodity markets respond to expectations of changes in demand supply in future. It is on expectation of a record crop in 2004-05 that world prices have moved down.

While markets move in anticipation, agricultural production in a country like India does not change dramatically in anticipation of a change. If anything, under the existing conditions in India, the production or supply response to prices is rather limited.

As a matter of fact, the recent downward movement is seen more as a correction from unsustainably high levels rather than a crash because of supplies exceeding demand.

Importantly, many fail to see the role of speculators and hedge funds in impacting commodity prices. Much of the price volatility can be attributed to the speculative positions held and the entry and exit of funds.

Indeed, the USDA forecast has merely helped draw attention away to the next harvest; but the realities of the present physical market — the tightness in supplies — cannot be ignored. The world needs enough oilseeds over the next four months till the next harvest is available.

Additionally, there is the weather factor. The market will very clearly remain weather-driven through September. We have seen forecasts going awry so many times — the 2003 experience being the latest. Last year, the US soyabean crop harvested was 65 million tonnes, down from 78 million tonnes forecast made by USDA in May 2003.

Even a slight weather scare in the US, China or India — three of world's largest producers of oilseeds — will once again push the market up. There are many uncertainties between now and the next harvest that will keep the market under a leash.

Therefore, any talk about Indian farmers shifting acreage away from oilseeds is largely unwarranted. The present downward movement in prices may at best, or at worst, affect acreage so marginally that it would be negligible.

Growers of kharif season oilseeds — groundnut, soyabean, sesameseed — received such attractive prices that nothing can wean them away from planting the same crop, and certainly not a downward correction in oilseed prices at the time of planting.

Latest assessment by the Ministry of Agriculture suggests that area under oilseeds and cotton is actually going up (Business Line June 14).