The Hindu Business Line : Stocks build-up by processors behind high oilseed prices

Mumbai, Jan. 22 Despite a rebound in domestic oilseeds production in 2007-08, continuing imports at a modest effective rate of customs duty (20 per cent) and rupee appreciation, domestic vegetable oil prices continue to remain strong, and practically out of reach of poor consumers. Agriculture Ministry’s preliminary estimate for kharif season of 2007-08 suggests a rebound of oilseeds production to 161.3 lakh tonnes (lt), from 139.4 lt in the previous year.

Specifically, soyabean output has recorded anew high of 90.4 lt, up from 88.6 lt and 82.7 lt of the previous two years. In addition, the country has had a bumper crop of cotton (over 300 lakh bales) and the availability of cottonseed is over 90 lt.

Groundnut is perhaps the only major oilseed that has under-performed; but even its production estimated at 51.8 lt is considerably higher than 32.8 lt of kharif 2006. Despite such remarkable outturn of crop, oilseed prices remain rather high. For instance, soyabean prices continue to rule at elevated levels of around Rs 19,000-20,000 a tonne, far higher than the minimum support price. Other oilseeds are no exception.

A major reason for strong oilseed and oil prices in the domestic market is the strength of prices in the world market. As the domestic market integrates with the world market, the former reflects current global market reality, it is argued. However, there are additional factors that fuel price rise in the domestic market. Many market participants are convinced there is large-scale inventory built up by processors and speculators which is the immediate cause of current high prices, bearing no relationship with harvested output and arrival data.

No curbs on storage

Admittedly, there are no storage or quantitative restrictions on oilseeds and oils inventory. In a rising market, there is always the tendency to buy at harvest time to build stocks with the intent to sell when the market is sufficiently high. Oilseeds processors such as oil mills and solvent extraction plants are believed to be holding stocks of raw material (oilseeds) far in excess of their actual requirement.

In addition, speculators (euphemistically called investors) have also purchased large quantities in anticipation of price rise. Such artificial build up of stocks for speculative purposes – in the context of an overall shortage situation and high international prices – has raised open market rates to unprecedented levels. Worse, the benefit of the oilseed price rise since the harvest time (October 2007) has not flowed to the grower. If anything, an average soyabean grower or groundnut farmer received a small part of the price premium. Speculators have gathered the cream of profits; and consumers are paying a high price for their cooking oils.

At the risk of sounding retrograde, there is case for imposing storage limits on both oilseeds and oils, in order to tide over the crisis. Extra-ordinary situations demand extra-ordinary responses. Processors, traders and others who are currently holding stocks should be made to declare the stock levels. In case of wheat, the government introduced the system of stock declaration by large corporates.

The same may be applied for oilseeds and oils. A limit on raw material and finished product inventory may be in order taking into account processing capacity and other factors. This will reduce speculative tendencies and have a salutary impact on prices of cooking oils. Consumers will be the real beneficiaries. The prospects for rabi crop do not look bright. Rapeseed/mustard acreage has lagged by about 8 lakh hectares. The target of 75 lt production is most unlikely to be achieved. Several traders and trade association representatives this correspondent spoke to said they would welcome quantitative restrictions on storage in order to maintain steady supplies at reasonable prices.