The Hindu Business Line : Oilseeds under the crusher

At the recently concluded Globoil International 2008 seminar in Dubai, the recurring theme was what would happen to the global vegetable oil market in the face of continued spikes in crude oil prices, support for biofuels, planting area constraints and, of course, weather uncertainties.

The world market dynamics is critical for India, which is a large importer of edible oils — about 50 lakh tonnes representing over 40 per cent of the total consumption requirement. The country spends over $2.5 billion on such imports.

India, a substantial market

Until a couple of years ago, India was a market closely watched by most global players in the vegoil sector, not only for the size of its vegoil economy, growth potential and import volumes, but also for the unpredictability of its policies towards this sector. China, of course, is another major economy closely watched because of the massive size of its import volumes. Yet, India was a dark horse.

Two years ago, when the bio-diesel movement began to gather momentum, the world’s attention was diverted away from India. While India continued to stay in the market as a large producer, importer and consumer of vegoils, it was no longer the “mover and shaker” of the world market.

Specifically, the palm market got somewhat de-linked or insulated from Indian influence. In recent times, the tariff policy changes have had limited impact on the palm group of oils, unlike the situation, say, five years ago, although the country continues to be a substantial market even today.

Bio-fuels frenzy

Meanwhile, as the bio-fuels frenzy seized some major economies, new issues have come to the fore. Specifically, competition for acreage; mandated use of bio-fuels; government support; and not in the least, flow of speculative capital.

The situation has not altered dramatically in recent months except for three-four significant developments.

Food verus fuel debate is gathering steam;

Global food inflation is putting pressure on governments in many countries

‘Splash and dash’ (practice or business of avoidably moving bio-fuels/feedstock to obtain government subsidy) is under challenge; and

India truly opening up its market with zero-duty on crude oils (unthinkable, even recently).

Both palm and soya oils are currently ruling well above $1,000 a tonne. Prices have doubled in the last year-and-a-half. There has, of course, been a smart correction in recent weeks. Will current high prices of vegetable oil hold up for long?

Volatile markets

By their very nature, commodity markets are volatile. High and low prices are a part of market dynamics. History tells us that bull markets in commodities do not generally last long. Supplies usually respond to prices. In the case of energy and metals, there will be a lag before high prices result in higher supplies; but in the case of agricultural commodities whose production cycle is small at four-six months, supply response can potentially show up in a matter of months.

However, this time, the extraordinary price spike in vegoils has sent ripples through the entire supply chain/value chain. There is concern primarily because ‘food inflation’ has combined with ‘fuel inflation’. In more sense than one, high energy prices have contributed to food inflation.

Consumption of high-priced energy products for agriculture — fertilisers, mechanised farming, transportation — has meant rising production costs for food crops. Adverse weather has played a role in disturbing production in some of the key exporting countries.

No great relief from high food prices is expected anytime soon. Both demand and supply-side factors are likely to keep the market buoyant. A significant relief from high energy prices — mainly crude — is also becoming increasingly unlikely. The prices of crude and other energy products suggest that the market expects the rates to stay high. This expectation will continue to rub-off on food prices in general and vegoil prices in particular.

It is within this overall expectation that one needs to assess how the Indian vegoil sector will pan out in the next few years. It must be realised that, globally, the policy environment is turning increasingly complex. Across the world, governments are in a dilemma as to how to reconcile the conflict between domestic political and other compulsions on the one hand, and international obligations and steadfast adherence to economic liberalisation, on the other.

Implications for India

However, India’s problems are more internal than externally driven. Lop-sided nature of growth so far and compulsions to ensure “inclusive growth” and “growth with equity” are beginning to create “political risk” for the government and “policy risk” for the market.

One may reasonably expect that, during next three-five years, the economic policy would be oriented towards greater investments in rural areas, and generation of income and employment opportunities in the hitherto neglected regions. Rural incomes are set to go up. Successful implementation of welfare programmes and schemes such as Bharat Nirman would improve the livelihood conditions in the villages.

Demand and supply

If rural incomes go up, demand too would. With rising incomes, the demand for a wide variety of goods and services would expand. This is simply because the existing consumption levels are low and every increase in income would first translate to higher demand for food and other necessities of life. Will supplies go up too? Will incremental supplies match incremental demand?

In the case of edible oils, there is little confidence that additional demand will be matched by additional supplies. Projections of the Government of India, Planning Commission for the Eleventh Plan hardly inspire confidence. The Government has targeted an annual growth of 4 per cent in oilseed output. Two points need focussed attention. First, there is absolutely no guarantee that output will grow at 4 per cent a year. There is no specific action plan to make it happen. Second, even if 4 per cent growth is achieved, it would fall short of incremental demand by a large margin. As a result, import volumes would expand.

Serious concerns are developing over the future of Indian agriculture, in general, and oilseeds production, in particular. The area under oilseeds has stagnated at 26-27 million hectares. Meanwhile, foodgrains shortage is looming large; and, therefore, grains will enjoy priority in terms of government’s policy attention.

For oilseeds, the scope for area expansion is limited. Relative prices of various crops and procurement policy may influence farmers’ planting decision in many areas. Importantly, inflation control will be the top priority for the Government. New Delhi will do everything within its control to ensure prices are reined-in. As the government faces political risk over inflation and poor farm performance, its negative response will result in policy risk for the trade and industry. Lastly, with the burgeoning demand for food, who will feed India in future?

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