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Harish Damodaran

New Delhi, Oct 12 The crash in open market vegetable oil prices, in line with international trends, is threatening the viability of the Centre’s newly launched scheme for subsidised sale of imported RBD palmolein and soybean oil.

Under the scheme, the Centre is providing a flat Rs 15 a kg subsidy on imported edible oils channelised through the public distribution system (PDS). The public sector undertakings – MMTC, PEC, STC and Nafed – have been asked to import up to 10 lakh tonnes (lt) of oil for this purpose during 2008-09.

The parastatals are, in turn, reimbursed Rs 15 on every kg of oil they make available to State Governments at below the ruling market price.

At the time of the scheme’s launch in end-July, bulk imported RBD (refined, bleached, deodorised) palmolein was selling at around Rs 52,000 a tonne in Mumbai, after having scaled Rs 60,000-plus levels in June.

On Friday, however, prices had dropped to just Rs 37,400 a tonne, reflecting the ongoing global financial meltdown and retreat of investors from commodity markets. The benchmark December 2008 crude palm oil contract at the Bursa Malaysia Derivatives Exchange is now trading at 1,773 ringgit or $505 a tonne – the lowest since November 2006.

The parastatals are currently making available imported RBD palmolein to State Governments at Rs 45 a litre (one litre equals 0.91 kg), net of Central reimbursement and costs incurred in packaging. States such as Tamil Nadu are, then, selling the same oil still cheaper through the PDS at Rs 40 a litre.

But given the sheer magnitude of decline in open market prices, even Rs 40 a litre may not be attractive enough.

“If you take today’s wholesale price of Rs 37,400 a tonne or Rs 34.03 a litre and add another Rs 4-5 a litre towards packaging and freight costs, the open market oil will retail at below Rs 40 a litre. The difference will be even more in States that do not offer any subsidy over and above the Centre’s Rs 15 a kg,” trade sources pointed out.

The question being raised is whether the Centre’s subsidised edible oil sale scheme would be viable in the new bear market situation. “Giving Rs 15 a kg subsidy when the price of imported RBD palmolein is Rs 50-55 a kg is understandable. To extend the same when market prices are Rs 37-38 a kg may not be sustainable,” the sources noted.

When asked about any rethink on the extent of subsidy, a senior Food Ministry official said, “we do not propose any changes in the scheme as of now.” The reason, he stated, was that about 90 per cent of imports contracted by the parastatals so far were at $1,000 a tonne-plus levels (against the current $635).

“We can think of reducing the subsidy once the more recently contracted cheaper imports start landing in,” he added. The parastatals have so far placed import orders for about 3.25 lt, of which 2.5 lt have landed in the country and 1.40 lt distributed to various States.

More Stories on : Oilseeds & Edible Oil | Commodity Markets

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