The Hindu Business Line : Experts see upside potential for vegoil

THE world vegetable oil deficit during September 2003-March 2004 will undergo a change as the market reverts to a supply surplus in the second half of the year which will weigh upon prices that are currently far above their long-run trends.

As prices fall back, there will be some reduction in soyabean oil's premium over palm oil, which is currently higher, can be explained by the Indian import duty structure.

As a result of the emergence of oil supply surplus, the Malaysian Derivatives Exchange (MDEx) crude palm oil futures price is forecast to be below RM 1,400 by the year-end, but this would still be above its long-run trend value of RM 1,250 a tonne.

Giving this forecast at the Palm and Lauric Oils Price Outlook for 2004-05, Dr James Fry of the London-based LMC International informed that India's role is pivotal in the oil market, not only as a major importer whose imports would be down by a million tonnes this year, but also because of the effects of its import tariff structure that penalises palm oil and favours soyabean oil.

"This is creating a world market premium of over $100 a tonne for soyabean oil", he said adding that if the expansion in world oil supply is being led by softseeds in 2003-04, soyabean and palm oils will lead the way next year.

China has been central to the surge in the level of world soyabean demand. Its rapid increase in meal demand is due more to the modernisation of livestock farming than to sharp rises in meal consumption.

"This modernisation still has a long way to go and should help overcome the short term slippage in meal use caused by avian flu", the expert asserted. On the supply side, Dr Fry pointed out that while the late drought in the US soyabean areas wiped out around 2 per cent of world oil supply and 4 per cent of meal supply, with normal yields and similar areas in 2004-05, the oil content of the US soyabean output should rise by 1.7 million tonnes next crop year.

Both Brazil and Argentina are achieving remarkable growth in soyabean yields and areas, and they will pull global 2003-04 soyabean output 1.5 per cent ahead of the previous year, he observed. addingthat soyabean cultivation was so profitable for the South American producers (current soyaoil production costs are negative after deducting meal credits) that further substantial output growth in forecast. According to Mr Thomas Mielke of Hamburg-based Oil World publication, fundamentals remain tight in the near to medium term and there is the possibility that we will see higher prices for palm oil, soya oil, sun oil and lauric oils in March-May 2004 before a turnaround to weaker prices begins.

The new crop prospects in the northern hemisphere will become an important price-determining factor from June onward.

"It is possible that prices begin to weaken in expectation of a sharp increase in world oilseed production. The seasonal increase in palm oil production could then add to price pressure", Mr Mielke argued, but cautioned that "prices for the new-crop positions currently still seem to be undervalued and may continue to rise in next 1-3 months, before they begin to weaken again from June or July onward".

Price pressure on vegetable oil will be limited as long as global stocks have not sufficiently been replenished. But in case of favourable weather conditions in the important oilseed growing areas of the northern hemisphere in May-September 2004, prospects are for a decline in prices of oilseeds and oils during July-December, he forecast.