The Hindu Business Line : World vegetable oil prices may soften near-term

On cards
Global production of major vegetable oils projected up 6 mt by USDA to 124 mt.
Domestic consumption set to expand by 7 mt to 122.6 mt.

Kuala Lumpur March 12 A day ahead of the official opening of Palm and Lauric Oils Price Outlook 2007-2008, the mood within the industry is upbeat. Vegetable oil producers and exporters have not had such a profitable time in the recent past.

Market Performance

Considering that global vegetable oil market went through a 30-month long bear phase not long ago (2001-2003), the recent market performance — prices registered an enviable 30-40 per cent rise in last 6-8 months — producers have every reason to be happy.

The profitable bull run has emboldened them to further entrench their business interests and keep prices buoyant; and why not? The spike has come about mainly because of a sudden spurt in demand for vegetable oil from the bio-diesel industry.

Rising crude market of the last two years has encouraged huge investments to flow into the bio-fuel sector comprising bio-ethanol (produced from sugarcane or corn) and bio-diesel (from vegetable oil), often with significant amount of government support.

Major driver

Scores of bio-diesel plants have been set up and currently are coming up in different parts of the world. While Europe continues to be major driver of bio-diesel market using rapeseed oil, the US does not lag far behind in the use of soyabean oil.

Principal palm oil producers Malaysia and Indonesia too have seized the opportunity to divert crude palm oil for fuel use. Interestingly, in the current year 2006-07, global production of major vegetable oils has been projected by the US Department of Agriculture to rise by 6 million tonnes (mt) to 124 mt (118 mt), while domestic consumption is set to expand by as much as 7 mt to 122.6 mt (115.6 mt).

Currently, crops are readying for harvest in South America (mainly soyabean in Brazil and Argentina) as also in India (mainly rapeseed/mustard and some groundnut). While South America crop is looking healthy (57 mt soyabean in Brazil and 44 mt in Argentina — together higher by 5.5 mt from last year), Indian summer oilseeds output is seen suffering a setback — rapeseed/mustard could be lower by at least one million tonne this season.

So, how does the market look like? Between mid-March and mid-May, the market is likely to soften from the current levels because of arrival pressure in major origins. At end of the so-called lean season (first quarter of the calendar year) palm oil production will begin to gather momentum from April onwards.

The month of May would be crucial. The US oilseed planting intentions will be known and progress of planting will be closely monitored. In India, the southwest monsoon forecast would be out by around May 20. Rains should generally mark their advent on June 1 in the Kerala coast.

The robustness with which monsoon breaks and makes the initial progress will be keenly noted.

The market will take a definite direction after mid-May depending on how factors turn out.

Import expectation

However, the fact remains that India is woefully short of indigenous oilseeds and vegetable oils.

India's imports are expected to rise by 8-10 lakh tonnes during oil year ending October 2007 as compared with 45 lakh tonnes imported during the whole of 2005-06.

The market is well aware of India's dire need. Concerned over untamed inflation and its political backlash, the government has already made a series of moves including duty cuts to ensure easy availability of edible oils at reasonable prices. Most of the market making factors and the time line are reasonably clear. It seems unlikely that the expert speakers at the price outlook seminar here would come up with anything dramatically different.

The role of funds and their perception about price prospects will be crucial determinants of market direction.

Global vegetable oil market is expected to remain firm with some correction in the near-term. For instance, crude palm oil ruling currently at around Malaysia ringgit (MYR) 1,920 a tonne has the potential to decline by MYR 100 a tonne. Soya oil too has a downside of about $20 a tonne.