The Hindu Business Line : Vegoil scene: High open interest positions a worry

On slippery ground
Open interest in soyabean for Jan was 2,78,202, while for March it was 1,09,103.
Speculation that China’s import of soyabean and its oil would be higher is lending support.

M.R. Subramani

Chennai, Nov. 27 A few days ago, the Malaysian Commodities Minister, Mr Peter Chin, said his Government was uncomfortable with the current prices for palm oil. On Monday, crude palm oil on the Malaysian Derivatives Exchange closed at a record 3,068 Malaysian ringgits (Rs 36,100) a tonne. Soyabean prices, on the other hand, hit the highest in the last 34 years on Chicago Board of Trade at $11.135.

However, on Tuesday, all edible oils began to decline along with crude oil on fears that there would be economic slowdown.

More than the prices, what is causing concern for those in the vegetable oil business is the open positions in the soyabean counter on Chicago Board of Trade. On Monday, open interest in soyabean for January was 2,78,202, while for March it was 1,09,103. Both these positions show a significant fall from last week, indicating vacation of long positions.

“Edible oil prices have runaway to current highs following crude, which nearly touched $100 a barrel twice in the last fortnight. The higher crude prices have given way to the thought that it could lead to increase in offtake of vegetable oils for bio-diesel,” said Mr B.V. Mehta, Executive Director, Solvent Extractors Association of India.

China factor

Crude prices have been on the downswing since the last two days on fears of slowdown in the US economy and hopes of higher production by the Organisation of Petroleum Exporting Countries. Apart from crude oil, speculation that China’s import of soyabean and its oil would be higher to control rising food prices has also lent support.

According to an analyst, the major problem in the vegetable oil counter could be that people/funds would like to unwind the huge open interest position. “If they don’t unwind, then they will have to rollover for which they will have to pay a premium. Going by the current situation, the high price phenomenon could be short-lived,” he said.

An indicator, of at least short to medium term trend, is that open interests are low during May (45,786) and June (52,182), while it is higher for November next (89,300).

Domestic arrivals

“More than the open interest, there are other fundamental issues to consider,” the analyst said. One is that domestic arrivals could soon begin pressurising market. “In India, oilseeds production during kharif is higher. Therefore, it will not be buying edible oils much at least until March. Arrivals of soyabean in Indore are higher, while a higher cotton production could ensure better supply of cottonseed for oil, especially in Andhra Pradesh. Even a State such as Tamil Nadu has had a good groundnut crop,” he said.

“India will also stay off buying palm oil during winter because it will turn solid and therefore, interests will be low,” he said.

During November 1-25, exports of Malaysian palm oil fell 0.4 per cent to 11.07 lakh tonnes.

Output

Also, China would not be in the market after January as the import quota had not been fixed, while soyabean arrivals are expected from Argentina, Brazil during February-March. Though soyabean production in the US is expected to be lower with plantings being at a 12-year low, crop in other countries such as Argentina and Brazil is expected to be higher than last year.

In Malaysia, palm oil stocks, currently around 16 lakh tonnes, could soon top 20 lakh tonnes. Also, the long positions in palm oil are currently around 43,800, whereas during the same time last year, it was over 73,000. “It is a clear indication that things look bearish currently,” the analyst said.

“For palm oil, the US move to not extend subsidy to it for bio-diesel is another blow. The subsidy is only for soya. And Malaysia, disturbed by higher palm oil prices has decided to delay its bio-diesel projects,” he said.

All these point to the current price trend continuing in the short-term only.

According to Mr Mehta, the higher prices could have an effect on demand and consumption. “The higher prices will squeeze demand and could lead to lower growth in consumption,” he said.

Mr Dorab Mistry of Godrej International, speaking at an edible oil seminar in Guangzhou, China, said he would not like to make any fresh forecast for palm oil prices, though 3,000 ringitt was a fair one.

But analysts and the trade expect palm oil price to dip to around 2,500 MYR. “There is a probability of vegetable oil prices falling by at least $100 a tonne in the near term,” said an analyst.

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