The Agriculture Ministry's second advance estimate of oilseeds production released earlier last month has the castor seed and oil traders shaking their collective heads in disbelief.

The Government's estimate for 2011-12 is a whopping 23.4 lakh tonnes, significantly higher than the target of 13.9 lakh tonnes and from the previous year's actual output of 13.5 lakh tonnes.

On the other hand, a crop survey sponsored by the Solvent Extractors Association of India came up with an estimate of 16.2 lakh tonnes.

The difference between Government and private estimate obviously is rather large, has the potential to distort the market and therefore, deserves to be reconciled. Not a single person who attended the recently-concluded International Castor Oil seminar in Ahmedabad would believe the Government's crop size. It was described as “outlandish” and not deserving of any serious discussion.

Be that as it may, without doubt, castorseed was traded at unprecedented prices last year, upwards of Rs 40,000 a tonne and often closer to Rs 50,000 a tonne. Robust export demand for castor oil and frenzied speculation in the local market boosted the sentiment.

Growers received attractive returns last year; and therefore there is reason to believe there was expansion in area planted and improved use of inputs.

Although it is reasonable to expect that supplies would usually respond to prices, under existing Indian conditions of agriculture, the supply response to prices has often been rather limited. As per SEA survey, the area planted was 11.5 lakh hectares in 2011-12 (8.6 lakh hectares in the previous year) and the yield is estimated at approximately 1,400 kg per hectare.

Much of the discussion on castor oil price outlook was based on crop size of around 16 lakh tonnes rather than anything significantly higher. Clearly, even going by private estimate, there is no denying that the castor seed crop size for 2011-12 is about 3 lakh tonnes higher than in the previous year.

Market prices are sure to reflect this ground reality. It is well known that castor oil is a versatile vegetable oil with varied industrial applications. While its consumption demand is generally believed to be price inelastic, its demand growth is influenced by global economic growth in general and industrial production growth in particular.

While global supplies of castor oil are likely to be comfortable, it is demand which needs to be watched closely. Western world growth, in particular European growth, is slowing. At the same time, vegetable oil prices in general are expected to rule relatively firm while crude oil prices are currently rapidly escalating in the wake of geopolitical concerns. The dollar is gradually weakening. A combination of these can potentially lift castor oil prices which are currently trading at $ 1,400 a tonne for export.

(This article was published on March 2, 2012)
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