G. Chandrashekhar

Kuala Lumpur, Feb. 22

DEFYING the prognosis of experts and contrary to the general expectation of players, the global vegetable oil market has remained rather subdued in the last several months. The market has rallied only in the last few days, that too on weather reports.

Forecasts of major diversion of various vegetable oils - palm, rapes and soya oils - for bio-diesel purpose have yet to become a reality. Earlier forecasts were grossly overstated.

Crude market too has softened, reducing the enthusiasm of investors in bio-fuel capacities. Moreover, speculative funds flowed into other commodities that had better price performance potential.

Several bio-diesel plants set up in recent months are likely commence production in the near future. This can, to some extent, have an impact on prices, in addition to other factors.

Global oilseeds and vegetable oil production is poised to expand in the current year and be in a position to meet demand surges.

Many players who took a long position in the oil market since the beginning of the 2005-06 season in October last came in for a shock as the actual market price has continued to remain way below what was projected or expected.

It is in this context that the palm and lauric oils price outlook meeting organised this week by Bursa Malaysia Berhad (formerly, Malaysian Derivatives Exchange) assumes significance. Experts from around the world are expected to share their views and perceptions of the world market.

However, given the current production, supply and demand scenario, it does not require the expertise of a rocket-scientist to come with price forecasts.

Importantly, given the seasonal and regional nature of oilseeds production as also susceptibility to weather aberrations, any reasonable forecast can at best be confined to three months; anything beyond that would be mere conjecture.

What is the current status of world oilseeds and vegetable oil production? Very clearly, the world is going to produce at least four million tonnes (mt) of additional vegetable oil in 2005-06, thanks to largely satisfactory oilseeds crop outlook in the southern hemisphere.

Major contributors to the production increase include soyabean oil (1.5 mt); palm and sunflower oil (one mt each).

On the demand side too, growth is expected to be robust at between 4.0-4.5 mt. In other words, there is enough oil around the world to meet demand.

The opening stock of oilseeds since 2000-01 has been rising annually, but for a dip in 2003-04 (due American soyabean crop debacle). Going by USDA numbers, the opening stock for the current year 52.2 mt is up by 11.6 mt from the previous year.

The closing stock for the current year is projected even higher at 62.6 mt with soyabean stock at a record 54 mt.

No doubt, palm oil production growth in 2005-06 is projected to slowdown to one million tonnes. But one has to reckon with large level of inventory (a little over 1 mt) and sluggish purchases by major importers such as India, which is one of the reason why crude palm oil prices remained steadfast at around ringgit Malaysia 1,400-1,450 a tonne in recent months.

Also, the much talked-about diversion of palm oil for bio-diesel has not materialised so far in quantities that would have had an impact on prices.

January-March is traditionally the lean season for palm oil production and prices tend to look up; but with the peak season from April, the rally does not usually last long, unless other price making factors emerge.

One of the major importers, India is expected to harvest a significantly large rapeseed/mustard crop, currently estimated at about 6.5 mt. In addition, is the unsold stock of 1.5 mt with the procurement agency National Agricultural Cooperative Marketing Federation of India.

Also, a bumper crop of cotton this season has resulted in a record availability of cottonseed (7.5 mt).

If the South American crop eventually shapes up as expected (soyabean crop in Brazil at 58.5 mt and Argentina at 40.5 mt) there would be sufficient supplies available for the world market beginning latter half March and the whole of April. These supplies should pressure the market down, but not before allowing a $15-20 a tonne increase from the present level.

Interestingly, with a substantially improved crop, sunflower oil prices have already weakened. Its price differential with soyabean oil has halved in recent weeks to about $50 a tonne.

Where does it leave palm oil? Crude palm oil has a clear upside from the level of 1,450 ringgit a tonne. It has the potential to reach 1,600 ringgit a tonne in the coming weeks; but not stay at that level for long because of resistance from big buyers such as India.

A more sustainable range for crude palm oil is seen at 1,520-1,550 ringgit a tonne till April.

Beyond April, and especially in May, the market has the potential to pause and take a new direction. What surprises the Union Budget slated for February 28 will contain for the vegetable oil industry and trade is hard to tell. As far as India is concerned, a part of the uncertainty will unravel on the last day of the month.

(This article was published in the Business Line print edition dated February 23, 2006)
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