Sudhakar Rao Desai, Chief Executive Officer (CEO) of Emami Agrotech Ltd, was re-elected unanimously as the President of Indian Vegetable oil Producers’ Association (IVPA) recently.
A person with vast experience in the vegetable oils sector, Desai is also the Chairman of Agri and Food Council, Eastern India ASSOCHAM, and the organising committee member of Glob Oil. He feels that the pandemic is the biggest reset button for many aspects of life, including commodity prices. In an interview to BusinessLine he explains the reasons for the recent uptrend in prices of edible oils. Excerpts:
In spite of the pandemic, prices of edible oils have gone up now. What factors are driving this price movement?
Mostly the factors have been global. Firstly, there is no production growth in Indonesia and Malaysia. Secondly, there is continued support to the global biofuel mandate and demand recovery in the fuel sector. The HoReCa (hotels, restaurants and catering) demand has been almost fully substituted by the household demand, not only in India but in the major global consuming markets. Added to this, there are production and supply chain challenges in the major soyabean growing areas like Argentina and Brazil, and in Ukraine for the sun seed crop. Plantation areas, which are facing labour shortage and related issues at the global level, and the renewed Chinese demand, I think, are the major reasons. Our government had done a fantastic job of supplying the grains and staples through ration shops, and that also has spurred the rural demand for edible oils.
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Do you see the prices of edible oils going up further in the coming days? What could be the reasons for that?
India has kharif crops of oilseeds from November till about February. So, there can be a temporary halt in prices. However, I feel the fundamentals of the global markets are still strong despite over 45 per cent rally from May to now. This is not a small rally by any means. Mustard prices are at record high prices and way above the minimum support price, which is good for the farmers. But in India there is no demarcation like between farmers and consumers. After the crop is harvested, most of the burden of the price shifts to the consumers. Since India has a high import duty of about 40 per cent, for every 10 per cent rally in global markets, it translates to 14 per cent rally in Indian consumer prices. So, a 50 per cent rally would mean a 70 per cent rally in consumer prices due to import duties. It is a quintessential dilemma and a tough challenge for the government to balance between farmer and consumer prices.
What other global factors are likely to play a role in the price movements of edible oils in India?
The biggest global factor is the pandemic-induced uncertainties. We cannot assume that there won’t be any supply chain disruptions. Another biggest factor is Indonesia’s biodiesel resolve to implement the B40 programme and that would take away a substantial global palm supply to the biofuel sector. Malaysia and Indonesia have been seeing stagnant production so far. Brazil soybean carryout has been much lower than last year due to Chinese demand and it is not easy for the supply chain of either soyabeans or oil from USA to compensate the trade flows. Meanwhile, the pipeline in major oil consuming countries got dry due to HoReCa shutdown. If HoReCa demand opens up further and we see signs of Covid-19 vaccine success we can see further spike in prices. Let us remember the big rally so far has happened despite the relatively lower demand due to pandemic restrictions everywhere.
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Pandemic is the biggest reset button for many aspects of life, including commodity prices. I don’t think we can have any long-term price projections. Every business has to stick to the core function and minimise the speculative risks of the business.
Is the demand for edible oils, especially palm oil, from HoReCa segment picking up after the gradual opening up of many sectors in the country? How do you see the price movement of palm oil in the coming days?
Prices of palm have rallied globally from $530 C&F to $800 currently, and that is a steep rally, especially when most people did not believe such a price rally could happen. During the pandemic most people ruled out demand and assumed that HoReCa shutdown would mean a huge consumption drop, which proved to be only partially true. Markets misunderstood pipeline corrections to be demand destruction. Palm prices should take a breather now in order to retain the same demand from global markets. Unless there is a good production increase due to La Nina in Malaysia and Indonesia, I feel the market can be bullish in January, February and March also. However, further upside can’t be as steeply higher. Palm markets can remain supported longer than we can assume.