Among various food products, edible oil has witnessed a significant demand destruction following the nationwide lockdown announced on March 25. The country lapsed into a state of ‘forced inactivity’ even as shuttering of businesses meant massive job and income losses as also reverse migration of over a 100 million people.

The supply chain was disrupted with the closure of processing units (oilseed crushing, solvent extraction and refining) and nonavailability of labour and transport for movement of goods. On their part, retailers jacked up prices in the wake of supply tightness and panic buying by households.

Demand-supply challenges

In April, retail prices of almost all import-driven food products increased by 10-20 per cent due to the supply disruption. In other words, the country faced both demand side and supply side challenges. With the gradual easing of lockdown, supply side is beginning to limp back.

However, optimism on the demand side is not so robust. Institutional consumption, as opposed to household consumption, of edible oil has taken a major hit because of the national lockdown. The worst affected in terms of demand was the HoReCa segment (hotels, restaurants and catering) that accounts for a bulk of out-of-home consumption.

Usually, cooking oil consumption across the country slows during summer months; but this year, occurrence of Ramadan festival during April/May provided a small prop to demand.

Weak demand

If one looked at the demand prospects for edible oil in the months ahead, it is clear consumption will certainly stay weak till July. Traditionally, India celebrates a series of festivals during August, September and October when consumption demand for a variety of food products, including cooking oil, peaks.

However, because of the humongous job and income losses as also uncertain prospects of revival of business activities, demand for cooking oil this year is unlikely to be robust during the festival months. If the pandemic peaks in June and stimulus package of the government kicks in soon, it may take the whole of the third quarter (July to September) for revival of economic activities.

Revival prospects

In other words, any meaningful demand revival for edible oil can happen not before the last quarter of 2020. In fact, restrictions on the HoReCa segment are unlikely to be lifted in a hurry. Even if they are, consumers will be extra-cautious in patronizing out-of-home consumption.

Edible oil consumption demand will witness a contraction of 10 per cent this year (2019-20) to 21 million tonnes. This will have a direct bearing on our vegetable oil import, which will decline to 13.5 ml t this year (15.0 ml t). Palm oil import is expected to suffer because of collapse of demand in the out-of-home consumption segment. As a result, India’s palm oil import is expected to be lower this year at 7.5 ml t.

Not just because of India, but palm oil market is likely to be under pressure from rising stocks at the origins, under-performance of the ambitious biodiesel mandate in Indonesia, and lower demand from China.

Rising crude oil market in recent days is seen propping up the palm oil market via the biodiesel route. Brent is trading around $ 40 a barrel and WTI is not far behind. As crude oil prices rise, shale producers / drillers who had either cutback or abandoned production are sure to come back, augmenting supplies. At the same time, crude oil is facing massive demand destruction globally.

So, palm oil cannot piggyback on crude oil for long as its own fundamentals are less supportive and are likely to continue to be so over the second half of the year. So, the recent rally in crude palm oil prices (Ringgit 2400 a tonne) is unsustainable and the market must decline by up to 10 per cent.

Time for regulations

The government of India has already expressed its intention to reduce the dependence on imported oils. This is an opportune time to regulate and monitor import, prevent excessive import that depresses domestic oilseed prices and address some of the structural issues that stymie oilseed production.

(Excerpted from speech delivered by the writer, a policy commentator and global agribusiness specialist, during webinar organised by the UK-based Oils and Fats International on vegetable oil market outlook. Views are personal)

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