A case for uncorking castor

Prices of the commodity remain subdued despite strong market fundamentals

The castor oil market in India presents a strange anomaly, with prices remaining subdued despite strong fundamentals.

Castor oil is a versatile vegetable oil with a variety of industrial applications and limited substitutes. It enjoys nearly inelastic demand. It is used in soaps, resins, paints, varnish, lubricants, plasticisers and so on.

It is also a partial substitute for mineral oil. The long shelf life of castorseed also enables stock-building.

India’s stronghold

India is the world’s largest producer of castor seed and oil, its largest processor and the largest exporter, accounting for as much as 80 per cent of world supplies.

Derivatives made out of castor oil command a premium price. India has enjoyed a near-monopolistic position in the world castor market for very long years. Under the circumstances, India should be a price-setter; but it hasn’t actually leveraged this position.

Again, the dominant position should have resulted in immense economic benefit to all participants in the value chain — seed growers, seed crushers, traders and oil exporters. Yet this has generally not been the case. The farmer has hardly benefited, if at all.

Rising consistently over the last three years, castor oil exports out of the country reached a new high during last fiscal.

Traditionally, Europe and the US have been the markets for Indian castor oil; but new destinations are now emerging with shipments to China and other markets.

The current situation is that despite constructive market fundamentals — falling seed production, rising oil exports and tightening stocks — castorseed rates have remained subdued at around ₹4,000 a quintal for several months now. This is a situation that market fundamentals do not seem to justify.

There is suspicion of concerted efforts to keep the seed rates as low as possible so that processors and exporters are able to source the raw material at attractive prices for themselves, at the expense of the growers.

At the same time, export prices do not adequately reflect the bargaining strength a near-monopolist can demonstrate, either. The current export rates of around $1300 a tonne free-on-board have the potential to sharply move up to, say, $1,700-1,800 a tonne; and the overseas market can absorb it.

Favourable policies

Are Indian exporters throwing away a precious commodity at low prices?

Who benefits from the ongoing price play?

Obviously, the case for enforcing policies that ensure higher economic benefits from the country’s near-monopolistic position in the world market is strong.

Because the physical market and the futures market feed on each other, it is imperative that commodity futures exchanges and the market regulator pay attention to the seemingly anomalous price situation and inequitable flow of economic benefits to stakeholders, especially growers of castorseed.

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