Reducing inventories to boost castorseed

Increasing export demand for castor oil could help limit price fall and trigger a reversal



The year 2014 has not been a good one so far for castorseed. Castorseed futures traded on the National Commodity and Derivatives Exchange have tumbled some 23 per cent from their high of ₹5,054 per quintal in December last year. A drop in export demand and weak domestic demand dragged the commodity’s price. In 2013, the price had risen by 22 per cent, following lower production for the second consecutive year.

The Ministry of Agriculture estimates castorseed production to have dropped by 16 per cent to 16.44 lakh tonnes in 2013-14 from a year ago.

Lower inventories

Though the price of castorseed has declined due to weak export demand, this could be a short-term phenomenon. The overall scenario is not very alarming. Castor oil export from the country is on a rise. Data from the Ministry of Commerce and Industry shows that castor oil exports rose 6.5 per cent to 4.3 lakh tonnes in 2012-13 from four lakh tonnes in 2011-12.

Exports during April-December of fiscal 2013-14 were up by over 9 per cent at 4.7 lakh tonnes. Increasing castor oil exports suggest that the huge inventories built up from the record production in 2011-12 and thereafter are used up in oil production. Fall in production in the last two years, coupled with an increase in oil exports, implies that inventories may drop, going ahead.

The below-normal monsoon forecast for this year and the threat of El Nino could add pressure on the supply side. These could limit the current fall in prices and there is high probability of a reversal in the price trend.

Outlook

Long-term view: MCX castorseed (₹3,920 per quintal) futures contract has been trading in a very broad range of ₹3,200 and ₹5,000. Within this range, the price has been coming down from the high of ₹5,054. Significant support for the contract is at ₹3,726 — the 21-month moving average. Declines below this support can drag it lower towards ₹3,200, the lower end of the long-term range. On the other hand, a reversal from the 21-month moving average support can take the contract higher to ₹5,000. It will also then increase the probability for the contract to break out above ₹5,000.

Such a break can take the price higher to ₹5,650.

Medium-term view: The medium-term trend is down. The contract has dropped decisively below its 21-week moving average, currently at ₹4,145. The outlook will remain bearish as long as the contract trades below this level. Intermediate support is at ₹3,767 — the 100-week moving average level. A break below this can take the contract lower to ₹3,500-3,450 levels in the medium term. For the outlook to turn bullish, the contract will require a strong weekly close above the 21-week moving average resistance. After this the contract can go up to ₹4,300.

Short-term view: The short-term trend is down for the contract. However, there are signs of a reversal. The contract has taken support near ₹3,850 twice, once in early April and the next just a few days ago. If the price bounces from the current levels of ₹3,920 in the coming weeks, then there is a possibility of a double-bottom formation on the daily chart. This bounce will face resistance at ₹4,150 and a break above this level will confirm the trend reversal.

The ensuing target on a breach of ₹4,150 will be ₹4,450. On the other hand, if the contract fails to reverse higher from current levels and declines below ₹3,850, then the short-term downtrend will remain intact. The short-term targets on a break below ₹3,850 will be ₹3,795 — the 61.8 per cent Fibonacci retracement level, and ₹3,767 — the 100-week moving average.

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