Spotlight. Palm oil set to skid on output rebound

Under the lead of palm oil, global vegetable oil prices are set for a downward correction in the months ahead, thanks to changes beginning to be felt in market fundamentals.

After a year of tight market balances, there is widespread expectation of augmented production around the world, modest demand growth and gradually expanding inventory. The recent downward pressure on crude mineral oil prices (falling below $50 a barrel) is another factor to reckon with.

Indeed, even the previous year’s production figures are being revised upwards. For instance, the 2016 palm oil production of Indonesia — the world’s largest producer — is now estimated at 32 million tonnes (mt), 2 mt higher than the previous estimate and unchanged from the 2015 number.

With the start of the peak production season for palm oil from April and demand in two of the world’s largest importers, India and China, hardly showing signs of a healthy pick-up, inventories at the origin are expected to expand steadily.

The trade and tariff policies of the exporting countries also mean that the differential between crude palm oil and refined palmolein is negligible ($10 a tonne or thereabout), encouraging import of the latter in large markets such as India. At the same time, the differential between crude palm oil and degummed soyabean oil is also narrowing and currently stands at about $30 a tonne, making the latter more attractive for refiners.

The ongoing supply pressure of soyabean oil from the recently harvested large South American crop is seen pressing palm oil further down. In the US, the world’s largest soyabean producer, the planted area in 2017 is widely anticipated to be higher, on top of a high opening stock. Already, the US has had four successive years of large harvests after the disastrous Midwest drought of 2012 and as a result, there is inventory accumulation. Additionally, this year, higher soyameal demand is expected to accelerate bean crushing which, in turn, will result in more bean oil availability.

Notwithstanding the OPEC and non-OPEC producers’ agreement to curtail crude output, the rise in rig count in the US following a spurt in crude prices to around $55 a barrel is already seen pushing crude rates below $50 a barrel. Lower crude prices will discourage diversion of vegetable oil for biodiesel for discretionary blending. In the current quarter Q3, crude prices are expected to hover around $50 a barrel with a downward bias.

So, the world vegetable oil market is seen moving to a surplus situation in 2017 with consequential impact on prices of major oils. There will be at least 6.0 mt additional production of palm oil. As a result, from the current levels of Ringgit Malaysia 2,800-2,900 a tonne, crude palm oil is likely to slide by 10-12 per cent to around RM 2,400-2,500 a tonne some time in May; in other words, $580-600 a tonne levels. Typically, edible oil consumption declines in peak summer months of May, June and July.

From an Indian perspective, edible oil availability and prices are expected to remain consumer-friendly. There has been a rebound in domestic production of oilseeds with additional production of 8.2 million tonnes going by the estimate of the Agriculture Ministry, with the three major oilseeds — soyabean, rapeseed/mustard and groundnut — all showing a significant jump in production. This will result in additional production of about 2.0 mt of oil domestically.

India’s port stocks and pipeline stocks (close to 2 mt currently) suggest an element of stock transfer from origin to destination. Additionally, continuing large-scale vegetable oil imports are seen depressing domestic oilseed prices, especially soyabean and groundnut.

For most part of the season, soyabean rates have been ruling at or below ₹3,000 a quintal and testing the minimum support price. To support growers, the government has recently opened up export of edible oil in bulk. This policy decision ought to have been taken at least three months ago. How soyabean growers will respond next season remains to be seen.

The writer is an agribusiness and commodities market specialist

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