As widely expected, palm-oil prices have been under pressure for the past several weeks, caused by a combination of rising inventory at origins, slowing demand in key import markets and softer prices of competing vegetable oils.

In 2018-19, for the fourth successive year, world palm-oil production is set to record a growth, to reach close to 73 million tonnes (MT), up from 69.6 MT the previous year.

The supply side

Production in the two principal origins — Indonesia and Malaysia — is projected to touch new highs of 40 and 21 MT, respectively.

Often, the contributions of minor origins such as Thailand, Nigeria, Columbia and others are ignored; but these countries have been consistently expanding their output, albeit from a small base. Their production of palm oil in 2018-19 is estimated at about 12 MT.

For the past three months, palm-oil values have been falling on persistently subdued global demand and ensuing accumulation of inventories at major origins. Price decline has been 10-12 per cent, to the current level of 2,200 Malaysian ringgit a tonne for crude palm oil. The relationship between stock levels and prices is, of course, well recognised.

In particular, in combination with a rapidly weakening currency, the higher import duties imposed by India — arguably the world’s largest palm-oil importer — have lowered import demand. From 7.5-8.0 lakh tonnes-per-month imports earlier in the year, arrivals have fallen to around 5.0 lakh tonnes in the past three months. At the same time, the world’s second-largest palm oil buyer, China, has reportedly deferred its import purchases, awaiting tariff reduction in Malaysia.

Competition from both soybean oil and sunflower oil have turned aggressive. Thanks to strong crushing activities in the US and Brazil, world soy-oil supplies are ample, continuing to weigh on the global vegetable oil market.

A narrowing soy-palm price difference usually hurts demand for the latter as consumers often opt for soft oils that are competitively priced. In 2018-19, global vegetable-oil production will continue to outstrip consumption, resulting in further accumulation of stocks. Palm is likely to bear the brunt of the development.

Palm oil usually draws strength from high mineral-oil prices. However, the current high prices of crude oil (Brent testing $80 a barrel) have been of limited help as the commodity supply-demand fundamentals for palm oil continue to assert themselves and largely ignore any extraneous stimuli.

It is a matter of some relief for the market that Indonesia has been expanding its palm-based biodiesel consumption and sucking away a part of palm-oil inventory for fuel use.

However, the area under oil-palm plantation is expanding, more trees are coming into maturity, and yield recoveries are higher in the world’s largest palm-oil producing nation. The ongoing replanting programme may limit the biodiesel fund. Importantly, Indonesia’s biodiesel fund is under challenge by smallholder cultivators.

Road blocks

At another level, palm faces huge challenges, especially from policy-makers and activist in Europe. There are restrictions on use of palm-based biodiesel in Europe. The levy of anti-dumping duty and countervailing duty by the US is onerous. Worse, there is a concerted campaign for ‘palm-oil-free’ certification in the food market.

Third-party pressure through lending institutions and investors for production of ‘responsible palm oil’ acts as headwind.

Over the next few months, the palm-oil market is likely to continue to remain under pressure, and the Indian policy response to market prices of domestic oilseeds will be key, given the upcoming kharif season harvest.

If oilseed values fall below the specified minimum support price, the government will come under enormous pressure to defend MSP.

The author is a policy commentator and a global agribusiness specialist

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