Spotlight. Time to rationalise vegoil imports

The global vegetable oil market is currently in transition mode, with the outlook for 2017-18 clouded by several uncertainties, such as weather, biodiesel-related investigations, currency dynamics and flow of speculative funds. Yet, the market is gradually but decidedly turning bearish. From a consumer perspective, this is likely to be good for large importers like India.

Higher production, increased availability, rising consumption (yet, trailing production) and higher inventory are going to characterise the market during the year beginning October 2017, with the obvious price implications.

It is clear that the world will harvest yet another large crop of soyabean in 2017-18, boosted primarily by the large northern hemisphere harvest led by the US and put at 115 million tonnes (mt). This will likely be followed by an equally large crop in South America (mainly Brazil, Argentina – totalling 180 million tonnes), subject to normal weather in the southern hemisphere.

Large stocks of soyabean (estimated at about 95 mt) have dampened the upward price move seen in the vegetable oil market under the lead of palm oil in August and early September. Though technical factors may have indicated that palm oil production recovery was slower than anticipated, the rise in inventory levels and flow of speculative capital boosted palm oil prices to multi-year highs.

Palm oil production prospects for 2017-18 strongly suggest an expansion of 3.5-4.0 mt to a new high of 70 mt, while consumption demand would trail output by at least 2 mt. This will result in gradual inventory build-up during the year.

Elsewhere, palm oil is facing a series of threats. While restriction on use of palm-based biodiesel in the EU has been in the air for some time, the US Department of Commerce is investigating subsidised export of palm-based biodiesel from Indonesia. Palm-biodiesel may well be slapped with countervailing and anti-dumping duty too.

Slow progress of ‘sustainable palm oil’ certification, campaign for palm oil-free certification for food makers and third-party pressure through lending institutions and investors for production of ‘responsible palm oil’ act as headwinds.

Given these fundamental factors and barriers to trade, the current price of crude palm oil (CPO) at around Ringgit Malaysia 2,800 a tonne is seen as not sustainable at all. CPO should correct down to less than RM 2,500 a tonne in the next 6-8 weeks.

Closer home, the first estimate of the Agriculture Ministry’s Kharif 2017-18 shows a decline of 1.7 mt in oilseeds production to 20.7 mt, with soyabean placed at 12.2 mt, down from 13.8 mt last year. While private forecasters pitch the output estimate lower, it is important that about 1.5 mt of uncrushed beans are available as opening stock for the year, to mitigate the tight supply. Assuming a normal rabi season, total availability of indigenous oils would be 7.5 mt. Import would continue to be about 15 mt, largely unchanged from the previous year.

A higher differential in the rate of duty between crude and refined oils would slightly change the composition of the import basket for 2017-18. It would prompt higher import of CPO (up 10 per cent to 7.0 mt) and reduction in refined palmolein arrivals to two mt.

The country holds humongous stocks of imported oil (about 2 million tonnes), a part of which is stock transfer from origin as also speculative import to take advantage of the duty hike. It is necessary to strictly regulate vegetable oil imports, the value of which is a mind-boggling $10 billion. Policy-makers are ensconced in a ‘comfort zone’ as far as oilseeds and oil are concerned. Will they learn from the ‘pulse shock’ the country suffered not long ago?

The writer is a global agribusiness and commodities market specialist

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