Wait for mustard to splutter

Increasing arrivals will put pressure for further price correction

Rape mustard seed is the world’s third most important oil yielding crop (next to soyabean and palm) and the main rabi oilseed crop in India. Mustard oil is the most preferred edible oil in the northern, central and eastern parts of India. Its prices touched record high level of ₹5,500 per quintal at the Jaipur market in 2016 owing to a shortfall in production due to unfavourable weather and unseasonal rains. However, the prices started correcting later in the year with expectation of good soil moisture, better acreage and lower export demand for mustard meal. Even the winter season didn’t help the prices peaking up much. Mustard future prices are currently ruling at ₹3,818, down over 26 per cent from its July 2016 peak.

India is expected to produce around 6.5-7 million tonnes (mt) of rape mustard seeds in 2016-17 as compared to 5.8 mt produced in 2015-16 due to higher acreage and improving productivity.

The carry-forward stock from the previous season was around 0.15 mt. The Ministry of Agriculture expects 8.5 mt of mustard seeds to be produced in the current rabi season against 6.8 mt a year ago, as per its 4th advanced estimates. Higher price levels seen before sowing, favourable weather and a hike of over 10.4 per cent in MSP to ₹3,700/Q (including ₹100 bonus) explain the increase in acreage by over 9 per cent to 7.05 million hectares as on January 25. Initial estimates show that arrivals this year are going to be better than last year. Increasing arrivals will put downward pressure and a price correction is likely.

Meal export

The demand for Indian mustard meal in the international market is down by 44 per cent for the FY 2016-17 (April-December) compared with the same period last year, and the export in December has been the lowest in the current financial year, down 86 per cent (YoY). India exports mainly to South and Far East Asian countries such as South Korea, Vietnam and Taiwan.

China, the largest buyer of mustard meal, has banned imports from India since 2012 on grounds of chemical contamination. Lower overseas demand for the meal has pushed the prices down.

However, with lower domestic prices and parity in crushing (value of mustard oil and meal greater than the cost of mustard seeds and cost of crushing), we may witness rapeseed meal exports to go up in the coming months.

As per USDA’s estimates, India is expected to export 0.35 mt of rapeseed meal in October to September 2016-17 compared to 0.29 mt in the same period the previous year.

Mustard oil is not only sold as pure mustard oil but also in blended forms. It is blended with cheap oils such as rice bran, canola or palm oil, depending on the comparative prices of these blending oils, though palm oil is the most common among these. With palm oil prices running high, the demand for mustard oil is expected to be on the upper side.

Global factors

The USDA forecasts the global production of rapeseed for 2016-17 to be down by over 3 per cent at 67.9 mt due to reduced production from the EU and Canada resulting in 26 per cent decrease in stocks by year-end.

China’s rapeseed market is undergoing a shift towards increasing meal imports compared to the import of rapeseed. So, rapeseed demand has decreased due to higher domestic prices, uncertainty over possible import restrictions and the ongoing auction of domestic stocks, while lower production of rapeseed, together with growing demand from the sector, has accelerated the demand for meal. As a result, the import of rapeseed meal has increased by 300 per cent in 2016 over 2015. To meet the rising meal demand, if China opens up imports from India, we may see a sudden surge in prices.

Outlook

The expectation of higher output and increased arrival pressure are likely to bring further correction in prices in near term, assuming the weather conditions remain favourable until the harvest is complete.

However, if the prices fall sharply, stockists will enter the market, thereby pushing up demand. With relatively high prices of competing edible oil, palm oil in particular, the demand for mustard oil for blending may go up, leading to strengthening of prices. Moreover, lower prices will provide better parity for export of meals.

Overall, buyers interested in investing for the long term may wait for further correction in prices.

The author is Vice-President and Head Agriculture, Food and Retail at Biznomics Consulting

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