Indian consumers can expect little relief from high edible oil prices at least until May as a combination of factors such as labour shortage in South-East Asia oil palm plantations, surging crude oil prices and dry weather in South America will keep them elevated.
These factors have resulted in palm oil prices zooming to record highs this year, gaining 20 per cent, while soyabean oil has increased by over 15 per cent.
“Dry weather in South America over the past two months has significantly depressed forecast soyabean yields and slashed production,” said Oilseeds: World Markets and Trade report of the Foreign Agricultural Service of the US Department of Agriculture (USDA).
‘Perfect storm’
Since the December 2021 WASDE (world agricultural supply and demand estimates) of the USDA, soyabean production has been lowered by over 18 million tonnes (mt) in Brazil (down 7 per cent), Argentina (9 per cent) and Paraguay (37 per cent).
Edible oil expert and Godrej International Director Dorab Mistry told CNBC TV-18 on Wednesday that there was a “perfect storm” in the vegetable oils market and he now sees no relief for Indian customers and fast-moving consumer goods (FMCG) until May.
“There is the problem of labour availability in Malaysia, the protectionist policy being followed by Indonesia, the impact of La Nina in South America and tension in the Black Sea region. The energy prices outlook is also bullish,” he said.
Indonesia export curbs
BV Mehta, Executive Director, Solvent Extractors Association of India (SEA), said the Covid pandemic had led to a labour shortage in Malaysia’s oil palm plantations.
Earlier this month, Indonesia ordered its palm oil producers to set aside 20 per cent of their planned exports for domestic sale. It also said export permits will be given only if they submit their domestic sale plants.
The La Nina weather phenomenon has resulted in dry weather in South America, particularly affecting crops in Brazil and Argentina, while the Black Sea region is witnessing tension due to the Russia-Ukraine standoff.
Bullish bets up
As a result, crude palm oil March contracts have increased to 5,700 Malaysian ringgits ($1,379,06) on Thursday, off the record high of 5,704 ringgits on Wednesday. Soyabean oil March futures on the Chicago Board of Trade closed at 64.50 US cents per pound ($1,433 a tonne).
ING Think, an arm of Dutch multinational financial services firm ING, said speculators were continuing to build fresh long positions on CBOT. Money managers increased their bullish bets by 39,593 last week, driving it to an eight-month high of 154,488 lots on February 1.
On Wednesday, the landed price of RBD palmolein was $1,495 a tonne (against $1,345 on January 4), while crude palm oil rate was $1,500 ($1,365). The price of degummed soyabean oil landed has increased to $1,514 (1,450) and sunflower oil at $1,450 ($1,420).
Palm oil for bio-diesel
“Vegetable oil prices are seen ruling at elevated levels for the foreseeable future,” Mistry said.
Though Malaysia has announced the easing of border norms that will allow labours from Myanmar and Indonesia in its oil palm plantations, it will take 3-4 months before normalcy returns, said SEA’s Mehta. The USDA said the massive decrease in soyabean production in South America will “severely constrict global trade”.
With crude oil prices ruling around $90 a barrel, Indonesia, in particular, is looking to divert palm oil for bio-diesel purposes. The Sout-East Asian nation accounts for 57 per cent of the total global palm oil production.
Crude oil prices have been ruling over $90 a barrel this week as US inventories have dropped more than expected, besides a surge in demand. “The availability of vegetable oils could be affected they are used for the production of energy,” said Mehta.
Headroom for rise limited
Mistry told the television channel that edible oil prices may not rise much from here, though they might claim the 3-4 per cent drop after China decided to release one million tonnes of soyabean and 3,00,000 tonnes of soya oil from its reserves.
“Prices may rise 4-5 per cent from here and palm oil may touch 6,000 ringgits. Prices will not go up much,” he said
The USDA now estimates global oilseed production this season (October 2021-September 2022) at 611.48 mt against its earlier projections of 619.17 mt with soybean output cut to 363.86 mt from 372.56 mt. As a result, it expects exports to drop to 188.84 mt, lower than 190.98 mt last season and initial projections of 194.40 mt.
Mistry said the high prices are leading to demand destruction, including in India, and it will be one reason why the headroom for a further rise in prices is less. This view is being supported by the USDA outlook which sees vegetable oil imports dropping to 185.38 mt from 190.16 last season and initial estimates of 191.21 mt.