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G. Chandrashekhar

THE RECENTLY-concluded Palm Oil Price Outlook 2003-2004, organised by Malaysian Derivatives Exchange (MDEx) in Kuala Lumpur, has left many players in the global vegetable market not only unconvinced but very nearly confused about the future course of the market.

While two speakers forecast a rising price trend for palm oil in coming months, two others projected bearish conditions to prevail over the next six months and beyond. Obviously, the expectations of the two sets of forecasters are at variance with each other. It is well known that commodity markets generally move on the basis of expectations of a sufficiently large number of players who cumulatively are able to impart an impact. For taking an informed decision, players must have as complete a picture as possible about the emerging conditions.

In order to get a clear and comprehensive picture, it may be necessary to first examine the fundamentals of the global market as well as Indian situation and then see what is in store for the future. For 2002-03, global oils and fats production at 120 million tonnes is virtually unchanged from the previous year as output of major oilseeds has remained close to the previous year's figure of 325 m.t.

Growth in global utilisation which expanded by two million tonnes to 118 m.t. in 2000-01 and increased further by 4 m.t. to 122 m.t. in 2001-02 is expected to slowdown in 2002-03 because of general economic sluggishness in developed economies and relatively higher prices impacting developing countries. For the current year, global oils and fats usage may increase marginally by one million tonne to 123 m.t. Therefore, closing stocks of oils and fats are expected decline drastically to about 13.2 m.t. from the previous year's 16.2 m.t.

A stagnation in world output growth, a marginal increase in total consumption demand and falling stocks should prove positive for prices. In fact, global vegetable oil prices had started to recover from last year itself when production (120 m.t.) trailed consumption (122 m.t.), signalling perhaps the end of downtrend in prices of last three seasons owing to over-supply conditions. Thus, the prevailing market fundamentals for the current season as a whole — insufficient output growth to cover the projected increase in world demand for oils and fats — clearly point to the inevitability of rising trend in prices, rather than a declining trend and much less a bear market. No doubt, the large South American crop is weighing heavily on the market right now. In addition, as we progress into May and June, major origins such as the US, China and India will begin to prepare for the next planting season. Information relating to planting intentions of different crops in different countries, especially in the US, will impact prices. Overall, at least until June, the supply conditions are known and it would be reasonable to assume that the market has already taken cognisance of it.

What is currently intractable is the demand side. India, for sure, is experiencing a demand compression. With a severe drought sharply reducing indigenous production of oilseeds and in turn, vegetable oils in 2002-03, India's demand-supply gap for edible oils has widened like never before. Estimated incremental supply shortfall in the current season — based on lower production from primary and secondary sources — is about 8 lakh tonnes. It would of course be too simplistic to assume that India will this year import eight lakh tonnes more than the 44 l.t. it imported in 2001-02. At 15.8 l.t., arrivals during November 2002-March 2003 were considerably below expectation because of the double-whammy of high prices and lower rural incomes. The situation is unlikely to improve at least until June when the South-West monsoon season commences.

Looking at the known pace of import contracting and shipments scheduled, it would be reasonable to estimate total arrivals during April-June period at about 12-13 l.t., that is, four lakh tonnes on an average per month. This quantity will not only meet the limited requirement during the summer months (when cooking oil consumption declines seasonally), but also help replenish the low level of inventory. But the key to future price behaviour, especially of the palm oil market as India is the largest buyer, is held SW monsoon prospects. The forecast of the India Meteorological Department (IMD) is generally issued some time in the latter half of May, that is a few days prior to the onset of monsoon which usually is on June 1 in the southern tip of the country.

Admittedly, the annual forecast of "normal" rainfall made by the IMD since 1988 has by and large been correct. But the agency does not forecast temporal and spatial distribution, so essential for agricultural crops. It is worth remembering that in three out of the last four years (1999, 2000 and 2002), the actual performance of the SW monsoon was disappointing. Despite the IMD's forecasts of normal rains, 1999 and 2000 saw Rajasthan, Gujarat and parts of Maharashtra and Madhya Pradesh (important oilseeds growing regions in the kharif season) suffer moisture stress in varying degrees. After some recovery the following year, 2002 turned out to be the worst with 14 States suffering drought conditions.

No one knows what is in store for 2003. There is nothing to suggest that in India a drought year is followed by a year of excellent monsoon. It can at best be a wish, but there is no empirical evidence or statistical support to this expectation. Indeed, under normal rainfall conditions, without an iota of doubt, India's oilseeds production will stage a recovery in 2003-04, and a sharp recovery at that because of the low base of 154 l.t. production for 2002-03. How much will the actual increase be is the crucial question.

The Table gives the production figures of nine major oilseeds last six years. Peak output of 245 l.t. was achieved in 1998-99, after which production had been trending downward because of weather aberrations.

Interestingly, the Government has sharply reduced the oilseeds production target in the current Plan period based on the experience of Ninth Plan, the terminal year of which had a target of 270 l.t. (2001-02) while actual output was 205 l.t. Indeed, in the whole of the Ninth Plan, actual production was nowhere near the target, except for 1998-99.

For 2003-04, the oilseeds production target is 247 l.t., same as produced more than five years ago. As said earlier, there is nothing, on current reckoning, to suggest that India's oilseeds output will reach the target, barring an exceptionally good SW monsoon. Will current high prices of oilseeds and oils encourage an expansion in oilseeds area? It may at the margins, at best. Under Indian farming conditions, supply response to prices is inadequate. It would be fallacious to assume a significant area shift.

Farmers, especially in irrigated regions are most unlikely to shift from cereals, because of assured procurement and higher returns from rice and wheat. Also, under extant conditions here, there is simply no connection between futures trading in oilseeds and farm output.

Importantly, even if there is some intention to plant more area (though there is little evidence at present), availability of planting seeds, especially of groundnut and soyabean, two major crops in the kharif season, will be rather tight because of lower output in the previous season and distress sale of stocks by farmers for crushing.

For India to produce an extra 13 l.t. of vegetable oil (as presumed in one of the forecasts) in 2003-04, oilseeds production will have to increase by around 40 lakh tonnes.

Even assuming it does, the total oilseeds production would still be just about 200 lakh tonnes, and significantly below the target. What are the implications of a good monsoon for Indian agriculture and rural incomes? If the SW monsoon begins on time with a flourish and covers the entire country by, say, early July, there will a definite change of mood. Depression will give way to optimism.

In the urban areas, consumer confidence will return and, importantly, in the rural areas there would be tendency to return to normal consumption, aided by anticipation of improved harvests and higher incomes. A series of anti-poverty and drought relief measures of the government has begun to put some incomes in the hands of poor rural population.

A series of festivals during the months from August to November will spark renewed demand for cooking oil. As indigenous supplies would have virtually run out by June/July, there will be no escape from importing oils to meet the festival demand. Subject to a satisfactory onset of monsoon, India's import requirement from July to October may touch and perhaps exceed 20 l.t. in the aggregate, taking the annual aggregate to about 48 l.t. for 2002-03 oil year, up 10 per cent from previous year. This level of import by India is sure to support prices and limit the downside of the palm oil market. What are India's import prospects in 2003-04? A recovery in oilseeds output from 154 l.t. in the current year to over 200 l.t. next year cannot take place without an overall satisfactory monsoon. A normal monsoon should predicate an overall improvement in agricultural production and higher rural incomes. This will lead to a renewed demand for all essential food items including edible oils. Indeed, the pent up demand of the drought-hit year will be unleashed next year if incomes rise. The high income elasticity of demand for edible oil is well known.

A political aspect that needs to be borne in mind is that in many States elections are scheduled towards the end of 2003. The Government would like to keep the electorate happy by maintaining consumer-friendly prices as edible oils have a high weightage in the Consumer Price Index. For the purpose, a cut in the Customs duty cannot be ruled out.

In sum, neither the fundamentals of the global vegetable oil market, nor reasonable expectations about India justify bearish conditions sought to be projected at the Kuala Lumpur meet. If anything, players here have to be careful in monitoring the market closely on a regular basis to read emerging signals correctly.

From now until almost September, weather across the world will play a major role in shaping the market. While expectations of a significant expansion in the global oilseeds production for next year are running high, there is no certainty that the expectation will be met, at least in case of cultivated oilseeds.

The best laid plans of men and mice can go awry, if nature so wills. A further delay in global economic recovery — especially post Iraq war — can lead to some compromise on consumption growth, although there is no warrant at present to assume a de-growth or cut back in consumption. Over the last few months, India has managed with low stocks as evidenced by low level of monthly imports since November. It is possible the tide has turned now as March arrivals were at a season's high of 4.55 l.t. and the anticipated inflow each of the next three months is about 4 l.t.

India must get the best out of the Malaysian market (read, lowest possible price). The only way for Indian importers to put pressure on Malaysia is to buy increasingly larger quantities from Indonesia and, possibly, enter into bilateral trade agreement with the country. New Delhi should step in to support this. Ironically, the palm oil market may indeed turn bearish as forecast at the Price Outlook meet; but such a turn of events would surely be for reasons other than those adduced at Kuala Lumpur. In other words, India is unlikely to contribute to palm oil's miseries forecast.

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