Edible Oil Outlook: Short-term spikes may not sustain

Soya oil along with crude palm oil accounts for a large part of India's edible oil consumption, trading as well as imports

A record acreage in Maharashtra and Madhya Pradesh had led to a build-up in expectations of a higher soybean crop after the sowing process. However, due to very heavy rains during the pod filling stage in Madhya Pradesh and some parts of Vidarbha (Maharashtra), a larger than expected damage was caused to the soybean crop. On account of this, we have seen a sharp drop in production, as well as quality issues in the new crop of soybean. Crushers from Madhya Pradesh are these days seeking Maharashtra’s crop due to quality issues.

The soymeal produced by the low quality crop of Madhya Pradesh has led to rejection of export shipments. At the same time, oil produced out of these low quality beans contains high free fatty acid, leading to lower realisation for the crushers in Madhya Pradesh. Soya oil availability has taken a huge hit because of the quality issues of soybean, leading to a rally in soya oil prices. Crushing of soybean produces soya oil while leaving by-products like soymeal and cakes.

Indian edible oil availability can improve as cotton crop is in great shape and supplies of cotton seed oil is likely to hit the market by the second half of this month. On the international front, India imports more than 90 per cent of its soya oil requirement from Argentina. Argentine farmers have continued to hoard a huge chunk of soybean, estimated at 17-18 million tonnes, as against seven to eight million held by them last year, leading to tight FOB (free on board) prices at Argentine ports. Expectations of a good crop in Argentina can lead to farmers releasing their hoarded stock, which can soften Argentine soya oil FOB prices.

In the short term, with the recent depreciation in the rupee, quality issues of soybean will remain supportive for soya oil prices which can test Rs 780 per 10-kg pack. But from three-month horizon expectations, due to a surge in imports from Argentina in December and with domestic crushing likely to gain momentum, we see a cap on any major upside in soya oil prices.

On the one hand, we have seen weather woes have led to a major rally in soya oil prices. Similar is the case with crude palm oil. With weather anomalies causing harvest delays, there has been a spike in crude palm oil prices. Strong import demand from the European Union and lower stocks of palm oil have added fuel to the fire. October (data awaited) could see a drop in production by six to 10 per cent as against a rise earlier, which will be followed by a seasonal declining production trends. Though we have seen a gradual rise in stocks in September, we are still below the record stock number of 2.63 million tonnes seen last year. Malaysian stock piles as on September, stood at 1.78 million tonnes against 2.48 million in the corresponding time last year.

Soya oil, along with crude palm oil, accounts for a large part of India’s edible oil consumption, trading and imports.

Due to weather woes in the short-term, crude palm oil prices may also remain supportive but we are still in a high cycle of palm oil production at the moment. It’s because of excess rains and mild cyclones that we have seen harvesting delays of FFB’s (fresh fruit bunch). Going forward, the demand for palm oil is likely to see a setback in the winter season. In the short-term, rallies to the tune of Rs 580-585 per 10 kg pack shouldn’t be ruled out but once the production cycle revives due to moderating weather anomalies the medium term trend shall remain bearish.

The author is head, commodities research, Nirmal Bang Commodities