MARKET DEVELOPMENT
Consumers Pinched as Palm Oil, Soybean Prices Rise
Consumers Pinched as Palm Oil, Soybean Prices Rise
15/03/2014 (Wall Street Journal) - Droughts in South America and Southeast Asia are sending soybean and palm oil prices surging, and pushing cooking oil prices higher in India and China.
India is particularly sensitive to global edible oil prices. It relies on imports for more than half of its cooking oil, and its edible oil imports plunged 40% in February.
If cooking oil prices rise further, "we will be forced to skip fried foods," said Rupa Das, a 29-year-old housewife in Mumbai, who said her family consumes about five liters of cooking oil a month.
Women browse at a fish market in Hyderabad, India, this week. Bloomberg News
The pain being felt by consumers stems from poor rainfall in Brazil and Southeast Asia, where most of the world's soybeans and oil palm are grown. Drought-induced production shortfalls sent crude palm oil futures in Malaysia to an 18-month high on Tuesday.
This is helping to drive up global food prices. The U.N. Food and Agriculture Organization's price index rose 2.6% in February from the previous month, the biggest jump since mid-2012, and its vegetable oil index jumped 4.9%.
Drought is catastrophic for oil palm trees, especially at this time of year.
"In the short term, the dry weather delays the ripening of palm fruits that are already on the palms, which normally happens by April," said Yeo How, president of Apical Group Ltd., a Singapore-based palm oil exporter. "This is the best case, as it stands. If however, no rain falls for another few weeks…it will [also] impact flowering and new fruit formation which will impact yields negatively 10 months on."
Tensions in Ukraine are also to blame for higher edible oil prices. The country is the world's biggest producer of sunflower oil, of which India is the biggest buyer. Wholesale prices in India have jumped 10% in the past month as shipments from Ukraine have been delayed, and the rise is likely to trickle down to retail prices.
Higher palm oil prices are affecting India's imports as people shift to healthier soy oil and sunflower oil, now that palm oil prices are comparable, said B.V. Mehta, executive director of the Solvent Extractors' Association of India, the country's leading edible oil trade body.
Last year, palm oil prices were about $300 a ton cheaper than soy oil and sunflower oil, and are now only around $50 cheaper, Mr. Mehta said. Palm oil accounts for 70% of India's edible oil imports.
If cooking oil prices continue to rise or remain elevated, inflation could worsen, reversing declines in recent months. Thanks to lower food prices, India's wholesale price index likely rose by only 4.95% in February, which is line with the central bank's inflation target, according to analysts' estimates. Sluggish growth in India's economy has left less money in consumers' hands to spend on food.
Higher palm oil prices in China, a major palm oil consumer, could also affect buying patterns.
Palm oil in China is now more expensive than soy oil, the most commonly used cooking oil, which is an unusual development, said Jane Peng, oilseeds analyst at Rabobank in Shanghai. That could lead big consumers of palm oil, such as fast food restaurant chains, to switch to soy oil.
The Chinese government has said it intends to keep cooking oil prices stable and in the past has asked producers to cap prices to avoid hurting consumers.
Looking further out, farmers and investors will be closely watching whether the El Nino weather system returns later this year, which typically brings dry weather to Asia and could keep oil palm yields under pressure.
"Weather forecasters say that this dry spell is likely to last for another month or so," said Barnabas Gan, commodities economist at Overseas-Chinese Banking Corp. in Singapore. "But if El Nino takes hold, we may see an extended period of time where palm oil production is going to be lackluster."
India is particularly sensitive to global edible oil prices. It relies on imports for more than half of its cooking oil, and its edible oil imports plunged 40% in February.
If cooking oil prices rise further, "we will be forced to skip fried foods," said Rupa Das, a 29-year-old housewife in Mumbai, who said her family consumes about five liters of cooking oil a month.
Women browse at a fish market in Hyderabad, India, this week. Bloomberg News
The pain being felt by consumers stems from poor rainfall in Brazil and Southeast Asia, where most of the world's soybeans and oil palm are grown. Drought-induced production shortfalls sent crude palm oil futures in Malaysia to an 18-month high on Tuesday.
This is helping to drive up global food prices. The U.N. Food and Agriculture Organization's price index rose 2.6% in February from the previous month, the biggest jump since mid-2012, and its vegetable oil index jumped 4.9%.
Drought is catastrophic for oil palm trees, especially at this time of year.
"In the short term, the dry weather delays the ripening of palm fruits that are already on the palms, which normally happens by April," said Yeo How, president of Apical Group Ltd., a Singapore-based palm oil exporter. "This is the best case, as it stands. If however, no rain falls for another few weeks…it will [also] impact flowering and new fruit formation which will impact yields negatively 10 months on."
Tensions in Ukraine are also to blame for higher edible oil prices. The country is the world's biggest producer of sunflower oil, of which India is the biggest buyer. Wholesale prices in India have jumped 10% in the past month as shipments from Ukraine have been delayed, and the rise is likely to trickle down to retail prices.
Higher palm oil prices are affecting India's imports as people shift to healthier soy oil and sunflower oil, now that palm oil prices are comparable, said B.V. Mehta, executive director of the Solvent Extractors' Association of India, the country's leading edible oil trade body.
Last year, palm oil prices were about $300 a ton cheaper than soy oil and sunflower oil, and are now only around $50 cheaper, Mr. Mehta said. Palm oil accounts for 70% of India's edible oil imports.
If cooking oil prices continue to rise or remain elevated, inflation could worsen, reversing declines in recent months. Thanks to lower food prices, India's wholesale price index likely rose by only 4.95% in February, which is line with the central bank's inflation target, according to analysts' estimates. Sluggish growth in India's economy has left less money in consumers' hands to spend on food.
Higher palm oil prices in China, a major palm oil consumer, could also affect buying patterns.
Palm oil in China is now more expensive than soy oil, the most commonly used cooking oil, which is an unusual development, said Jane Peng, oilseeds analyst at Rabobank in Shanghai. That could lead big consumers of palm oil, such as fast food restaurant chains, to switch to soy oil.
The Chinese government has said it intends to keep cooking oil prices stable and in the past has asked producers to cap prices to avoid hurting consumers.
Looking further out, farmers and investors will be closely watching whether the El Nino weather system returns later this year, which typically brings dry weather to Asia and could keep oil palm yields under pressure.
"Weather forecasters say that this dry spell is likely to last for another month or so," said Barnabas Gan, commodities economist at Overseas-Chinese Banking Corp. in Singapore. "But if El Nino takes hold, we may see an extended period of time where palm oil production is going to be lackluster."