10/08/2008 (The Hindu Business Line), Mumbai - The widespread sell off in the commodity markets in recent days has not spared the vegetable oil market. Firming US dollar, falling crude prices, burgeoning stocks and generally improved weather conditions in major origins have all combined to drive speculative funds holding long positions to liquidate.

As a result of improving supply prospects and disappearance of speculative froth, soyabean oil prices have now declined to a four-month low. The effect on palm oil is understandable. Prices of crude palm oil have tumbled to levels that have caught many upbeat plantation companies unawares, while bullish forecasts stand rubbished. The development once again proves – if proof was necessary – that fundamentals will ultimately prevail, although non-fundamental factors may appear to rule for a while. Many forecasters are still unable grasp the nuances of how speculative funds operate. Commodity markets that are tightly balanced can swing either way depending on a host of factors.

Falling vegoil
The current situation of sharply falling vegetable oil prices was not unexpected though. It has been coming for quite some time; but the market was propped by funds that took support from a host of negatives such as rising crude prices, weather aberrations and uncertainty of South American supplies. For instance, from a fundamental perspective, crude palm oil above the range of Ringgit Malaysia 3,000-3,200 a tonne was never sustainable for long. With uncertainties removed, the speculative froth evaporated, and world vegetable oil market has begun to find its levels that are more or less in sync with fundamentals. With seasonal production pressures continuing, Malaysian crude palm oil inventory is burgeoning, and is set to breach the 2.4 million tonnes mark. A sharp fall below the psychological RM 3,000 a tonne levels must have surely alarmed palm oil producers. Currently, it is traded at RM 2,750 a tonne. In agricultural markets, supplies usually respond to prices in a time-scale shorter than in case of metals or energy markets.

Windfall gains
Producers have enjoyed windfall gains from market price movements in the last two years. They will do everything within their control to talk and prop the market up. If past behaviour is any guide, one can expect Malaysia to start sabre-rattling once again about mandated use of palm-based biodiesel and diversion of larger quantities for burning, primarily to arrest falling prices rather than anything else.

The next 4-6 weeks will be crucial for the development of planted field crops of oilseeds in major origins such as US, China and India. If weather holds well, production prospects would improve. The USDA is scheduled to release its first survey-based forecast of 2008-09 soyabean crop on August 12.

Indian crop scenario
The latest acreage information from the Indian Ministry of Agriculture is reassuring. At about 15.6 million hectares, area planted to oilseeds is unchanged from this time last year. Weather permitting, yields should show improvement. Soyabean is reported to have gained in acreage, but groundnut has lost some.

While vegetable oil prices have dropped in the world market, it may be too early for Indian consumers to celebrate. It is an open secret in the domestic edible oil market that large refiners dictate prices. A dealer from the south who did not wish to be identified bemoaned the fact that refiners at Kakinada continue to sell at much above parity prices and have refused to pass on to consumers the full benefit of duty-waiver and falling import prices.

Some refined palmolein imports have begun, primarily through government agencies. The volume was about 93,000 tonnes in June and a similar quantity is estimated for July. If the customs duty on refined palmolein (7.5 per cent) is withdrawn as a temporary measure, larger quantities of this readily marketable oil will flow with the participation of traders and government agencies alike. It will have a salutary effect on open market prices and make available cooking oils at affordable prices during the festival season.

Currently, crude palm oil is offered at close to $ 860 a tonne free-on-board (fob), while refined palmolein is on offer at $ 100 a tonne higher than CPO, all for shipments anytime from August to December. Degummed soyabean oil from Argentina is on offer at $ 1,170 a tonne fob. Customs duty on crude vegetable oils is zero.