01/11/2008 (The Hindu Business Line), mumbai - The country’s edible oil trade is in a heightened state of expectation about an imminent increase in customs duty on various imported oils such as palm and soya.

The Group of Ministers meeting slated for November 3 is keenly awaited.

Reports of duty hike floating around in the market last two weeks have actually encouraged importers to expedite shipments inwards and stock up in the hope of a rise in domestic prices. If the duty expectation is realised, those with large inventory will end up making windfall gains; but consumers will be hurt.

According to trade reports, between four lakh and five lakh tonnes of various oils are in storage at various port towns.

With the Customs announcing a revised exchange rate of Rs 50.40 to a dollar, refined oils, on which there is a 7.5 per cent duty, are already set to become expensive on arrival. Restoration of duty to previous levels will exert a further inflationary effect.

Meanwhile the overseas markets have begun to react to external factors such as the crude market.

Crude has stopped falling and has begun to firm up in the last 3-4 days on the back of output cut announced by OPEC and expectation of pick up in seasonal energy demand in the US during winter months. This has lent some support to palm and soya oils — both of which have firmed up by $25 to $50 a tonne in the last two days.

According to a trade intermediary, on October 30, degum soya was quoted at $723 a tonne FOB (free-on-board), up from $675 a tonne on October 27. Crude palm oil gained about $25 a tonne to be quoted at $450 to $455 a tonne on October 31.

Given the large inventory of imported oils already built up and the ongoing harvest, there is belief that a duty hike on edible oils will not make any difference to domestic oilseed prices, but will be seen as a Government largesse to help traders with stocks to earn large profits.

As recent as on October 20, the Government went on record in the Lok Sabha that there has been no severe crash in prices of agricultural commodities this year. As evidence of this assertion, the Minister of State for Agriculture provided to the Parliament a table showing monthly wholesale price index (base year 1993-04=100) for agricultural commodities from January to September 2008.

According to the Government, the All Commodities Index increased every single month from January (218.1) to September (241.0), although from July it has shown some stability. As for Index for Primary Articles, there has been a sustained monthly increase in the first nine months of 2008, having risen from 224.6 in January to 251.5 in September. Very simply, looking at All Commodities Index and Primary Articles Index, it is clear, inflation is yet to be contained. The rate of increase may have slowed, but across-the-board prices are still at elevated levels.

Specifically, for edible oil, the index stood at 182.4 in January and gradually rose to hit the peak of 201.3 in July, but declined to 196 the next month and down to 192.1 in September. Even assuming a further decline in October, the wholesale price index for edible oil is far above that in the first five months of the year. In other words, the conditions that prompted a zero-duty regime on crude edible oil have not changed significantly.

Similarly, in case of oilseeds, the index standing at 225.6 in January gradually increased to 259.8 by July, and then fell to 255.2 the next month and to 249.9 in September. But even this latest number is far higher than the index for oilseeds between January and May this year.

Fight against inflation
Any fillip to open market prices in the form of a duty hike will weaken the fight against inflation. A rise in wholesale prices may also have a disproportionately larger effect on retail prices; and it is well known that edible oils have a high weightage in the consumer price index.

The index for other food articles such as foodgrains (cereals, rice, wheat, pulses) has also been ascending with pulses and wheat still at elevated levels.

High prices of food articles are already threatening a demand compression. A small price correction in edible oils resulting from global influences should actually be welcome at this stage as being pro-consumer.

Importantly, despite oilseed arrivals gathering pace, prices have not reached close to the minimum support price. Oilseed growers have not complained of a price crash; but the liquid oils industry for its own selfish reasons is raising the bogey, pushing hard for an increase in customs duty.

Krishi Bhawan must ensure that procurement agencies such as NAFED are in a state of readiness to step-in in the unlikely event of a further price fall. The processing industry should actually be happy to source its raw material at current prices. Indeed, even at the current levels, it may be a good time for the State agencies to begin to buy. That will force the industry to rush in to cover its needs.