07/03/2010 (The Hindu, Business Line) - Record global output of oilseeds and in turn vegetable oil, huge projected ending stocks, a world still struggling to come out of recession (despite nascent recovery signals), a firm US dollar and tightening monetary policy have all combined to pressure the global vegetable oil market.

Over the next two months, under pressure of market arrivals, especially from the record South American crops, prices are expected to ease.

The market has already taken cognisance of the changing market fundamentals and features of broader markets.

Under the lead of soyabean oil, global vegetable oil prices including palm oil prices are set to register a welcome correction of anything between 10 and 20 per cent.

Arrival pressure
Come April, peak production season for palm oil will start; and that is the time arrival pressure from Brazil and Argentina will be felt. Beyond that of course, the US planting intentions, actual planting and weather would take over.

Back home in India, after record imports of nearly 8.2 million tonnes of various oils for the oil year ended October 2009, arrivals are still unabated and were an estimated 2.3 mt till January 2010, averaging close to eight lakh tonnes a month.

Currently, India has a conservatively estimated inventory of over one million tonnes of imported oils at various ports. In the vain hope of a hike in customs duty, many importers over-traded. The Finance Minister did not oblige them. If anything, storage tanks are going full and rentals have shot up. There is a strong belief, a significant part of Indian import is actually stock transfer so as to pare down inventory levels at the origin.

Almost half the soyabean crop harvested last October/ November is yet to hit the market. Farmers and traders cannot hold on to the stocks for long.

Rapeseed/mustard crop has been estimated by the Government at 7.3 mt and by the trade at less than 6 mt. Discussion with market participants reveals the crop size could be around 6.5 mt. This will add to supply pressure.

Food inflation factor
Food inflation is still a big issue in the country and strong prices of rice, wheat, pulses and sugar have eroded the purchasing power of the poor.

Foodgrains and edible oil are complementary products and so demand for cooking oil moves in tandem with demand for food grains.

Overall, in the short-run, the global and Indian vegetable oil market conditions point to a price decline rather than an increase. Beyond June, onset and progress of southwest monsoon in India will have to be watched. Weather concerns, if any, in the Northern Hemisphere will have to be reckoned with.

Non-fundamental factors
In addition to market fundamentals (which over the next quarter point to a price decline), non-fundamental factors including dollar dynamics and flow of speculative capital will influence price direction. There is a widespread expectation that there will be a further monetary tightening in the US and that the dollar will remain firm vis-à-vis the euro. In the event, world vegoil market will surely stay under pressure.

The Indian Government is most unlikely to change the extant customs duty structure anytime soon, despite hectic lobbying by the industry and trade.

Depending on how the next kharif oilseeds crop shapes up, a call may be taken sometime mid-September.