G. Chandrashekhar

Mumbai, Sept. 8 The global vegetable oil market has clearly been bearish in recent weeks, with hardly anyone believing there will be a rally anytime soon. All bullish factors have evaporated, at least for the near term.

Futures prices too are looking rather weak with resounding bounce back in production of major oilseeds on the cards for 2008-09. High crude prices that lent support — in a somewhat exaggerated manner — to vegetable oils, too, are rapidly reaching more realistic levels.

Malaysian palm oil futures are currently trading at below Malaysian Ringgit 2,500 a tonne, or almost at half the price level that ruled in March 2008. Soya oil futures are trading a third below their all-time highs, again recorded in March this year.

In the cash market, crude palm oil is currently trading at a huge discount to soya oil — a difference of nearly $400 a tonne is unusual. This is the result of rising palm oil production, burgeoning inventory and demand resistance at unrealistic high prices.

Palm oil producers should have seen this coming at last four months ago; but they probably got carried away by forecasts of even more bullish prices.

While crude palm oil is on offer at $720 a tonne F.O.B. Malaysia, degummed soya oil is available at $1,115 a tonne F.O.B. Argentina. At this level, palm offers good value, to producers and consumers both. For producers, the margin is still attractive, with low production costs estimated at $200-220 a tonne.

A large differential with soya oil would prompt anyone to assume that palm prices have the potential to rally to narrow the difference. But this is most unlikely to happen given the market sentiment. If anything, as the northern hemisphere moves towards oilseeds harvest time, soya oil prices would move further down, putting further downward pressure on palm oil.

At this point of time, there is case for continuing India’s zero-duty regime. A call could be taken on re-imposition of duty sometime in the second half of October when crop assessment is complete. In the event palm oil could come under further pressure. However, electoral considerations may force the Government to continue with the extant duty regime.

© Copyright 2000 - 2009 The Hindu Business Line