Oil and oilseed: will bullishness last?

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Rape oil and Rape blossoms on dark rustic wooden background, top view, place for text

Commodities in the oil and oilseed baskets have been riveting the bulls for more than a year. During the second half of 2020, all the commodities in the basket regained its footing, hitting record highs. The main fundamental factors that fueled the rally in the oil and oilseed complex are, the global supply side disruptions, drought in South American countries, fall in output and significant decrease in ending stocks after the easing of lockdown restrictions. The repercussions were also felt in India, since India is one of the largest consumers of oilseed, oil and meal.  Also, 70 percent of our domestic edible oil demand is largely met by imports. Hence, any change in consumption pattern will affect the prices.

Soybean rallied on robust soy-meal export demand

Soybean futures in the NCDEX platform rose to its highest level in August 2021, up 160 percent from the same period last year. In spite of higher output last year, the lower global carryover stocks and output made Indian soymeal prices competitive when compared to international markets. Domestic soybean crushing sharply increased. This higher crush margin resulted in improved export demand for Indian non-GM soymeal from U.S.A, Europe and Iran. Along with this, higher domestic purchases from feed industry kept prices firm during this year. The Solvent Extractors Association (SEA) reported that India’s soymeal exports jumped by 125 percent YoY to 1,564,833 ton in the FY ending March 2021. Further, concerns over a fall in domestic bean output during the current kharif season due to poor monsoon also led the upside momentum. Later prices eased as government allowed the import of 1.2 million tons of genetically modified soymeal until October 31 to augment supply and cool off domestic oilseed prices. On the international front, fall in production in key growing nations like US, Brazil and Argentina due to drought amid lower carryover stocks kept the prices on a firmer note. According to USDA, the production in Argentina fell by 6 percent to 46 million tons compared to the previous year. Moreover, shortage in supplies of other substitute oilseed supplies like mustard, sunflower etc. created demand for soybean.

Fall in global output fueled the rally in mustard seed

Similar upward journey has been witnessed in mustard seed as well. The September mustard seed contract in NCDEX has rallied over 60 percent from previous year in spite of rise in mustard seed output in India. Rise in export demand for mustard meal pushed the prices as well. India’s mustard meal exports skyrocketed by more than 150 percent to 1,113,021 tons in FY ending March 2021, according to data released by SEA. Banning of blending mustard oil with other edible oils and gradual decline in ending stocks supported the price. Huge demand for mustard oil also accelerated the price. In the meantime, some respite in prices were seen on closure of spot markets due to stringent lockdown due to second wave of COVID-19. In the global market, ICE canola November futures prices rose more than 70 percent to $876.3 per twenty tones, year till date. This is mainly due to fall in output in major producing nations like Canada and European Union to multi year lows pushing down ending stocks to four year low. Record high temperature in Canada drastically reduced canola yield. Statistics Canada estimated that canola production is likely to be 12.8 million tons, which is about 2 million tons less than its previous month’s estimate and down 34 percent from last year.

Increased global consumption demand bolstered soy oil

In the edible oil segment, refined soy oil rose the most. Refined soy oil prices gathered strength starting from the middle of last year. The September soy oil contract in NCDEX rose by nearly 50 percent. Higher soybean crush margin resulted in rise in soy oil output. However, a consistent rise in domestic demand for the yellow bean oil has led to fall in ending stocks since 2017.  Imposition of higher import tax by the government lead to imports becoming more expensive. Hence, imports were considerably flat over the year. Meanwhile, regular seasonal demand owing to festivals like Dussehra, Diwali and Ramzan always kept the ending stocks in a tight situation. To cater to the higher demand, the government has slashed duty on import of both crude and refined soy oil and sunflower oil till September 30. Recently, government also trimmed the base import price of soy oil by 2.5 percent which cooled off the domestic edible oil prices.

The strength in domestic soy oil was also supported by the gains in US CBOT soybean oil prices. The gain was fueled by higher domestic consumption from the largest consumers like China, US, and Brazil. Severe drought in South America buoyed the prices as well. In Brazil and Argentina, heat wave has disrupted harvest in many parts leading to fall in output. The lower output along with higher export pulled down the global ending stocks to two year low. According to USDA, the global ending stocks for soy oil has declined by more than 9 percent to 4.33 million tons compared to previous year.

CPO spiked on global cues

Crude palm oil prices in MCX rallied more than 40 percent starting from mid of last year. The rise in domestic palm oil price was mainly propelled by higher domestic demand for cheaper oil along with the strength in BMD Malaysian CPO prices. The rise in benchmark CPO prices in BMD Malaysia is largely attributed to marginal reduction in output especially from the 2nd largest producer, Malaysia. Moreover, rise in domestic consumption from the largest consuming countries like Indonesia, India and China supported the gains in the Indian markets. This has consequently resulted in a drawdown in global ending stock. The USDA reported that the global ending stock dropped by 10 percent to 12.27 million tons compared to the previous year. In the domestic front, cut in import duty of palm oil products to cool off the domestic prices by the government has softened the prices.

Looking ahead, in spite of monsoon deficit during the year, soybean acreage in India is marginally higher. Harvesting is likely to start from early October and import of GM soymeal for feed industry is likely to cushion major upside moves. Meanwhile, global soybean output is now on the higher side, but a rise in delta variant of corona virus in the US may keep soybean prices under check. Mustard seed prices may remain firm due to lean season in India. Moreover, lower global ending stocks due to drop in output in Canada is likely to keep domestic prices firm. Any hike in Minimum Support Price (MSP) by the government coupled with average soil moisture in key growing areas of Rajasthan is likely to increase acreage due to the expectation of higher return. In the edible oil faction, imports are likely to pick up in India as government already cut import duty for most of the edible oils and expectation of festival demand which is likely to start in the month of October. Yet, demand is anticipated to resume in full swing only after the safe reopening of the economy after completion of the ongoing vaccination drive.

Though, currently, stocks in the ports and pipelines are slightly higher, but festive demand is likely to support the prices in the near term. However, harvesting of kharif soybean in September may keep a lid on the rise in domestic edible oil prices. Pick up in domestic demand for meal from poultry industry may increase supply of soy oil in the local market in the long run. In the international markets, vegetable oil supplies across the globe are still looking tight. Moreover, lower palm oil stocks and higher exports in Malaysia are likely to prop up domestic prices too. Demand for biodiesel in Indonesia and Malaysia may keep the prices tight in the near term. Thus, demand is set to pick up as the pandemic situation gradually subsides. Meanwhile, the labour shortage in Malaysia is still hurting the palm oil output. Any intervention by the Malaysian government to increase workers would raise the hopes of higher palm oil production. Still, higher demand for palm oil may lift substitute oils such as soy oil and sunflower oils in the near term.

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