As India is the fifth largest producer of the oil seed soy bean and fourth largest importer of the edible oil, soy oil, the international price
movements have a bearing on the domestic prices. However, the production cycles and import duties skew the price trends for soy bean and soy oil respectively.
Domestic soy bean futures have gained more than 20% and soy oil futures have declined by 10% since the beginning of 2009. A downward revision in crop expectations by countries such as India and reserve buying by China gave a push to the soy bean prices. While the price of soy oil moved in tandem with soy bean, a cut in import duties on edible oils by the government led to the down move.
Soybean is an important crop globally, used mainly for protein and oil consumption. A very small portion is consumed by humans either directly or as a value-added snack food. Nearly 80% of the crop is solvent extracted for vegetable oil (soy oil) and the defatted soy meal is used as cattle feed.
Production of soy bean is concentrated in the United States, followed by South American countries like Brazil and Argentina, and Asian countries including China and India.
The US, India and China follow a similar production cycle, whereby sowing is done in May-July and harvesting takes place in September- December. For the South American countries, September-December constitutes the sowing season and February-April sees harvesting.
The drought conditions in Argentina and Brazil in the last sowing season led to a downward revision in the crop expectations by an average of 4 million tonnes. The arrivals from India in late December failed to meet expectations. And China started building its soy bean reserves (total imports stood at 6.289 million tones in 2009, up 15%) to support farmers’ interests following a price decline of nearly 40% in 2008. While these developments supported the price rise through February and early March, the soy exports from Argentina were threatened in the third week of March due to a strike by farmers over a 35% export tax.
The outcome of the strike in Argentina will be decisive for continuation of the short-term price rally. While the Indian production has been revised to 8.9 million tonnes for 2008-2009 from 10.8 million tones earlier, the demand for soy meal is expected to remain steady. Reserve buying by China may also be restricted as traders are demanding an increase in import duties from 3% to 13% to protect against the government’s defensive price mechanism.
Following an upsurge in domestic inflation (wholesale price index), trading in soy oil futures was suspended on the commodity bourses in May 2008. Now that inflation pressure is easing and trading has resumed in December, the open interest in soy oil futures has increased by 45%.
Soy oil is a derivative of soy bean and after crushing of the oil seed constitutes nearly 15% of the output. It belongs to the edible oil group which mainly consists of palm oil and mustard seed oil. With a total annual consumption of 2.7-3 million tonnes, it is the second largest edible oil imported into India after crude palm oil.
The domestic price swings are influenced by the change in import duties on edible oils and resultant consumer shift towards cheaper substitutes. The prices have declined by 3% after the government scrapped the 20% import duty on soy oil in the second week of March. According to Solvent Extractor’s Association of India, the import of soy oil has increased by nearly 87% since November 2008 compared to the same period in the previous year. A decline in import duty is expected to push up the supply in the domestic market, thereby suppressing the prices further. The arrival of mustard oil in the traditional months of February and March should add to the price pressure.
Source : The Economic Times