The Middle East conflict and weaker than forecast rains have raised concerns across India’s market for edible oils since the country relies on them to feed its 1.4 billion population.
This year's ‘monsoon’ summer rain season is forecast to deliver the weakest rainfall in eight years just as India grapples with soaring prices of palm, soybean and sunflower seeds needed to make cooking oil, a kitchen staple across the country. This, coupled with higher crude oil prices, has prompted economists to lower this year's GDP forecast to 6.6% from 7.7%.
Crucially, the situation risks derailing plans by the world's most populous nation to double domestic edible oil production to roughly 25.5 million metric tons by 2031, analysts said. Under its National Mission on Edible Oils program, India hopes to cut its massive reliance on cargoes from Malaysia, Indonesia, Brazil, Russia and Ukraine to build a self-sustained industry.
To achieve this, the plan calls for the expansion of cultivation acreage to 33 million hectares, up from 29 million hectares, and the use of more innovative harvesting methods, such as those employing plant-gene modification techniques and/or those that can yield climate-resilient crops.
Growing Import Dependence
In a recent report, Indian think tank Observer Research Foundation (ORF) said the nation's high reliance on imports (56% vs. 15% in 1995) gives it little room to negotiate prices in the face of supply chain bottlenecks brought by geopolitical shocks.
“While demand has grown at an average annual rate of 4.3%, oilseed production has expanded at a comparatively modest rate of 2.2%, widening the supply-demand gap and increasing reliance on imports,” the researchers noted. “This persistent shortfall has heightened India’s exposure to global price volatility and supply disruptions.”
As petroleum prices rise, farmers are suffering from higher raw input costs, such as fertilizers, that may not be entirely compensated by domestic Minimum Support Price (MSP) government subsidies, which aim to establish fair prices and promote food security. If this continues, farmers may be discouraged from long-term oilseed cultivation, potentially undermining the national expansion plan, according to the ORF.
Palm, soybean and sunflower oil, meanwhile, have surged 23%, 11% and 8% since the conflict began in late February, hurting importers who were already suffering under India’s weakening rupee, analysts said.
In an effort to stabilize domestic prices, India could roll out so-called price-triggered tariffs that rise when foreign prices drop below a benchmark and ease during global price spikes, helping farmers to harvest more profitably, according to the ORF report. Currently, import duties stand at a flat rate regardless of market dynamics.
“Farmers are vulnerable to fluctuating international prices because imported oils are cheaper than locally produced ones and they are too small and poor to achieve economies of scale on their own and compete with foreign suppliers,” said an industry analyst. “To help farmers, the government could roll out more flexible tariffs that rise when global prices are low to make local products more attractive for importers like hotels and restaurants, and vice versa.”
Simultaneously, the state could establish Special Oil Zones (SOZs) and Foreign Farms. The SOZs would operate as “dedicated” trade hubs at the nation’s ports, the researchers noted. India could also work to secure offshore farming deals with partner nations to grow oilseeds and build a more integrated global value chain.
For now, however, the situation looks increasingly difficult, especially as Indian farmers are already paying much more for key fertilizers, such as urea and ammonium phosphate, than they did in February.
“There is a large negative coming from fuel imports right now and their impact on fertilizer prices, which could hurt their availability for next year's crops,” said Dr. Scott Irwin, Laurence J. Norton Chair of Agricultural Marketing at the University of Illinois Urbana-Champaign.
Prime Minister Narendra Modi is already working to rescue the sector, recently pledging to boost the MSP, especially for sunflower seed, where production lags. Modi has urged citizens to curb energy usage by 10% to help tame inflation and give India more time to respond to cross-border strains and uncooperative weather.
Potentially squeezing Indian importers, Indonesia and Malaysia plan to increase biofuel output to benefit from higher margins.
Indonesia has mandated that 50% of palm-based biodiesel be blended with regular (petroleum) diesel starting this July, up from 40%. Malaysia, meanwhile, is also transitioning to B12 (12% palm/88% petroleum) from B10 and plans to gradually boost it to B15.
New Ways to Manage Price Risk
Against this backdrop, CME Group’s edible oil futures contracts offer one way for market participants to manage price risks across South Asia’s soybean oil and crude palm oil markets.
Launched on March 2, the contracts track prices at Indian ports and also allow investors to trade the spread between South Asian and U.S. prices.
So far, they have been well received, with up to 100 contracts of the South Asia Crude Palm Oil futures traded as a block between Avere Commodities and Olam Agri.
"We're pleased to see early industry support for our new South Asia edible oils futures contracts," said John Ricci, Managing Director and Global Head of Agricultural Products, CME Group in a press release. "The addition of these contracts provides South Asian market participants with enhanced price discovery and risk management capabilities and will further support their investment and hedging strategies."
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