Trade with Commodities: A FAVOUR FOR CONSUMERS VEG OIL OVERSUPPLY

COOKING oil is now astonishingly cheap. Thats nice. Our cooking oil industry is subsidising it. Even better. Its not often that an industry makes life easier for us by picking up the tab. So when it does, time to enjoy it to the fullest.
    Like all businessmen, our veg oil barons didnt set out to do us a good turn. Quite the opposite. The motivating factors were uncomplicated greed and fear, along with that herd mentality which turns individuals into lemmings.
    To fill you in, domestic cooking oil prices were so attractive in March and April that every trader and refiner bullishly thought he could profit by importing oil. Rising palm oil prices on Kuala Lumpur exchange indicated the world was running short.
    Plus, there was fear the new government would re-impose customs duty on veg oils currently allowed in duty free. But if you import palm oil before the duty, you could potentially make a killing when more expensive duty-paid oil came in. These two factors were enough to make everyone jump in. Simultaneously.
    Imports shot up 110% in April year-on-year. From the three largest refiners Ruchi Soya, Adani Wilmar and Liberty Oils, to the Delhi guys who normally import pulses and decided to try their luck with palm oil, everyone turned importer. Ten guys with a bet on 1,000 t each were getting together to book a shipload. At the other end, Ruchi Soya will import 150,000 t cooking oil in June, up almost 70% over last year.
    The consequence was classic comedy. Suddenly there was so much oil in port tank farms around the country that no one wanted to touch it. Then everyone also remembered it was summer, when customer demand drops off because it is too hot to eat fried stuff.
    In April, traders had been fooled into believing demand was buoyant because all those election rallies, post-victory parties and weddings had meant lots of people eating out. Once those feasts ended, demand dropped to normal summer levels. In May, it scraped the bottom. June looks pretty grim too. We are unlikely to get back to pakoras and kachories before rains in July.
    The final twist of the knife came from desi oils - mustard, groundnut, cottonseed, rice bran, and sunflower. They remain cheaper than imported palm oil. When soya oil is selling at Rs 48/kg, while mustard oil is available for Rs 45/kg, whats to discuss? In Punjab, Maharashtra, Gujarat and Andhra, desi oils continue to hold sway. Until they get consumed, palmolein stands no chance.
    The upshot was that prices dropped. In an excessively over-supplied market, that was expected. The small guys were willing to sell even for a Rs 200-per-tonne profit. The big refiners, with higher overheads, had to fume at the sidelines while their ready-to-eat oil lay unsold. Or cut prices to match the small fry and see refining margins evaporate. Either way, we consumers gained.
    The best part is that small traders continue to book oil for late June and July shipment. Are they gluttons for punishment? Not really. Its the compulsion to circulate letter of credit (LC) limits from banks at work. Basically, if an importer has a LC that allows him to pay Rs 50 cr, for example, to his seller at the end of 180 days, and he manages to sell his cargo in 60 days, he uses the cash received for it to book more oil rather than pay his buyer early. That way he uses working capital to do more business. Hence the tearing hurry to book contracts abroad. So we can be sure of affordable oil well into August. After that, our local oilseed crops will get harvested.
    Meanwhile, plenty of good has emerged from this situation. One, we are buying cooking oil at great prices. Liberty Oils says its sunflower oil, yes that heart-friendly one, is now priced just Rs 50/l. Perfect!
    Two, its great for refineries and vanaspati factories, too. When they purchased oil in April, palm oil was at $610/t. Today, it is at $740/t. So by creating an inventory of cheaper oil, they have done their bottom lines a favour. Plus, there is no tension about raw material. Its tough to be happy when your tanks are overflowing, guys. But the proverbial glass is still half full.
    Three, it has drained away some of the governments tension about how to manage veg oil prices in case erratic rains delay oilseed plantings in June end. The tendency of the market is to flare up at the slightest hint of monsoon trouble. But with 1.7 mn tonnes lying at ports and refineries across the country, and more contracted, there are unlikely to be any rash moves.
    Four, international palm oil prices are not going crazy. Initially, exporters in Malaysia and Indonesia were delighted to have offloaded inventories (and carrying costs) to mugs in India. Malaysia is left with lowest stocks since June 2007. But with India slowing down, some of those smiles are wearing thin. Of course, this is a short-term situation. By autumn, when size of our soya and groundnut crops will be known, India may again shop in earnest.
    Five, current prices, low as they are, wont discourage oilseed sowing as they still promise ample gains to farmers. So there is no need for customs duty. Oilseed processors have always raised the bogey of farmer interests to frighten the government into artificially pushing up cooking oil prices. Now we know better.
    This year Indian consumers have plenty of grain. Now there is also ample affordable cooking oil, thanks to free trade and liberalised edible oils market. And that's really the biggest consumer benefit. A free market, without government meddling or import tax, can easily rid us of scarcity pricing. Of course, the industry is not daft. The market will soon correct itself as it is wont to. Meanwhile, enjoy.
    nidhi .srinivas @timesgroup .com