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Soaring edible oil prices threaten efforts to keep inflation under control

Prices of palm oil are up 15% this year to a record, while rival soybean oil has jumped 12%, putting a strain on India, the top buyer of palm, soybean and sunflower oils.

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The soaring cost of vegetable oils is an ever-growing threat to India’s efforts to bring inflation under control.

Prices of palm oil, the most-consumed edible oil in the world, have jumped 15% this year to a record, while rival soybean oil has gained 12%, contributing to a surge in global food inflation to near all-time highs.

The rally is putting a strain on India, the top buyer of palm, soybean and sunflower oils. Consumer food prices rose in December at the fastest pace in six months, squeezing household budgets and increasing pressure on Prime Minister Narendra Modi’s government which already provides food aid to 800 million people, or two-thirds of the population.

The central government has taken steps to cool prices, including reducing import duties on palm, soybean oil and sunflower oil, and limiting inventories to prevent hoarding. Success has been muted because India’s moves stoked expectations of higher purchases, which further boosted international prices.

India has limited options in the near term. Any further reduction in import duties won’t ease prices, said veteran trader Dorab Mistry, a director at Godrej International Ltd. The immediate solution is to import refined palm oil and sell through its public distribution system (PDS) at below market value, he said.

Under the PDS, the government allocates mainly wheat and rice to the states for distribution. State governments “are free to add any item they deem fit from their budgets” to their PDS program, a spokesman for the food ministry said in response to questions from Bloomberg News.

A rise in global rates caused domestic edible oils to surge last year, but the federal government managed to bring down prices through several measures, including duty rationalization, he said. India is working on medium- to long-term plans to cut its dependence on imported edible oils, he added.

Longer-term options for the government include building up reserves, boosting domestic production and allowing commercial cultivation of genetically modified (GMO) oilseed crops, according to traders and analysts.

State Reserves

India should build an edible oil reserve to insulate from any price spikes, said Gnanasekar Thiagarajan, head of trading and hedging strategies at Kaleesuwari Intercontinental. This will allow the government to release supply in times of shortage, to soften prices and to curb speculation trading and hoarding.

This would be similar to what China does with its massive stockpiles of crude oil, strategic metals and farm goods, according to Thiagarajan. Beijing doesn’t publicly publish information about the volumes it holds in its state reserves, but may release commodities in emergencies.

India’s food stockpile is focused on grains like wheat and rice, which the country produces in abundance. It hasn’t been able to replicate that with edible oils as India relies on imports for 60% of its needs.

Boost Production

India is trying to boost domestic production to overcome its dependence on imports. The government launched a $1.5 billion initiative called the National Mission on Edible Oils-Oil Palm last year to improve self-sufficiency.

India aims to more than double crude palm oil output to 2.8 million tons by 2029-30 from an estimated 1.12 million tons in 2025-26, according to the Economic Survey prepared by the finance ministry.

More land should also be diverted to grow soybeans, sunflower and rapeseed crops, said B.V. Mehta, executive director of the Solvent Extractors’ Association of India. The government will need to spend 50 billion rupees ($668 million) a year to boost oilseed output, he said.

For this to happen, farmers will need to shift away from growing wheat and rice, where they’re guaranteed a minimum price for their crops, the industry group said. It has pushed for a higher support price for oilseeds so that more farmers can be drawn toward oilseed cultivation.

The land under winter crops has climbed to a record this year due to more sowing of oilseeds, the food ministry’s spokesman said. The oilseed crop area was estimated at about 10.3 million hectares (25.5 million acres) as of Feb. 4, 23% higher from a year earlier, according to the farm ministry data.

Finance Minister Nirmala Sitharaman said in her recent budget speech that the government is working on a plan to boost oilseed production. The spokesman for the food ministry said various ministries and departments are involved in ensuring food security and crop diversification.

GMO Crops

The country may eventually have to turn to genetically-modified rapeseed, popularly known as mustard in India, to help boost overall oilseed output, Mistry said. Mustard oil accounts for more than 10% of India’s annual cooking oil needs of 22.5 million tons.

India’s top court put on hold in 2017 the commercial release of a GMO variety of rapeseed. Opinions are divided over the use of GMO food crops amid health, environmental and biosafety concerns. The only genetically-modified cash crop under commercial cultivation in India is cotton.

The government is not currently planning to promote GMO mustard, the food ministry’s spokesman said. – Bloomberg.


Also read: India needs to be wary of imported inflation: Economic Survey


 

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