Edible Oil Inflation To Remain in Double Digits, despite Cuts in Import Duty: Report
Moneylife Digital Team 21 October 2021
Edible oil inflation in India will remain in double digits in the near term, even with the recent steep cuts in the import duty by the government due to the country's high import dependence on edible oils, says a research note. Vegetable oil has been among the top-10 principal commodities in the country's import basket since FY14-15.
In the report, India Ratings and Research (Ind-Ra) says, "The reduction in import duty by India has been offset by a rise in global prices of edible oil. Malaysian palm oil market went up by about 150-170 ringgits (Rs2,700-Rs3,075) a tonne immediately after the duty cut announcement by the government of India."
Against this backdrop, Ind-Ra expects the imports of edible oils to touch 13.15 million tonnes for the period November 2020 – October 2021, and edible oil inflation will remain elevated in the near term.
In 2019-20, about 56% of the domestic demand was met by imported edible oils. However, a surge in global edible oil prices since the second quarter of FY20-21 (Q2FY20-21) has put pressure on domestic prices, leading to higher retail inflation. Besides impacting domestic inflation, it has increased India's edible oil import bill, thereby affecting the current account deficit, the ratings agency says.
The persistent gap in the demand and supply of edible oil has been on the radar of the Union government for quite some time, and several measures have also been announced in the past to address it. In this regard, the most recent step is the National Mission on Palm Oil announced in August 2021, totalling Rs110.40 billion to be used both for price assurance and production of crude palm oil to 2.5 million tonnes by 2030.
Ind-Ra opines that this and the higher price support to other oilseeds, are welcome steps but will play out only in the medium to long term. To provide near-term relief to consumers, the government announced a reduction in the import duties on edible crude oil first in September 2021 and after that in October 2021. As a result, the basic customs duty on edible oil has been reduced to zero until March 2022.
However, Ind-Ra feels it is unlikely to provide much comfort to consumers.
According to the Food and Agriculture Organisation (FAO) of the UN, world prices for vegetable oils have risen 59.3% until July 2021 compared to pre-COVID-19 (February 2020). A combination of demand- and supply-side factors has pushed the global edible oil prices high lately.
The demand-side pressures have been high because China has imported a large quantity of edible oils in anticipation of a demand return once the pandemic subsides. On the supply side, major exporting nations of palm oil like Malaysia and Indonesia have faced labour shortages during production ramp-up. Production of soybean and sunflower oils has faced pressures due to higher biodiesel use and adverse weather conditions in the US, Brazil, Argentina, Ukraine and Russia.
Ind-Ra says the spurt in global prices, despite the lower import volumes, has translated into higher domestic prices of edible oil.
India's import volumes of vegetable oils fell by a fifth in the first quarter of FY20-21 (Q1FY20-21) compared with the same period a year ago. However, with the lifting of lock-down and the festive season, there was a rise of 7.5% in the third quarter of FY20-21 (Q3FY20-21).
In 2019-20 (November to October), the import demand by India had fallen to 13.53 million tonnes from the record high of 15.57 million tonnes in 2018-19. The second wave in Q1FY21-22 also pushed the imports down by 6.3% relative to Q1FY19-20. The import volume has been 9.86 million tonnes from November 2020 - July 2021, almost akin to the import demand last year during the same period.
According to Ind-Ra, the imports bill for vegetable oils has been firming up since Q2FY20-21 due to the surge in global prices. "This has stretched the imports bill to a record high of $4148 million in Q1FY22, pushing domestic retail as well as wholesale inflation of edible oil to record levels in the 2011-12 series. At the wholesale level, edible oil prices increased by 46.9%, whereas retail level prices jumped by 30.5% in Q1FY22."
In fact, the ratings agency says, acceleration in inflation both at the retail and wholesale levels for edible oil had begun in Q4FY19-20. At the wholesale level, the inflation in edible oil entered into double digits in December 2019 and at the retail level, it entered into double digits with a lag of four months in April 2020. Edible oil inflation at the wholesale and retail levels has remained in double digits since then.
At the wholesale levels, it remained in the range of 11.0% to 27.0% during December 2019 and February 2021 and, at the retail levels, it remained in the range of 10.0% and 26.0% during April 2020 and April 2021. Subsequently, edible oil inflation at wholesale and retail levels crossed 30.0% and was there even in September 2021.
Edible oils have a share of 3.6% in the retail basket and 7.8% in the retail food basket. However, due to persistently high inflation, edible oil has contributed more than its weight to retail inflation since Q1FY20-21. Edible oil contributed 17.5% to retail inflation in Q1FY21-22, the highest among all the major commodity items in the retail basket. Its contribution to retail food inflation was 46.9% in Q1FY21-22.
According to the ratings agency, the demand-supply gap for edible oils has been so large that the domestic supply has not been able to catch up with the pace at which edible oil demand has grown.
The net availability of edible oils from domestic sources stood at 10.66 million tonnes in 2019-2020, which grew at a CAGR of 0.9% from 9.78 million tonnes in 2010-11.
"However, during the same period, the domestic edible oil demand grew fourfold. Consequently, the rising gap between domestic demand and supply had to be met through higher imports which increased at a compounded annual growth rate (CAGR) of 6.5% during 2010-11 and 2019-20. As per the fourth advance estimates of oilseeds production, the domestic supply is expected to reach 11.17 million tonnes in 2020-21, but the domestic demand would touch 24.46 million tonnes," Ind-Ra says.
The acreage in the current Kharif season for oilseeds has been satisfactory, with the sown area at 19.61 million hectares as of 1 October 2021. This is more than the five-year average of a normal area of 18.00 million hectares, but 0.27 million hectares less than 2020.
Soybean has witnessed record sowing, but the sowing of groundnut lags by 0.18 million hectares than the previous year. Key groundnut producing states such as Gujarat, Andhra Pradesh, Karnataka have seen lower acreage due to the uneven monsoon rainfall.
Also, water reservoir levels in the western region have been lower than usual at 81% as of 30 September 2021. "This implies that overall production of groundnut in the Kharif and Rabi seasons in 2021-22 is likely to be less than last year. This may keep upward pressure in the groundnut oil prices. In fact, the first advance estimates project the oilseeds production to be slightly lower than the 2021-22 production of 36.10 million tonnes," the ratings agency says.
sanjay M
11 months ago
what is scope for farmers who are selling their soybean @4000 to 5000 per quintal. When highest price of produce was 10000 to 12000 per quintal in Aug sep 2021, now when it\'s farmers turn it\'s now half of peak.
Average cost of production is increased.
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