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Commodity outlook: Edible oil down but not out

Gnanasekar Thiagarajan/Mumbai 15 Mar 19 | 02:02 PM

Edible oil prices have been declining due to rising stocks and poor demand. Rising output in India, the largest consumer, has added to the weak sentiment. Accordingly, domestic crude-palm-oil prices also declined, by around 8 percent. The January price gains were on expectations that palm-oil output in Malaysia would shrink due to seasonally lower yields and thus stockpiles might be reduced to some extent. But, stocks haven’t fallen as much as expected. Exports, however, declined around 21 percent in February while output contracted just 11percent. Thus, inventories continue above the 3 million-tonne mark.


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Indonesia's output is seen increasing 7 per cent to 42.4 million tonnes. Global output is likely to rise 5.6 per cent to 73.4 million tonnes this year, the slowest growth in three years and a return to a normal pace after bumper-production years.


For decades we have pursued a highly liberal edible oil import policy to advance consumer interest. Yet, until very recently, we followed a highly restrictive export policy for the same commodity. We followed a policy of zero-import duty on vegetable oils for long years. Although it was a facile option, one can argue that such a policy was the compulsion of the time, as inflationary trends were worrying and domestic production was not enough. But we did little to promote domestic output. We remained smug because of the availability of low priced edible oils in the world market. Oilseeds cultivation faced and continue to face benign neglect.


Now, times are different. We face low domestic prices for many crops and farm distress. Farmers’ protests have become the order of the day. There is now a political compulsion to address the grave situation.


Supply-side fundamentals may continue to exert pressure on Malaysian palm-oil futures. For benchmark prices to rise once again, palm inventories need to fall substantially, from 3.05 million tonnes at present. The bullish factor that would drive prices higher is demand-side fundamentals, including bio-diesel consumption and demand from key importers such as India and China. The upcoming Ramadan demand and rising energy prices are the only hope going forward for palm. 


The differentials to between Soy/Palm have started going in favour of palm in the month of March and sustaining such high differentials could lead to strong buying in palm sooner or later. 


Technically, palm looks vulnerable in the short-term and could revisit recent lows, but subsequent to that we anticipate a strong rebound from there towards 2175-2200 MYR/ton levels. On the downside, the benchmark contract could test 2010 MYR/ton followed by 1925 MYR/ton. 

Cotton looks bullish


Global factors, too, exerted an influence. The US cotton market faced a sharp downward correction because of the ongoing trade friction with China, which has resulted in the latter imposing a retaliatory duty of 25 per cent on American cotton. From over 80 cents a pound, US cotton slumped to around 70 cents a pound a couple of months ago. In other words, sentiment had turned weak.


Now, a revival is on the cards, especially in the Indian market. Export demand is just about beginning to pick up. Sensing that the market may have bottomed out, domestic mills, too, have begun to make purchases to build inventory. Cotton prices are clearly showing an uptick and every move above the minimum support price should bring relief to growers and policymakers alike.


Supply side concerns


There is some concern on the supply side though. While cotton output for 2018-19 has been revised downward by the trade to about 325 lakh bales, the Agriculture Ministry estimate is even lower and possibly closer to reality at 301 lakh bales as compared with the production target of 355 lakh bales. In other words, cotton market fundamentals are tightening.


There are concerns relating to quality. Unseasonal rains have reportedly damaged the crop and hurt quality in some producing regions. In other words, the availability of really good quality cotton is tightening. Significantly, the Cotton Association of India (CAI) expects a big drop in the Indian cotton crop figures for this season as there will be no third, fourth or fifth pickings in the country.


According to the CAI crop committee’s last meeting on March 1, 2019, the committee has estimated Indian crop size of 328 lakh bales of 170 kg against an earlier estimation of 330 lakh bales. Last year, crop size was 365 lakh bales which means India will have 37 lakh bales less crop as compared to the previous season.


Popular variety Shankar-6, currently trading at about Rs 42,000 a candy (355 kilograms), is in great demand. Prices of other varieties will also be lifted as well. With prices firming up, the cotton procurement by state-run Cotton Corporation of India (Cotton Corp) has almost come to a standstill. CCI has procured 11.6 lakh bales so far, nearly four times the amount collected during the same period the previous year, top officials said and maintained the cotton body would remain in the market to ensure that prices remain stable. Procurement is likely to touch 15 lakh bales by the end of this season. When this stock could potentially be offloaded, the current bull run in the domestic markets could come in for a rude shock.


China set to restock


Notwithstanding these supply-side developments, trade representatives believe that export of about 50 lakh bales of cotton is a strong possibility. Bangladesh and China are two of India’s largest cotton buyers. After years of destocking, the world’s largest importer and consumer China will have to begin to restock cotton. The Asian major has been buying the natural fibre from Brazil. India is now set to join the race.


Signals from the US too suggest a possible expansion in the planted area and a bigger crop in 2019-20. So, the world market will have an abundance of cotton with output exceeding consumption and a possible stock build. To what extent the anticipated slowdown in global economic growth will impact cotton consumption remains to be seen.


Weather worries resurface


A late winter Blizzard pounded the US central plains on Wednesday, bringing high winds and snowfall disrupting travel and power outages. 


Fundamentals look extremely good for cotton prices going forward, but caution needs to be exercised on excessively getting bullish unanimously. 


Technicals also hint at strength going forward with benchmark NY ICE futures potentially headed to 81c on the upside. Any dips to 71-72c looks supportive in the near-term.

(The author is the Director of Commtrendz Research and these are  guidance for prices. He is not liable for any gain/loss arsing out of it.  He can be reached at gnanasekar.t@commtrendz.com. )

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