By Abhijeet Banerjee
Edible oils have been attaining new highs on a month-on-month basis. The upward momentum has eased of late, after the benchmark June contract of NCDEX soy oil reached a high of Rs 1,454 recently. Palm oil has followed suit, with the May CPO contract on
currently trading near Rs 1,245, after establishing a high of Rs. 1,249.
The segment has retreated from recent highs mainly due to profit taking, which was stimulated amid fears of the rising threat of the pandemic and intermittent corrections in international markets. Despite strong upside rallies and soaring price levels, fundamentals still favour further appreciation in prices from the current levels.
The return of China as a major demand driver for commodities like corn and soy complex products, in addition to tightening vegetable oil inventories, will be one of the key factors that can help global soya oil or palm oil maintain the upward trend.
A regular build-up of food reserves in different nations is quite likely, which will be positive for global agricultural commodity markets. Market talk suggests that US exporters are expected to fulfill roughly 30-35 per cent of China’s total soybean requirements, compared with 17 per cent last year. Trade tensions are expected to ease between the US and China. Once the pandemic threat cools off and lockdown restrictions are lifted, an increase in protein consumption can be expected globally as restaurants reopen across different nations. China leads the world in economic recovery. Therefore, the impact of improvement in the consumption of edible oil products can be far greater in China.
China continues to purchase wheat, ethanol and other commodities in decent quantities. Soybean and major oilseed inventories are constantly getting absorbed from global suppliers such the US, Brazil and Argentina, as the importing nations focus on maintaining adequate inventories against the lockdown-induced supply disruptions.
The weather has also been a key factor given the potential adverse impact of the crop development progress in South America, particularly Brazil, where the climate been hot and dry mostly. So, the depleting global oilseed inventory including soybean, and concerns over the falling soybean output due to untimely rains in Brazil, will continue to give a generative positive tone to the markets moving forward.
The USDA reports show an increasing exposure in long positions by the fund houses in corn and soybean for several months. This implies that there is strong conviction amongst global participants on a rise in prices in the future. In palm oil, the export demand from Malaysia and Indonesia is expected to remain healthy as of now, whereas production in these two nations may not increase, at least for the next few months.
These factors will contribute to keeping the average prices firm across different markets.
Another supporting factor will be the ongoing impact of the B30 mandate. This is because under this program, huge quantities of palm oil will be absorbed. Due to lockdown restrictions, border movements will not be possible, which implies that the availability of migration labourers will be restricted for carrying out plantation operations. Malaysia is heavily dependent on labourers from neighbouring countries, hence, an adverse effect of plantation activity will be a decrease in production levels.
Rising fear about the pandemic may pose an adverse effect on demand in the short term, keeping the upward price movement in check. The prices of soya and palm oils will face some resistance for the next few days but are expected to attempt higher levels in the latter half of this month.
Technically, the May CPO contract on MCX will trade with a positive bias this month unless it closes below the Rs 1,200 level. Similarly, one should expect the June soya oil contract to trade on the upward path as long as it closes comfortably above the Rs 1,400-1,410 levels.
(Abhijeet Banerjee, Senior Research Analyst-Agri Research, Religare Broking)