Under the disturbance of various policies, the recent fluctuations in vegetable oil trends have intensified. Although the market generally expects that the balance table of major grain and oil products will improve in 2022/23, the reality facing many countries is still tight grain and oil supply and high food prices, which has prompted more and more countries to introduce some policies to deal with it, including restricting the export of key agricultural products and reducing import tariffs to improve international procurement competitiveness. Among them, the policies of Indonesia and India, two major vegetable oil producers and demand countries, have attracted more attention from the market.
Since January, Indonesia has introduced intensive policies to control domestic edible oil prices while ensuring supply, but with little effect, which eventually led to the emergence of a major move to ban palm oil exports at the end of April. Amid domestic pressure on the stock market and industry protests, Indonesia lifted its palm oil export ban this week, but exports are still stagnant. As the price regulation target was not met, the Indonesian government announced further domestic market obligations and re-implemented a licensing system for palm oil exports. Only companies that prove that they meet the domestic market supply obligations can obtain export license approval, but the details have not been clarified, which has left exporters still in a wait-and-see period of waiting for policies. In addition, Indonesia also plans to replace the original bulk edible oil subsidy with domestic price obligations starting from May 31. Although no official document has been issued yet, this basically means the return of previous regulatory policies.
Table 1: Indonesia has introduced various policies to regulate the supply and price of domestic edible oil
Source: CITIC Construction Investment Futures compiled
As early as January this year, Indonesia had used DMO, DPO and export licenses to regulate the price of edible oil, but did not achieve the expected results. The return of these policy tools again implies that the Indonesian government is helpless in regulating the price of edible oil. Against the backdrop of high vegetable oil prices in the international market, it is too difficult to maintain such low prices of edible oil in the domestic market. The huge price difference between domestic and foreign prices will inevitably trigger a confrontation between domestic companies and this may enable the Indonesian government to continue to increase its regulatory policies. overseas high prices, domestic low prices and free exports have almost become an impossible triangle, which makes Indonesian palm oil exports in the later stage continue to be full of policy risks. Against the backdrop of poor Malaysia's production and inventory conditions, this will significantly support palm oil prices, especially in recent months, which is beneficial to the unilateral and positive trend of palm oil.
Indonesia's excessively frequent export policy adjustments have made India uneasy. The previous conflict in Russia and Ukraine has caused India to be stranded at 380,000 tons of sunflower oil to be stranded at the Black Sea port, and Indonesia's palm oil export ban has stranded a considerable scale of India's buying ships, making India a serious victim of the price increase of vegetable oil. In order to curb domestic inflation and to improve the purchasing competitiveness of enterprises in overseas markets, India allows 2 million tons of edamame oil and 2 million tons of edamame oil and 2024 to be duty-free in each fiscal year from this fiscal year to the next fiscal year 2024. The current import tariff of Indian crude oil is 5%, and the effective tax rate after 10% of social welfare surcharge is 5.5%. The new export policy will lead to the import tariff of edamame oil and umami oil in the quota being 5.5% lower than that of gross palm oil. It seems to be conducive to promoting the import of edamame oil and umami oil, which may change the import structure of India's vegetable oil, but the actual impact may not be that simple.
According to market annual statistics from November to October of the following year, India's annual edible oil imports are in the range of 13-15 million tons. In recent years, due to the impact of high prices of vegetable oil and the epidemic, it has shrunk to about 13 million tons. Against the backdrop of India's high rapeseed production this year, it is estimated that vegetable oil imports will not increase much. The quota for imports of 4 million tons of soybean sunflower oil accounts for about 25-30% of the total import volume, which is not small. From the perspective of import structure, about 50-60% of India's imported vegetable oil is palm oil, and about 35-40% is soybean oil and sunflower oil. In recent years, the approximate imports are about 8 million tons of palm oil, 3 million tons of soybean oil, and 2 million tons of sunflower oil respectively. Under normal import situations, India's import quota for edamame oil and maroonan oil will be completely used, but there will also be a part of the import volume that is not covered by the quota, so this will inevitably involve the issue of how to allocate the duty-free import quota.
Although we have no way to know the allocation rules for these duty-free import quotas, refers to the situation of domestic cotton and sugar implementation of import quotas. It is clearer that duty-free import quotas will be expected to become a scarce resource. In addition, implementing quota duty-free imports may not necessarily effectively reduce domestic prices, and pricing may still be based on the quota cost, but importers who obtain quotas through various channels will be able to earn excess import profits from it. If this is the case, with the limited decline in vegetable oil prices, India's new import policy may not stimulate more demand for vegetable oil, and this policy will not play much role in promoting the growth of its total vegetable oil imports.
As for whether the new policy will lead to India increasing imports of soybean oil and sunflower oil and reducing palm oil, thereby changing India's vegetable oil import structure, it may still be debated. For companies with quotas, of course, they will tend to increase the import of duty-free vegetable oil, which will also form their relative advantages in the import costs of soybean oil and sunflower oil; but for companies without quotas, the disadvantages in the import costs of soybean oil and sunflower oil may prompt them to switch to a more fair palm oil track, thereby reducing the import of soybean oil and sunflower oil. So, from the perspective of total volume, India's vegetable oil import structure may not change much. is only the enterprises participating in the specific import, so the negative for palm oil in India's new import policy will also be relatively limited.
Of course, changes in the demand side of are of course important, but in the strong reality of the global supply being significantly tight, the key to the palm oil market is ultimately the recovery of its supply. Through the previous analysis, we can already expect that Indonesia's palm oil exports will not be able to return to normal soon, which will help alleviate the suppression of palm oil prices by its year-on-year and seasonal growth. The palm oil market in the medium and short term may focus more on Malaysia's supply. However, as of the end of May, the year-on-year performance of horse palm production was still poor, and there are still major obstacles to the entry of foreign workers, which may prompt the recovery of horse palm production in the later period to continue to fall short of expectations, and continue to delay the pace of its inventory reconstruction. The operating center of palm oil price will be expected to be strongly supported. Overall, the idea of longing on palm oil when it is low remains unchanged, while the trend of domestic soybean-palm price spread still needs to wait for new driving force.
This article is derived from CFC agricultural product research
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