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India's Production & Consumption of Vegetable Oil and their Impact

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					India’s Production &
Consumption of
Vegetable Oil and their
Impact on Global Oils
& Oilseed Industry

Paper by Dorab E Mistry

Director, GODREJ International Limited

At China International Oils & Oilseeds Conference- 2008

On Tuesday 11 November 2008

The Shangri La, Guangzhou


Ladies and Gentlemen

I am delighted to be speaking once again at the China International Oils and
Oilseed Conference organised by the Dalian Commodity Exchange and Bursa
Malaysia. The Dalian Commodity Exchange continues to go from strength to
strength and the volume of contracts traded each day on its Palm Oil contract has
touched new heights in recent months. Bursa Malaysia has also successfully held
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on to its volumes despite the emergence of new palm oil contracts such as the one
in Dalian and the most recent one in India. The Palm Oil Futures contract is still
not attracting the interest of fund managers on the same scale as the soybean oil
contract. I am sure conferences such as this one plus a more enlightened approach
from the host governments will give confidence to institutional investors.

On 31st October when I spoke at the Annual Forum of the Japan Oilseed
Processors Association in Tokyo, I had posed the question: Will this commodity
boom turn out to be the most short-lived of recent booms or is this just a half way
correction which, after a period of 12 to 30 months will re-start its journey and
give us yet another 5 to 7 years of high prices ?

To my great surprise, at least one major North American investment bank has
responded by taking the trouble to publish, in the last few days, its own research.
They have answered this question in the affirmative. I am naturally very
grateful and impressed that the question is uppermost in the minds of many
investors. I propose to speak on this subject in one of my forthcoming papers when
I do a new Supply & Demand Analysis for 2009 and 2010.

For today, I shall concentrate on the Supply & Demand statistics for India, in the
light of latest information and their Impact on International Price Outlook.

INDIA

Over the last 4 years, Indian GDP has been growing at an average close to 9 % per
annum. India’s Foreign Trade has been expanding at between 15 % and 20 % in
Dollars terms. For the current year, the Indian government appears to be confident
that GDP will grow by atleast 7 percent despite the current world economic
slowdown. To facilitate that objective, we have seen drastic cuts in interest rates
and a loosening of monetary policy. However, given the present world situation I
am rather sceptical and believe the Indian economy is going to enjoy only modest
growth.

AGRICULTURE in INDIA

In terms of agriculture, India has the second largest arable land area although it has
only the seventh largest land mass. India is the world’s third largest producer of
food. India accounts for 7.4 % of world oilseeds output, 6.1 percent of world
oilmeal production, 3.9 percent of world oilmeal export, 5.8 % of world vegetable


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oil production, 11.2 % of world vegoil import and 9.3 % of world edible oil
consumption.

The statistics I am going to present below are the same as those presented in my
recent paper in Japan. However, based on feedback I have received, I have altered
some of my estimates for 2008-09. As I have said previously, all figures for 2008-
09 are guesstimates because things will change as time goes by.

Let us first look at India’s production of vegetable oil.
( Oil year November to October )

INDIA’s PRODUCTION
 000 tonnes  2008-09   2007-08               2006-07        2005-06     2004-05
            Estimates Estimates              Actual         Actual      Actual
Soybean oil     1700     1550                 1280           1140         900
Cotton oil       900      915                  920            755         660
Gn oil           900      900                  580            950         970
Sun oil          500      550                  580            620         470
Rape oil        1850     1750                 2150           2250        1570
Sesame oil       120      120                  120            125         200
Coconut oil      390      380                  380            400         400
RiceBranoil      760      720                  680            660         610
Others           250      250                  225            200         200
Total           7370     7135                 6915           7100        5980



INDIA’s IMPORTS of Vegetable Oil
000 tonnes 2008-09     2007-08                2006-07       2005-06      2004-05
 Soya        350          700                  1335          1770         2027
 Palm       5015         4900                  3665          3000         3169
 Sun         150           80                   200            90             5
 Laurics     200          200                   200           240          145
 Vanaspati   100           60                   215           300          200
Total       5815         5940                  5615          5400         5546

I am pleased to note that my forecast of a resumption of sunflower oil imports
during 2008-09 has been vindicated already.


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Let us now look at INDIA’s CONSUMPTION

000tonnes     2007-08         2006-07          2005-06      2004-05        2003-04
            Estimates          Actual          Actual       Actual         Actual
Soybean oil    2250            2550             2850         2700           1900
Cotton oil      900             900              720          660            520
Gn oil          880             580             1020          950           1100
Sun oil         580             780              680          500            500
Rape oil       1750            2150             2250         1420           1700
Sesame oil      120             120              160          200            200
Palm oil       4710            3925             3150         3436           3500
Laurics         600             600              450          450            500
RiceBranoil     720             680              650          600            600
Others          225             225              350          350            200
Total        12735            12510            12280        11366          10820
Pop.Mlns       1140            1120             1100         1080           1070
Per cap kg     11.17           11.17           11.16         10.52         10.15

We find that in 2007-08 India’s per capita consumption stood constant and did not
increase. Indian statistics are always subject to improvement. Therefore, if after a
few months, it is demonstrated that per capita consumption in 2007-08 did rise, it
will lead us to believe that domestic crops last year were somewhat under-
estimated.



We can now study INDIA’s S&Ds                      000 tonnes

INDIA’s S&D for        2005-06       2006-07        2007-08      2008-09
Opening Stock            750           850           750           915
Production             7,100        6,915          7,135          7370
Imports                5,400        5,615           5940          5815

Consumption          12,280       12,510          12,735         13000
Exports                 100          120             175           200
Ending Stocks           850          750             915           900




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IMPORT DUTIES

The government of India has deferred a decision to raise import taxes on vegetable
oil for the time being. India is due to have parliamentary elections within the next
12 months and hence many decisions taken by the government will be questionable
and their timing will be even more so. The window of duty-free import of
unrefined vegetable oil has been extended for atleast the next 2 weeks and we are
seeing a scramble of ships steaming into India to take advantage of that opening.
The benefit of this window has gone in some measure to exporters of sunflower oil
and soybean oil because palm shipments, due to the much shorter voyage, had
already been stockpiled in India.

The Shameful Paradox of Indian Agriculture

In the last 30 days, we have arrived at a disappointing and depressing situation in
India. The Indian soybean farmer is now receiving less for his beans than his US or
Brazilian counterpart. In past years, Indian prices of oilseeds and oil were at a big
premium to world prices. Hence there was need to impose import duties. Now you
can see how much the situation has changed recently. Remember, the average size
of the soya farm in India is less than 2 hectares. The productivity is one third of the
US or Brazilian farm. The Indian soybean farmer is competing with the most
efficient oilseed farmers in the world. And yet, the Minimum Support Price for this
year, set by the Indian government is just USD 7.25 per bushel. Current market
prices in India are about US$ 8 per bushel. The poor hardworking Indian
soybean farmer has been condemned to poverty by his government and by his
political masters. It is both a pity and a crying Shame. And do not be surprised
if at this very time, there are Indian ministers making loud speeches on the need to
improve the lot of farmers! Is it any surprise that Indian agriculture is stuck in the
rut that it finds itself ? I am aware there are people in power and in government
who know about this and are deeply concerned. I hope and pray that these
men of goodwill and integrity will find the courage and the strength to prevail.

Indian agriculture does not need depressingly low prices. Indian agriculture will
flourish if prices rise from their depressed levels and take millions of farmers out
of generational poverty.

Having discussed India I now turn to the Global Scenario




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GLOBAL SCENARIO

The election of Senator Barack Obama has given a dose of optimism to the
otherwise depressing global economic scenario. I am sure all of us wish him well
and hope that the forthcoming discussions on a new world financial order will lead
to an improvement in the outlook for Demand. My own fear is that expectations
may already have been pitched too high.

In addition to the various factors that I have mentioned in my successive papers in
the last few months, there are a few more to be considered today.

Recently, the latest World Economic Outlook from the International Monetary
Fund sets out some chilling findings. In a study covering 17 developed economies
over 3 decades, the IMF came up with the following conclusion:

Recessions linked to banking crisis lasted twice as long as those not linked to any
financial crisis and the loss of output was about 4 times as great.

Let us not forget that the majority of Demand- creating countries, which means
most if not all the developed world, are already in recession. This places a very
heavy burden on regions like China, India, South East Asia and the Middle East to
grow at a faster pace in order to ensure that overall, the world economy sees some
growth in the last quarter of 2008 and the first 2 quarters of 2009. In my humble
opinion this is a tall order and almost impossible. I am not saying that during 2009
the world economy will contract. Simply that growth will have to wait for the
second half of the year.

Demand for oilseeds, vegetable oil, feedgrains and oilmeal will not be immune to
the slowdown. People may say that prices have already fallen considerably. That is
true but it is no guarantee that Demand will revive with prices at these current
levels.

I shall take a fresh look at the emerging Supply and Demand fundamentals for the
next few months.

Soya: We have been concentrating on the production prospects for Brazil and for
Argentina for this forthcoming season. So far they look good. We must also
consider the demand crunch facing soybean meal this year. The world has perhaps
too much wheat and a surplus of cheaper proteins than at any time in the last 3
years. Exchange rates in respect of the Real and the Peso will be critical to Price
                                          6
Outlook. Overall there are more bearish factors than bullish ones as far as Soya is
concerned. The only silver lining I see is in the brighter prospect for bio diesel
production in Argentina as well as in Brazil. Here too, recent moves in Germany
and the removal of Splash & Dash incentives in USA will dampen demand.

Rapeseed: World supply of Rapeseed appears to be getting bigger with each
passing week. Exports from Ukraine seem to have taken many markets already and
both Canada and Australia will find it hard to place their new crops in export
markets. The Canadian crushers plan to operate at almost full capacity which
means large quantities of canola oil will flow across into the USA and thus exert
pressure on domestic US soybean oil. With wheat prices under pressure, rapeseed
plantings in the EU in 2009 can be expected to expand once again.

Sunflowerseed: The recent over-production of sunflowerseed in Ukraine and in
Russia has brought down prices of sunseed. For the time being, sunfloweroil is
exerting pressure on the price of soybean oil in export markets. Non traditional
markets like India are taking advantage of this and replacing some soybean oil
imports with sunflower oil.

Palm oil: In recent weeks, the governments of Malaysia and of Indonesia have
announced some good long term measures to support palm oil. It is tempting to
brand these as being “too little and too late.” However, they are positive long term
measures and will help the industry in the second half of 2009 and 2010. On the
other hand, Palm has to overcome the current problem of high stocks and a weak
Rupiah.

I am pleased to note that most estimates of Malaysian CPO production for the
calendar year 2008 are inching closer and closer to my own forecast of 18 million
tonnes. I believe Indonesian CPO production in 2008 will touch 20 million tonnes.
The actual printed statistics may or may not come up with these figures but the
market will accept these estimates. In a year of rising production and falling
prices, it is but natural for production to be under reported. This is only
human. Therefore it is more than likely that the Malaysian Palm Oil Board will not
receive reports for a full figure of 18 million. We must remember that in the case
of Palm Oil, the data collecting agency has to rely on reports submitted by
producers themselves. There is no independent verification or measurement. In the
case of the USDA the position is also subject to change because their figures are
based on sample surveys and estimation. This is no reflection on the reporting
organisation, just a word of caution. Human nature and human behaviour are the
same in all parts of the world. Malaysian palm oil statistics are a whole lot better
                                         7
than many others we have to deal with ! My own country India is a prime example
of mushy statistics and wishful estimates !

Disconnect between CPO and Crude oil prices?

In the oil year 2008-09 Palm production will definitely grow more slowly and this
should give a measure of stability to CPO prices. However, for the next few weeks,
palm prices are likely to follow the course of crude oil. Strong arguments have
been sent to me by friends in the plantation industry that CPO prices have de-
coupled from crude oil prices. After all, for several decades, CPO prices have
always been at a considerable premium to crude oil. This is a powerful argument
and I have deliberated over it at length. Sadly my conclusion is that the situation
was changed completely by the emergence of Bio Diesel.

Someone had said at that time in 2005 that by mounting the Bio Diesel
Bandwagon, Palm is now riding a Tiger. That ride has been very exciting and
vastly beneficial. The good news is this is a vegetarian tiger who dines on a sparse
but sustainable diet. So from short periods of time, Palm will be under threat, as at
present. Bio Diesel has expanded the Demand Base for Palm oil and it is now
critical to Palm pricing. We cannot escape from that fact.

With those remarks I shall proceed to analyse the Supply Demand prospects for
2008-09.

As you know, my tried and tested method is to estimate how much Additional
Supply will come into the market and to test that against Additional Demand.

Therefore, we can summarize Global Incremental Supply as follows

        000 tonnes               Oct 07 to Sept 08    Oct 08 to Sept 09
        Soya oil                     + 1800               + 1200
        Rape oil                    - 500                 + 1200
        Sun oil                     - 1000                + 1600
        Gn oil                       + 200                  ----
        Cotton oil                   -----                 -----
        Palm oil                     + 4500               + 2500
        Lauric oils                  + 450                + 300
        Total Increase               + 5450               + 6800


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I have not changed these figures from my last paper even though it appears the
supply of Rape oil will exceed my estimates.

Let us now look at Incremental Demand

For 2007-08, Total Demand grew by just over 4 million tonnes. Food demand grew
by about 3 million mt and Bio fuel demand by about 1.5 million mt. Food demand
grew less than expected due to very high prices.

For 2008-09, I expect food demand to grow by between 3 and 4 million tonnes.
Bio fuel demand should grow at about 2.5 million tonnes in view of lower prices. .

Thus the Global Incremental S&Ds can be seen as

000 tonnes                    Oct 07 to Sept 08            Oct 08 to Sept 09
  Supply                            + 5,450                     + 6,800

   Demand                           + 4,000                      + 6,000

However, in the current economic situation we must ask ourselves the question :

What happens to prices if Food Demand does not grow at all in 2008-09? In
recent decades, this has never happened but are we not in an unprecedented
economic mess?

PRICE OUTLOOK

My normal presumption is that the U S Dollar will remain reasonably strong for
the next several months.

I am also presuming normal weather in the major oilseed and grain regions of the
world. On that basis, the S&Ds 2008-09 are quite comfortable.

I believe that vegetable oil prices will continue to be a follower of Nymex WTI
crude oil prices. My original formula that CPO on the BMD should be equivalent
to 1600 Ringgits basis Crude oil at US$ 80 per barrel should still hold good.

Vegetable oil in general and the price of CPO in particular needs to be at a
discount to Nymex crude oil equivalent so that it is used to produce Bio Diesel.

                                         9
That is the only way to expand the market. Therefore, if Crude oil declines to US$
50 per barrel, BMD futures would have to decline to 1200 Ringgits.

It is relevant to note that at 1200 Ringgits we are very close to the All-in cost of
producing CPO for inefficient plantations. My feeling is that we shall go to that
level and test the resolve of the producers.

I have to point out that the Friday 7th November CPO price of 1600 Ringgits
cannot be said to be a bottoming price. In a historical perspective, this level of
price is almost mid-range. It gives a handsome return on the All- in cost of
production. Looking at the macro economic situation, the outlook for demand and
the run of absolutely excellent weather all round the world, it is premature to talk
of a “bottoming out.” These words may not make me very popular with my friends
in the plantation industry but I am afraid I must give you the factual and honest
assessment. Today, fundamentals for Palm oil must include an assessment of
the macro economic situation. The patient is in the sick bay and he cannot be
expected to keep increasing his intake of food.

As regards soya oil, I have grave misgivings for Argentina. I believe we can rely
on the government of Argentina to do its worst and to bring this flourishing
industry down to its knees. The termination of Splash & Dash and the related
problems of bio diesel could push soya oil closer to US$ 500 FOB.

This is likely to remain the outlook for the next few weeks until we know more
about the prospects for the world economy and the state of outside markets.

In the meantime, we all prepare for the RT6 conference of the Round Table on
Sustainable Palm Oil which will be held in Bali later this month.

Conclusion

Commodity trading will continue to be extremely exciting in the months ahead. I
wish the Dalian Commodity Exchange and Bursa Malaysia and all of you the
very best in the coming months.

Good Luck and God Bless




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