Mumbai, March 9 It is that time of the year when major players in the global vegetable oil market congregate in Kuala Lumpur for the palm oil price outlook conference organised by Bursa Malaysia.
Between March 2008 and March 2009, commodity markets have undergone tectonic changes. Energy, metals and agriculture that were riding the crest of a price boom a year ago find themselves nearly in the dumps now.
The collapse in prices happened almost dramatically in the second half of 2008 and is continuing into the first quarter of 2009. Many market participants were caught completely unawares, even as the world, and more specifically the industrialised western nations, were fast slipping into sharp slowdown and finally into recession. Currently, there is no knowing whether and when the market would bottom out and growth in demand would resurface.
Vegetable oil market has not been an exception. From the record prices of $1,300-1,700 a tonne for major oils almost a year ago, the market is today just about a third of its peak. The irrational exuberance that marked the bull-run has given way to despondency. There is now the fear of the unknown, of an uncertain future.
Growth concerns
Over the last six months, global growth concerns have remained the focus of market attention. Growth in consumption demand has decelerated considerably, if not evaporated. As a result, inventories are piling up. There has been a sharp contraction of liquidity. Currently cash is king. Speculators holding long positions until mid-2008 quickly exited the market. Not only has there been long liquidation, indeed, there has been aggressive shorting. All these have combined to force prices down.
Many analysts and commentators who even as late as April/May 2008 almost guaranteed a continued bull run in palm oil must of course be feeling acutely embarrassed by the developments in the second half of the year. This simply underscores the dangers of getting carried away by euphoric market conditions. Like the game of cricket, commodity markets are known for their glorious uncertainties.
There is also risk in sticking ones neck out to forecast agricultural commodity prices beyond 3-4 months timeframe. At any time of the year, somewhere or the other in the world, either there is planting or harvesting of some crop or the other. Weather is a hugely uncertain factor. The market is dynamic and constantly evolving. It may, therefore, be foolhardy to talk beyond 3-4 months in the outlook for agricultural commodities.
quarterly reviews
In other words, a quarterly review of prices and market outlook is essential. One of the most recent examples of how awry forecasts and predictions can go, and importantly, how plugging for policy change passes for forecast is provided by developments in India itself. Sometime towards the end of 2008, a scare was sought to be generated within the government circle that the country’s rapeseed/mustard crop would turn out to be disastrous unless the government imposed or hiked customs duty on imported palm oil.
The argument was flawed, and seeing no merit in it, the government did not tinker with the zero-duty regime for crude palm oil. Look, where the rapeseed/mustard crop is today. At about an estimated 70 lakh tonnes, the rapeseed/mustard crop is about 20 per cent or 12 lakh tonnes higher than in the previous year, proving yet again that under Indian conditions, supply response to prices is rather limited.
Clearly, the objectivity of outlook has become a casualty; and increasingly, sectional agenda is pushed in the garb of market prognosis.
Non-fundamentals
Like many markets, the global vegetable oil market is passing through uncertain times. While market fundamentals of demand and supply continue to play an important role in market analysis and price forecast, non-fundamental factors seem to be playing an even greater role in impacting prices.
Currency fluctuations, role of speculative capital, geopolitics and government policies have had an enormous role to play in the commodity market, first to push prices to unprecedented heights and then to dump them into a bottomless pit as it were. Experts at the palm oil price outlook in Kuala Lumpur (March 10-12) would hopefully take a holistic view of the market.
Source : Business Line