Edible Oil to the Moon

Edible Oil to the Moon

In today's Finshots we look at why edible oil is so damned expensive these days


Business

The Story

Edible oil is witnessing a price surge like no other. Palm oil, sunflower oil, soybean oil, you name it — Everything is now more expensive. In some cases, prices have increased by as much as 100% compared to March last year. And this has broad implications for everyone, including you. For starters, the average Indian consumes about 19 kgs worth of edible oil each year. It’s unhealthy sure. But it can also weigh heavily on your pockets when prices increase disproportionately. Besides, people use vegetable oil for all kinds of applications. Restaurants use it to make fries. Cosmetic companies use it to make perfumes and consumer companies use it to make soap. So when prices of vegetable oil go on a rampage, it affects a whole host of products we use on a daily basis.

So this is a big deal and it’s important for us to see why it’s happening.

To do that, let’s start with palm oil — something that’s ubiquitous in India. It’s relatively inexpensive, does a half-decent job, and is available in abundant quantities, thanks to Malaysia and Indonesia. These countries have been at the forefront of introducing a palm oil revolution over the past few decades. They cleared vast swathes of land, grew palm trees in abundance, made it financially viable to process and export their products, thereby solidifying their spot at the top. In fact, the two countries put together account for about 85% of the global production, and India imports a large chunk of this produce. By one estimate the country imported 9 million tonnes of palm oil in 2019. That’s a lot of money to spend on vegetable oil and while we have tried to become self-sufficient in some ways, we still have a long way to go before becoming truly “Atma Nirbhar.” And that means we can’t always rein in prices. Sometimes they spiral out of control and there’s very little we can do, which is kind of what’s happening right now.

As this article from Reuters points out  “The palm-oil industry in Malaysia, the world’s second-largest producer and exporter of palm oil, faces a worsening of its chronic labor shortage. It relies on foreigners for 70% of its plantation workforce and almost all its field work, especially people from Indonesia and Bangladesh. Thousands have left the plantations for home as borders closed during the COVID-19 pandemic, adding pressure in an industry where 2% to 3% of foreign workers leave each year. “A major concern is that the peak crop production season is around the corner in a few months from now and the palm oil industry is crucially dependent on the availability of workers,” said the association, which represents owners of small and midsize plantations.”

This was back in June 2020 and the situation hasn’t exactly improved since then. Elsewhere, sunflower oil has witnessed an uptick in prices for entirely different reasons. Ukraine and Russia — two countries that account for about 50% of the global sunflower seed oil production have witnessed drought-like conditions in the recent past. And since we import about 2.4 million tonnes of sunflower oil each year we had to pay a premium once again since there wasn’t a lot of oil left to extract in the first place.

Meanwhile soybean oil, something that’s used interchangeably with palm oil has also been in short supply. And you could explain this anomaly by looking at Brazil — one of the world’s top exporter of soybean. Like Ukraine and Russia, Brazil saw unusually dry weather last year and farmers simply couldn’t grow their produce on parched soil. They had to wait and defer planting the crop. And as they continued to bide their time, China began hoarding supplies in a bid to stockpile its reserve buffers. The motive was simple — Extended global lockdowns had the capacity to disrupt supply chains once again. They wanted to make sure they had enough soybeans to fully meet their domestic demand . So with supplies being diverted to the Red Dragon, several importers had to pay a higher price to keep importing this stuff.

And when you begin connecting these dots you can see why there’s been a steady increase in the price of edible oil across the board. The Indian government at one point did cut import duty, but it did little to temper prices. So yeah, unless we become relatively “Atma Nirbhar” or these global dynamics change for good, we will likely be at the mercy of these external forces.

That's it from us today.

Until next time...

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