Market Survey

CMYK

BY: DR I. SATYA SUNDARAM

EDIBLE OILS: PRODUCTIVITYHOLDS THE KEY

India definitely has a favourable climate for growing a variety

of oilseeds. However, its yields are about half of the world

average, making it one of the leading importers of edible oils

to cater to its vast thriving domestic market.

The edible oil economy of

India is beset by a

number of problems

that have hindered its

ability to meet rising

demand, as apparent from poor yields

and declining production. The pro-

ductivity of oilseeds is just 900 kg

per hectare, putting India's oilseeds

yields among the world's lowest at

about half of the world average. The

total area under oilseeds production

in the country is around 26 million

hectares and less than 25 per cent of

the oilseeds area is irrigated. While

the demand projections of the coun-

try by 2010 have been estimated

around 15.6 million tonnes of edible

oils, stagnating domestic oilseeds

production have ensured that India

will remain an important global im-

porter of edible oils in the foresee-

able future.

Current scenario

Currently, India accounts for 7.4

per cent of world oilseeds output,

6.1 per cent of world oil meal pro-

duction, 3.9 per cent of world oil

meal exports; 5.8 per cent of world

veg oil production; 11.2 per cent of

world veg oil imports and 9.3 per

cent of the world edible oil con-

sumption.

Rapeseed oil (1.9 million tonnes),

groundnut oil (0.9 million tonnes),

and soybean oil (0.9 million tonnes)

are the major edible oils produced in

the country. The country also pro-

duces cottonseed oil, sunflower seed

oil, rice bran oil, coconut oil, sesame

oil and castor oil.

A growing population with var-

ied dietary habits and steady eco-

nomic growth have led to rising

standards of living, pushing con-

sumption and as a corollary there

is a thriving domestic market for

edible oils. But oilseeds production

has remained stagnant at around

25 million tonnes which amounts

to eight million tonnes of edible oils.

Edible oils consumption increased

from around six million tonnes in

the early 1990s to around 11 mil-

lion tonnes in recent years. The

Market Survey

CMYK

strong demand coupled with our in-

ability to meet it, has ensured In-

dia’s dependence on import to ca-

ter to the domestic consumption,

which is over 40 per cent, making

it a leading importer of edible oils

in the world.

Total edible oil consumption in

the country was expected to increase

by two per cent to 12.5 million tonnes

in 2006-07 compared with 12.3 mil-

lion tonnes in the previous year. The

per capita consumption, however, is

likely to remain unchanged at 11.16

kg.

India has the potential to pro-

duce over 12 lakh tonnes of rice bran

oil per year. The current production

is around seven lakh tonnes out of

which refined rice bran oil is just 1.5

to 2.0 lakh tonnes.

There are about 15,000 oil mills,

over 700 solvent extraction plants,

625 refineries and nearly 250

vanaspati (hydrogenated oil) units

spread across the country. They con-

tribute to the supply pool of around

12 million tonnes of various oils and

about 20 million tonnes of various

oil cakes/extractions that are used

as animal feed.

According to the fourth advance

estimates released by the agriculture

ministry in July 2007, oilseeds out-

put in 2006-07 may be at around

23.88 million tonnes, down 14.65 per

cent from final production estimates

of 27.98 million tonnes in 2005-06.

The world oilseeds production

stood at 387 million tonnes in 2005-

06, and 371 million tonnes in 2004-

05. Similarly, world vegetable oils

production was 113.7 million tonnes

in 2005 against a forecast of 113.7

million tonnes in 2010.

Edible oils imports

Edible oils imports declined by

14 per cent in 2005-06 (November

to October) to 4.42 million tonnes

from 5.0 million in 2004-05. It is

attributed to a high level of oilseeds

output at 27.7 million tonnes in

2005-06.

In the total imports basket for

2005-06, imports of refined oil were

reduced to 0.13 million tonnes from

0.45 million tonnes in 2004-05. With

the government raising the cap on

carotenoid content at 500 particle

per milligram (ppm) on crude

palmolein, importers refrained from

buying it from international mar-

kets. As a result, its imports in 2005-

06 were reduced to just 55,804 tonnes

from the 2004-05 level of 1,86,000

tonnes.

Total imports of pal-based oils

were reduced to 0.25 million tonnes

in 2005-06 from 0.30 million tonnes

in 2004-05. Of course, crude palm oil

imports maintained at around 0.23

million tonnes in 2005-06.

Importers purchased 0.1 million

tonnes of crude sunflower oil in 2005-

06 out of the tariff related quota of

0.15 million tonnes for which they

had to pay 45 per cent import duty

against the normal duty of 78.2 per

cent. In 2005-06, the country im-

ported 0.17 million tonnes of crude

soy oil as against 0.2 million tonnes

in 2004-05.

Vanaspati imports into the coun-

try were placed at 0.3 million tonnes

in 2005-06, up from 0.2 million

tonnes in 2004-05. With this, the

overall imports of vegetable oils into

the country dipped by 0.22 million

tonnes in 2005-06.

In 2005-06, oil year (November

to October), the country imported

2.4 million tonnes of crude palm oil

(CPO). In November-March 2006-07,

about one million tonnes of CPO

were imported.

Given the decline in oilseed pro-

duction, edible oil imports in 2006-

07 (November-October) may touch a

level of about 55 lakh tonnes. The

year witnessed a shortfall in edible

oil supply from domestic sources to

the tune of 8 lakh tonnes.

The import bill on account of ed-

ible oil is estimated to touch Rs

180,000 million in 2006-07 against

Rs 150,000 million in the previous

year, and Rs 100,000 million the year

before that.

In the first nine months of the oil

year, November 2006 to July 2007,

India’s imports increased eight per

cent to about 33 lakh tonnes, against

30.5 lakh tonnes in the correspond-

ing period of the previous year. Im-

ports increased anticipating higher

demand.

Price trends

At the international level, palm

oil price may rise as high as $1000

a tonne in 2008 because of increas-

ing demand and a shortfall in sup-

plies of vegetable oils. Vegetable oils

are increasingly being used to make

biodiesel as crude oil prices more

Table I

Domestic Production of Various Edible Oils(in thousand tonnes)

2002-03 2003-04 2004-05 2005-06 2006-07*

Soybean oil 580 1,000 900 1,140 1,200

Cotton oil 390 520 660 755 900

Groundnut oil 740 1,200 970 950 700

Sun oil 475 450 470 620 600

Rape oil 1,185 1,800 1,570 2,250 1,950

Sesame oil 150 200 200 125 120

Coconut oil 350 400 400 400 380

Rice bran oil 550 600 610 660 700

Others 180 200 200 200 225

Total 4,600 6,370 5,980 7,100 6,775

*Estimated

Market Survey

CMYK

than tripled to a record in five

years. In fact, US farmers have

switched to corn to meet demand

for ethanol.

The government has not been

able to control edible oil prices in

spite of import duty reduction. On

13th April 2007, the government an-

nounced a 10 per cent cut in customs

duty on palm oil. The landed price of

CPO (crude palm oil) rose by Rs 2000

to Rs 43,000 per tonne and that of

refined, bleached deodorised (RBD)

palmolein by Rs 700 to Rs 46,300 per

tonne.

Anticipating higher off take by

India in the wake of the import duty

cut, FOB (free on board) Malaysia

price of RBD palmolein moved up

$25 to $680 per tonne while FOB

Indonesia price of CPO increased to

$630 per tonne in April 2007. The

prices of palm oil and soy oil in-

creased by 40 to 50 per cent during

the eight month period—November

2006 to July 2007.

Areas of concern

One of the main factors behind

insufficient production of oilseeds in

India is its domestic price support

programme that generally favours

production of other crops like wheat

and rice. The oilseeds crops are thus

not as remunerative as their com-

peting alternatives. Hence, they are

cultivated on marginal lands. Most

improved varieties of oilseed crops

are inherently not widely adoptable

and are also susceptible to stress fac-

tors such as drought, excess mois-

ture, salinity, disease and pest at-

tack. Consequently, the high risk fac-

tor dissuades farmers from using fer-

tilisers and plant protection chemi-

cals.

The farmers too are generally re-

luctant to invest in fresh seeds un-

like more lucrative crops like wheat

and rice.

In addition to low yields at the

farm level, India's oilseeds sector

is also hampered by the fact that a

large number of processing units—

oil mills, solvent extraction or re-

fining—have relatively small in-

stalled capacities and hence

suffer dis-economies of scale. Moreo-

ver, crushing of two major

oilseeds—groundnut and soybean—

is reserved for the small-scale sec-

tor, that are not capable of process-

ing this large share of edible oils’

production. Investments in mod-

ernisation of plants are also inad-

equate.

In 2006, the government reduced

the duty on imported crude palm oil

to 70 per cent from 80 per cent, and

on refined palm oil to 80 per cent

from 90 per cent to check price rise.

The concessions were valid up to 31st

December 2006, but the government

extended the duty concession indefi-

nitely. This again, may not ensure

reasonable returns to farmers.

The domestic vanaspati oil indus-

try is in the doldrums. There is ram-

pant smuggling of vanaspati from

Nepal, over and above the permitted

quantity of duty-free imports under

the bilateral free trade agreement

between the two countries. At least

1.5 lakh tonnes of vanaspati is smug-

gled into the country. The duty-free

import quota under the agreement

is only 1 lakh tonnes. Many vanaspati

units, especially in the eastern re-

gion, are closed. No wonder, the

vanaspati industry is operating at

20 per cent capacity.

There is also an inverted duty

structure on vanaspati and imported

crude palm oil—the main material

for vanaspati production—created as

a result of trade agreements. While

the domestic industry has to pay an

import duty of 46.35 per cent on

crude palm oil, its key raw material

Table II

World Major Oilseeds Yields During 2006-07

Country Soybean Rapeseed Groundnut Cotton Sunflower seed(tonnes/he) (tonnes/he) (tonnes/he) (kg/he) (tonnes/he)

USA 2.89 1.36 3.12 894 1.27

Germany 3.71 — — — —

Brazil 2.67 — 2.17 1,197 —

Argentina 2.68 — 2.50 — 1.74

Paraguay 2.35 — — — —

France — 3.02 — — 2.25

Russia — — — — 1.19

UK — 3.30 — — —

Pakistan — — — 636 —

China 1.74 1.74 3.04 1,241 1.73

India 0.95 0.92 0.98 494 0.60

Canada 2.86 1.72 — — —

World 2.43 1.75 1.53 727 1.23

Most improved varieties of oilseed crops are inherently not

widely adoptable and are also susceptible to stress factors

such as drought, excess moisture, salinity, disease and pest

attack. Consequently, the high risk factor dissuades farmers

from using fertilisers and plant protection chemicals.

Market Survey

CMYK

for vanaspati manufacture, the im-

port of the finished production from

neighbouring countries carries no

duty. As a result, 15 kg indigenous

vanaspati costs Rs 832, while the

same quantity if imported costs only

Rs 730.

Measures needed

The government has identified

nearly one million hectares of land

suitable for palm cultivation. But

for a number of reasons, and par-

ticularly because the states con-

cerned are yet to recognise palm

tree growing as ‘plantation’ exer-

cise, investments in the sector are

shy. The area under the crop re-

mains at around 80,000 hectares.

Though around 1995, the govern-

ment had identified eight lakh hec-

tares of land for oil palm cultiva-

tion, till date only around 80,000

hectares have been brought under

cultivation. This is sad, because rise

in palm cultivation can halve our

edible oils imports. In fact, we have

favourable conditions for plantation

too. For instance, in Andhra

Pradesh, specially the Godavari dis-

tricts, the yield is high at 4 to 4.5

tonnes a hectare.

A policy measure that can boost

cultivation of oil palm is its declara-

tion as a plantation crop in India.

Once this is done, around 1000 hec-

tares can be put under cultivation in

a contiguous manner which is not

currently possible as most of the land

is owned by marginal farmers. These

plantations could have a cooperative

structure with around 1000-1500

farmers forming one unit. This would

lead to better utilisation of irriga-

tion, fertilisers, nutrients and adop-

tion of scientific methodologies.

We also have to fully utilise the

potential of rice bran oil industry.

There is an urgent need to exempt

all by-products of this industry from

the levy of excise to encourage and

support production of refined rice

bran oil.

Solvent Extractors’ Association

of India (SEA) has appealed to the

centre to focus on increasing pro-

ductivity in the oilseeds sector. It

has suggested that the price of veg-

etable oils be maintained through

appropriate duty structure and fo-

cus on increasing productivity rather

than expanding area under oilseeds

cultivation. It has also suggested a

larger allocation of funds for raising

farm productivity for the develop-

ment of high yielding varieties of

seeds, better post harvest technol-

ogy and irrigation facilities along

with encouragement to private seed

companies to produce better seed

varieties.

Oilseeds processors now realise

the importance of genetically modi-

fied (GM) seeds that have proved

their worth in the cotton sector. They

want to utilise locally developed seeds

to increase yield without any signifi-

cant enhancement in area under oil-

seeds cultivation.

The government is also keen on

implementing mandatory labelling of

edible oil packages. The industry is

willing to label all packaged edible

oils including small pouches, pro-

vided the government lays down

proper guidelines. As of now, if the

Sunflower seeds: Need to improve yield

value addition is roughly 100 per

cent, the entire lot of packaged oils

have to be labelled under one specifi-

cation. But, if the value addition

range differs, say between 110-120

per cent, there is no labelling guid-

ance according to existing guidelines.

The SEA has also urged the gov-

ernment to discourage the use of ed-

ible oils, including rapeseed oil, palm

oil and soybean oil, for biofuel as it

would lead to price rise of edible oils.

In order to keep edible oils prices

under control, the government is

mulling duty cuts of upto 15 to 20

per cent. It may also take other

measures like limiting futures trad-

ing to control prices. The govern-

ment has already cut import duty

on edible oils five times during

2006-07, to check domestic prices

and inflation. The latest cut has

brought down the levy on palm oils

to 40 per cent from 50 per cent and

on soy oils to 40 per cent from 45

per cent. However, the solution lies

not in reducing duties, but in in-

creasing the yield to 1.7 tonnes a

hectare from the current level of

900 kg a hectare.

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