While India does not export edible oil in any significant measure, actual imports during the November 1997-April 1998 are placed at 0.4 million tonnes. In the context of the overall scenario of oil availability, these volumes cannot be considered so significant that they coulddetermine vegetable oil prices in the Indian market.

The conclusion, therefore, is inescapable that the volatile behaviour -- mostly northward -- of vegetable oil prices this year is largely speculative and irrational, rather than one based on the demand-supply balance. A brief review of price behaviour since the beginning of the current oil year might help.

Groundnut oil was quoted at Rs 34,425 a tonne at Moorat trading on Diwali (November 1, 1997). Imported RBD palmolein that day was quoted by direct importers at Rs 27,000, though quotes by resellers were even lower by Rs 400/500 per tonne. Malaysian RBD palmolein was offered as follows: November US $545, December $550, January/February/March 1998 at $555, all f.o.b. Malaysian ports. As against this, imported soya degummed oil and imported crude sunflower oil were quoted at US $680 c&f Indian ports for November/December shipment.

There was practically no trading in any of these oils as the undertone of the market was weak. Importers were not keen onfresh imports as the festival season was already behind them and new crop crushing was in full swing.

There was an easy tendency in the oils market in India throughout November and December 1997. But in the beginning of January 1998 the market witnessed a historic sharp rise, especially in soya oil and imported palmolein.

Refined soya oil shot up to Rs 31,800 against Rs 26,000 per tonne during the second half of December. Similarly, groundnut oil rose to Rs 38,000; RBD palmolein to Rs 30,400. Chicago futures were firm, where RBD palmolein January shipment was quoted at $572.50; February/March at $575; April/May/June at $572.50 : all f.o.b. Malaysian ports.

Subsequently, February, March and April displayed a firm trend in the oil prices, leading to a steady rise, with end-April quotes being: groundnut oil Rs 39,000, and RBD palmolein Rs 37,000. The Malaysian quotes were: RBD Palmolein May $707.50; June $690; July/August/September $665, October/November/December $645, all f.o.b. Malaysian ports. Duringthe first half of May, the quote for groundnut oil has been hovering between Rs 40,000/42,000 per tonne.

It can be seen that the current oil year began on a perfectly happy note amidst expectations of an easy supply situtation. However, as soon as Indonesia imposed, in the last week of December 1997, a three-month ban on all exports of palm oil and olein to arrest depleting stocks and ensure stable prices for its domestic consumers in the wake of the Asian financial meltdown, tremors were felt in the international vegetable oil market.

This was not surprising, because palm oil and derivatives now account for almost 40 per cent of world vegetable and marine oils trade, other notable oils being soya (22 per cent), sunflower (12 per cent) and rape oil (9 per cent).

The apparent shortage of vegetable oils in the world market was paradoxical because the current year is, in fact, a record one for oilseeds production. Output of the major oilseeds has increased from 230 million tonnes in 1994 to over 280million tonnes in 1997-98, a 25 per cent growth in four years. Latest estimates from the Food & Agriculture Organisation (FAO) project oilseeds production at 283 million tonnes in 1997-98, a sharp rise from the 262 million tonnes recorded for the preceding two years. The FAO has also forecast an increase of four-five per cent in oil production, which yields a global output in excess of 100 million tonnes. In spite of this favourable trend, the oil market has displayed a distinctly bullish tendency as if there is a real shortage of supply. This calls for an explanation.

Fundamentally, a combination of two major factors explains this paradox. The increase in oilseeds supply is largely accounted for by a bumper production of soyabeans the world over. Soya, being a seed with only 17-18 per cent oil content, could not contribute sufficiently to satiate the growing demand for cooking oils though it threw up an abundance of meal. Secondly, the economic situation in south-east Asia dealt a heavy blow to palm oilsupplies in the international market. Initially, Indonesia imposed a ban on palm oil exports, which was recently relaxed, but only after the imposition of a 40 per cent export tax. To compound the miseries of the oil market, the social unrest and riots in major Indonesian cities such as Jakarta, Surabaya and Medan have totally paralysed the movement of essential food articles, including oils, within the territorial limits as well as outward to ports.

Palm oil supply has thus got concentrated to an alarming degree in one country, Malaysia, as the turmoil in Indonesia forces reliance on a single source, namely depleting Malaysia stocks. Incidentally, palm oil production has turned out to be worse than expected after a prolonged drought in Indonesia and Malaysia, accounting for a fall in output to the extent of 0.5 to 0.8 million tonnes. Malaysia has every incentive to capitalise on the oil deficit scenario, but, according to some analysts, increased supply later in the year would ease the situation. On theother hand, one cannot be sure about this happening in view of the impact of the unprecedented smogs and droughts on fruiting and oil yields in the coming year. The alternative would then be a curtailment of palm oil consumption simultaneously with a further diversion of demand to the soft oils.

Once again, the behaviour of China as an importer of palm oil could be a major factor. If China decides to cut its imports substantially, either by resorting to alternate oils or by an absolute reduction in its consumption in response to higher prices, the entire picture could change.

In this fairly complex scenario, India must review its stance as a major importer next only to China. We have several options depending on our goals and objectives. To begin with, it should be understood very clearly that in a free market economy, it is not possible to aim at supplying cooking oils to the consumer at a benchmark "affordable" price.

Incidentally, our experience with the public distribution system (PDS) has alreadytaught us that when there is a substantial difference between open market and PDS prices, PDS stocks have a tendency to vanish even before they reach the right consumer. It is doubtful if a foolproof delivery and distribution system can ever be ensured given the size of the country.

As has been already observed, despite there being a comfortable demand-supply balance overall, rising prices of imported oils have caused unwarranted distortions in the domestic market. For example, the so-called premium on market leader groundnut oil is getting eroded and the spread between the prices of other vegetable oils and groundnut oil is fast narrowing down. It is hardly a secret that imported oils are used to a considerable extent for mixing with the premium groundnut oil.

As suggested in this column (Commodity Watch: March 30), if the rise in edible oil prices is causing great concern, the government could adopt a flexible approach with regard to import tariffs. The announcement of an appropriate reduction inimport duty could take the wind out of the sails of speculators and bring about a desired correction in prices. As a matter of fact, even rumours of a possible reduction of import duty by 10 per cent have put the brakes on rising oil prices and even brought about a suo moto decline.

However, flexibility in import tariffs, if planned, will have to be prefaced by a clear and unequivocal statement of objectives. Namely, this is solely for the purpose of bringing about a salutory decline in domestic oil prices, so as to make the essential cooking medium affordable for the common man. If the duty reduction gets discounted or absorbed entirely or even to a large extent by an increase in the price of imported oils, that would defeat the very purpose of reduction. In that case, the government should make a clear announcement that it will have no hesitation in restoring import duties to their original level should duty reduction fail to show a corresponding decline in oil prices to the benefit of the consumer. Thestate cannot afford to lose the revenue, besides incurring a higher foreign exchange outgo on imports through increased prices -- if that is what the reduction in import duty is going to result in.

The other alternative would be to allow the forces of demand and supply to find a price equilibrium and let consumer resistance be the ultimate force to put the brakes on rising oil prices. In fact, this is already happening, as can be seen from a salutory arrest of the rise in groundnut oil prices above Rs 43,000 per tonne. After all, when one looks at the overall price behaviour of essential commodities of mass consumption such as cereals, pulses, sugar, etc, the price increase in vegetable oils does not appear to be so stark, or for that matter out of tune with the prevailing rate of inflation. If anything, there has been a decline in real prices of vegetable oils after discounting the annual rate of inflation and rise in the consumer price index. There may, therefore, be no need to panic on account of edibleoil price swings. At least, not at this point.

(The author is secretary of Groundnut Extraction and Export Development Association (Geeda). The above views are his personal ones and not necessarily those of the organisation he represents.)