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Getting Your Portfolio Oiled

Rahul Oberoi/Money Today   Delhi     Print Edition: September 2011

If you had invested in the various oil and oilseeds in January 2011 in equal proportion, you would have made profits till June. The combination of seven oil and oilseeds - castor seed, cotton seed oil cake, soyabean, refined soya oil, mustard seed, mustard oil and crude palm oil - gave a 3.37 per cent return during January-June 2011. In contrast, the Bombay Stock Exchange Sensex fell more than 8 per cent to 18,845 during the period.

Among the pack, cotton seed oil cake gave the maximum return by rising over 22 per cent, or Rs 213, to Rs 1,178 per quintal during January-June 2011.

These commodities are available on exchanges such as the National Commodity and Derivatives Exchange (NCDEX), the Multi Commodity Exchange, the Indian Commodity Exchange and the Ace Derivatives & Commodity Exchange.

Dilip Bhatia, chief executive officer, Ace Derivatives & Commodity Exchange, says, "In India, the demand for edible oil increases during the festival season due to higher consumption of sweets and snacks. The kharif season will start from October. The market estimates that 15-20 lakh tonnes will be imported till September 2011."

Subhranil Dey, research analyst, commodities, fundamental, SMC Global Securities, says, "The outlook for oil and oilseeds is bright for 2011-12. Soyabean, refined soya oil, mustard seed and mustard oil can see an upward movement after September due to the festival season."

REASONS TO INVEST

The demand-supply gap is creating an investment opportunity in oil and oilseeds. Abhishek Govilkar, assistant vice president, oil complex and cotton, NCDEX, says, "The global edible oil production is growing 3.5 per cent a year while consumption is rising by 4.2 per cent."

The global production of edible oils is 175 million tonnes a year. Palm oil tops with a share of 28 per cent, followed by soyabean oil (23 per cent), rape mustard oil (13 per cent) and sunflower (6 per cent).

"Global oilseed production is growing 2.9 per cent and consumption 3.18 per cent every year. The demand is higher than the supply," says Govilkar.

On the domestic front, India grows approximately 30 million tonnes oilseeds every year, which produce 8-8.5 million tonnes edible oils. The total demand for edible oils in India is in excess of 16 million tonnes a year. According to market experts, the average per capita consumption of edible oils is 13.5 kg per year. It is growing 3-4 per cent a year.

Prices in India are largely influenced by the global markets. Major international players are the United States, Brazil, Argentina, China, Indonesia and Malaysia.

FACTORS TO WATCH...

>> Domestic demand and supply conditions.

>> Production estimates of competing oils and oilseeds.

>> Demand and supply situation in the international markets.

>> Meal demand in the cattle-feed industry

>> Government policies and duty and tariff structure on import of oil and export of meal

>> Prices on international exchanges
"There is volatility in prices in overseas markets the whole year round, which affects the sentiment here. Right judgement about the market movement can give lucrative returns," says Prasoon Mathur, senior research analyst, Religare Commodities.

"As an investor, you should check domestic and international demand and supply conditions, production estimates of oils and oilseeds such as mustard, cotton and crude palm oil and prices of oil and oilseeds on international exchanges like the Chicago Board of Trade and the Kuala Lumpur Commodities Exchange," says Bhatia of Ace Derivatives.

"Oil and oilseeds are among the most liquid counters on the futures exchanges. Soyabean, soya oil, crude palm oil and mustard seed see heavy volumes. This ensures fair price discovery," says Religare's Mathur.

Aurobinda Prasad, head of research at Karvy Comtrade, a commodity brokerage, is also bullish on these commodities. "Other agriculture industries are dependent on products and by-products of the oilseeds complex," he says. For instance, oilseed by-products are fed to animals.

INVESTMENT OPTIONS

Let's take a look at the market dynamics of castor seed, cotton seed oil cake, soyabean, refined soya oil, mustard seed, kachhi ghani mustard oil and crude palm oil individually and try to understand the available investment opportunities.

Castor Seeds: India produces 9-10 lakh tonnes castor seeds annually. India is also the biggest exporter of castor oil. Its share of global trade in the commodity is 70 per cent. Castor oil, extracted from castor seed, and its derivatives have vast applications in the manufacturing of soaps, lubricants, hydraulic and brake fluids, paints, dyes, coatings, inks, cold-resistant plastics, waxes and polishes, nylon, pharmaceuticals and perfumes. Helped by global demand, the price of castor seed rose 14 per cent, or Rs 567, to Rs 4,594 per quintal during January-June 2011. On July 28, it was Rs 5,115 per quintal.

Subhranil Dey of SMC Global Securities says, "The demand in the spot market is strong as exporters are buying to complete their orders. Also, cold and untimely rain had hit production in the last season. The counter may have strong support at Rs 4,600 per quintal and face resistance near Rs 5,600 per quintal."

According to the Ministry of Agriculture, the area under castor seed was 0.91 lakh hectares on July 8, down 27 per cent from 1.25 lakh hactares on the same day last year. Thus, chances are that the output will fall, resulting in a rise in prices.

Soyabean: Soyabean is grown worldwide. It accounts for almost 59 per cent global supply of oilseeds, followed by rapeseed (13 per cent) and cotton seed (10 per cent). The price of soyabean and refined soya oil rose 21 per cent and 45 per cent to Rs 2,292 per quintal and Rs 638 per 10 kg, respectively, between June 2010 and June 2011. However, since the beginning of 2011 till June 30, the price of soyabean fell over 2 per cent, while refined soya oil gained a marginal 0.7 per cent from Rs 633 per 10 kg to Rs 638 per 10 kg.

The combination of seven oil and oil seeds gave a 3.37% return during January-June 2011. In contrast, the BSE Sensex fell more than 8% during the period.
Soyabean prices surged due to La Nina, a weather phenomenon in the Pacific ocean last year that resulted in extreme drought in the United States, Argentina and Brazil, the largest producer. "At the start of the calendar year, it was announced that La Nina would be neutral this year, and that resulted in a correction in soyabean and soya oil prices," says Kunal Shah, head, commodities research, Nirmal Bang Securities.

"Prices of soya oil and soyabean are likely to remain firm on the back of bad weather in the mid-west region of the US and the festival season in India. Soya oil can rise and test the level of Rs 700 per 10 kg and soyabean Rs 2,600 per quintal," says Shah.

According to the US Department of Agriculture, which compiles global data on agriculture, in 2010-11, India's production and consumption of soyabean was 96 lakh tonnes and 106 lakh tonnes, respectively. In 2011-12, the expected figures are 98 lakh tonnes and 101 lakh tonnes, respectively.

Mustard: Mustard seed is a rabi or winter crop. The seeds yield around 33 per cent oil and 67 per cent protein meal.

The price of mustard seed fell around 1.3 per cent, or Rs 38, to Rs 2,870 per quintal during January-June 2011. Kachhi ghani mustard oil rose 4.26 per cent to Rs 630 per 10 kg during the period.

Vinita Advani, research analyst, Geojit Comtrade, says, "Mustard seed futures fell as good weather led to expectation of an increase in acreage. Heavy selling and slack demand was also behind the decline."

"Decline in prices of soyabean also had a bearish impact on the mustard seed market. With a large number of farmers going for rapeseed/mustard, the area under oilseeds increased, taking production to 6.85 million tonnes, as against 5.92 million tonnes last year," says Advani.

"In India, the demand for edible oil increases during the festival season due to higher consumption of sweets and snacks."
Dilip Bhatia
CEO, Ace Derivatives & Commodity Exchange
India is self-sufficient in mustard seed and oil and there is no trade in the commodity. However, India is an exporter of rapeseed oil meal (de-oiled cakes). According to a release from the Solvent Extractors' Association of India, export of oil meals in June was 2.50 lakh tonnes, compared to 1.58 lakh tonnes in June 2010. The export of oil meals during April-June 2011 doubled to 10.72 lakh tonnes compared to 5.36 lakh tonnes during the same period last year.

During April-June, 3.74 lakh tonnes rapeseed oil meal was exported compared to 2.27 lakh tonnes in the corresponding period last year. June exports were 1.02 lakh tonnes compared to 45,000 tonnes in June 2010.

However, there was a huge selloff in kachhi ghani mustard oil contracts from January 2011. During January-March 2011, the oil slipped 10 per cent to Rs 546 per 10 kg. The demand picked up from March. From April 1 to June 30, the price rose 15 per cent to Rs 630. Market experts said the main reason was the seasonal pick-up in demand for pickles, of which the oil and the seeds are an essential part. The prospects look bright in view of the coming festival season.

Advani believes festival demand and the requirement of mustard oil millers may keep mustard seed prices high in the near term.

"They can touch Rs 3,400 per quintal in the next couple of quarters from Rs 2,972 per quintal on July 28," he says.

Crude Palm Oil: Crude palm oil prices dipped around 14 per cent, or Rs 82, to Rs 499 per 10 kg, in the first half of calendar year 2011 on the back of better supply forecast. Due to higher availability, there are chances the commodity can slip from the current levels.

Global palm oil production estimate for 2011-12 is 50 million tonnes, up 6.35 per cent from 47.26 million tonnes in 2010-11. Consumption is estimated to be 49.80 million tonnes, up 5.46 per cent from 47.22 million tonnes in 2010-11.

India produces 30 million tonnes oilseeds every year, which give 8-8.5 million tonnes edible oils. The total demand for edible oils is in excess of 16 million tonnes.
On July 28, NCDEX crude palm oil was trading at Rs 486 per 10 kg. Badruddin Khan, assistant vice president, agriculture, Angel Broking, is positive on the commodity. "Palm oil will trade with positive sentiments as there will be an improvement in demand ahead of the festival season. It may touch Rs 550 per 10 kg in the next few months," he says.

Cotton Seed Oil Cake: Cotton seed oil cake is a by-product of cotton seed obtained after extraction of oil. It is used mainly as cattle feed.

The marketing season starts from October, after which exports pick up and continue till April. Supported by large exports, the prices of cotton seed oil cake soared over 22 per cent to Rs 1,178 per quintal during the first half of calendar year 2011.

"Despite good production last year, continued export demand kept prices high during the first half of the year. The prices are expected to move up from October-November, when export demand rises again, and can touch Rs 1,400 per quintal," says Mathur of Religare Commodities.

So, even as you enjoy the coming festivals, you can keep an eye on the oil counters of the commodity exchanges.

There could be greater celebrations!

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