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Saturday, October 23, 2021

Explained: Why edible oils are costlier, and the way forward

The prices of six edible oils have risen sharply in the last one year. How much edible oil do Indians consume? What domestic and international factors have caused this price rise, and what is the way forward?

Written by Harikishan Sharma | New Delhi |
Updated: June 2, 2021 2:27:25 pm
Employees fill plastic bottles with edible oil at an oil refinery plant in Mundra (Reuters Photo/File)

The price of edible oil has risen sharply in recent months. We take a look at the reasons, and the options before the government for price control.

How much have edible oil prices risen?

The prices of six edible oils — groundnut oil, mustard oil, vanaspati, soya oil, sunflower oil and palm oil — have risen between 20% and 56% at all-India levels in the last one year, data on the Department of Consumer Affairs website show. The retail price of mustard oil (packed) has increased by 44% to Rs 171 per kg on May 28 this year, from Rs 118 per kg on the same date last year. The prices of soya oil and sunflower oil, too, have increased more than 50% since last year. (See graphic)

In fact, the monthly average retail prices of all six edible oils soared to an 11-year high in May 2021. The sharp increase in cooking oil prices has come at a time when household incomes have been hit due to Covid-19.

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How much edible oil does India consume?

With rising incomes and changing food habits, consumption of edible oils has been rising over the years. While mustard oil is consumed mostly in rural areas, the share of refined oils —sunflower oil and soyabean oil — is higher in urban areas.

Between 1993-94 and 2004-05, monthly per capita consumption of edible oils increased from 0.37 kg to 0.48 kg in rural areas, and from 0.56 kg to 0.66 kg in urban areas. By 2011-12, it had risen further to 0.67 kg in rural areas and 0.85 kg in urban areas. Although comparable figures are not available beyond that, a steady rise in the per capita availability of vegetable oils, through domestic sources as well as imports, indicates that demand has continued to rise. According to the Ministry of Agriculture and Farmers’ Welfare, the per capita availability of vegetable oils in the country has been in the range of 19.10 kg to 19.80 kg per annum during the last five years.

Source: Department of Consumer Affairs

How much is produced domestically and how much is imported?

According to the Agriculture Ministry, the demand for vegetable oils has been in the range of 23.48–25.92 million tonnes between 2015-16 and 2019-20. However, domestic supply in this period has been much lower, in the range of 8.63–10.65 million tonnes.

In 2019-20, domestic availability of edible oils from both primary sources (oilseeds like mustard, groundnut etc.) and secondary sources (such as coconut, oil palm, rice bran oil, cotton seed) was only 10.65 million tonnes against the total domestic demand of 24 million tonnes — a gap of over 13 million tonnes.

Thus, India depends on imports to meet its demand. In 2019-20, the country imported about 13.35 million tonnes of edible oils worth Rs 61,559 crore, or about 56% of the demand. This mainly comprised palm (7 million tonnes), soyabean (3.5 millon tonnes) and sunflower (2.5 million tonnes). The major sources of these imports are Argentina and Brazil for soyabeen oil; Indonesia and Malaysia palm oil; and Ukraine and Argentina again for sunflower oil.

Why are prices rising?

The increase in domestic prices is basically a reflection of international prices, because India meets 56% of its domestic demand through imports. In the international market, prices of edible oils have jumped sharply in recent months due to various factors.

The price of crude palm oil (for the most actively-traded futures contract at the Bursa Malaysia derivatives exchange) was quoted at 3,890 ringgit per tonne on May 25, compared to 2,281 ringgit a year ago. At the Chicago Board of Trade (CBOT), the closing price of soyabean for July delivery was at $559.51 per tonne on May 24, as against $306.16 at this time last year. The prices of soyabean at CBOT and of Malaysian palm oil determine the prices Indian consumers pay for edible oil.

Even the Food and Agriculture Organization (FAO) price index (2014-2016=100) for vegetable oils, an indicator of movement of edible oil prices in the international market, has soared to 162 in April this year, compared to 81 in April last year.

But why are international prices rising?

B V Mehta, executive director of the Solvent Extractors’ Association of India (SEAI), said one of the reasons is the thrust on making biofuel from vegetable oil.

“There is a shifting of edible oils from food basket to fuel basket,” Mehta said, adding there has been a thrust on making renewable fuel from soyabean oil in the US, Brazil and other countries. He said that despite the Covid-19 pandemic, the global demand for edible oils has been high.

Other factors include buying by China, labour issues in Malaysia, the impact of La Niña on palm and soya producing areas, and export duties on crude palm oil in Indonesia and Malaysia.

According to the FAO, reports of “lower than-expected planting intentions and accounts of below-average temperatures and dry conditions in parts of USA’s main soya growing regions cast doubts over the supply prospects for the upcoming 2021/22 season”. Besides, Argentina’s production outlook is conditioned by reports of lower-than-anticipated yields owing to prolonged dryness, says the FAO’s Oilseeds, Oils & Meals: Monthly Price and Policy Update for the month of May.

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What are the options before the government?

One of the short-term options for reducing edible oil prices is to lower import duties. According to SEAI, the effective rate of import duties, including agriculture infrastructure and development cess and social welfare cess, has been 35.75% with effect from February 2, 2021. The effective import duties on ‘refined, bleached and deodorised (RBD) palm oil’ is 59.40%. Similarly, the rate of effective import duties on crude and refined soyabean oil and sunflower oil is in the range of 38.50% to 49.50%.

The policy for import of crude palm oil is “free”, while for RBD palm oil it is “restricted.” If the government reduces import duty on refined palm oil, prices will come down immediately, said an official.

However, the edible oil industry is not in favour of reducing duties. SEAI’s Mehta said if import duties are reduced, international prices will go up, and neither will the government get revenue, nor will the consumer benefit. He felt the government should rather subsidise edible oils and make available these to the poor under the Public Distribution System.

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