As the monthly average retail price of cooking oils increased by almost 60% in a year, the cost of edible oil reached 10-year highs in May 2021, alarming customers already suffering from the economic and health effects of the coronavirus epidemic.
However, a year later, the government is adamant that prices have begun to decline due to local demand and falling global interest rates. Since imports satisfy more than two-thirds of India’s need for edible oil, domestic edible oil prices reflect international pricing.
The cost increase
According to statistics from the industry group Solvent Extractors’ Association of India (SEA), the average cost of crude palm oil at Indian ports in April 2021 was $1,173 per tonne, up from $599 the previous month. Domestic soy oil prices have also increased significantly in the last 12 months.
Government statistics show that groundnut oil retail prices increased by 20% between June 2020 and June 2021. Vanaspati oil prices increased by 46%, while mustard oil prices increased by about 50%. Palm oil and sunflower oil prices both increased by approximately 60%.
Why prices for edible oil are expected to rise again
Prices for edible oil are once again skyrocketing after a brief respite. The cost of Malaysian palm oil futures reached a record high on February 23 as tensions between Russia and Ukraine grew. The two countries are the biggest producers and exporters of sunflower oil, so a conflict between them would restrict supplies and drive up costs. India would be affected more severely than other nations since 90% of its sunflower oil is imported from Russia and Ukraine.
“The market for commodities is ablaze. According to B V Mehta, executive director of the Solvent Extractor’s Association of India, the price of palm oil increased by $40 only today.
Since the start of the epidemic, the price of edible oil has been steadily rising internationally and in India. The price rise has been so rapid that the Indian government has had to implement several steps to control it.
However, once the supply of edible oils like palm oil and sunflower oil is halted, the government’s current efforts won’t be sufficient. Continue reading to see what caused the 2021 increase in oil prices, how government actions slowed the rise, why another growth is expected, and how this would affect the FMCG sector and end users.
The market for edible oils affected by war
60% of the world’s sunflower oil production and an astounding 76% of exports are produced in the Black Sea area of Russia and Ukraine.
Vegetable oil prices have been rising due to the loss of shipments from Ukraine, the leading exporter of sunflower oil in the world, due to port blockades and drought in Argentina, the leading exporter of soybean oil.
Indonesia’s restriction on exporting palm oil
A decrease in sunflower availability increased the demand for other edible oils. Following this, Indonesia declared a restriction on palm oil exports to safeguard domestic supply. It sent shockwaves across global markets amid worries that it would further fuel food inflation.
Up to 60% of the palm oil supply, which continues to be the most popular edible oil worldwide, originates from Indonesia.
This action increased worries about already low supplies of alternative vegetable oils, which caused soybean oil prices to jump to record highs.
Later, Indonesia explained that the export prohibition only applied to shipments of refined, bleached, and deodorized palm olefin, excluding exports of crude palm oil. This provided some respite.
impact on the edible oil industry
According to a World Wild Fund assessment, approximately 50% of packaged goods include palm oil. The oil is used to manufacture shampoo, noodles, cookies, margarine, soap, and marzipan. Therefore, any increase in palm oil price will result in higher raw material costs for these goods.
Since cosmetics are made with sunflower oil, the cosmetics business has also been impacted. Prices of soybean and canola oil may increase further due to a shortage of palm and sunflower oils.
Companies have tried to adapt to the available options, for example, by reworking recipes to use soybean or palm oil. Rapeseed oil, formerly used in the biodiesel industry, is now used in food.
Due to a lack of sunflower oil, FMCG behemoth Unilever has changed several recipes to call for rapeseed oil instead of sunflower oil. Given the soaring input prices, the decision is expected to result in savings.
Governments are also offering support to consumers in adjusting to these changes. For example, France is giving businesses that have replaced sunflower oil a six-month opportunity to amend product labels to reflect recipe modifications. Similar issues affect retail end-users of cooking oil as well as business customers.
Leading supermarkets are limiting the number of cooking oil bottles that customers may purchase at once. One may only buy three oil bottles at Tesco and two each at Waitrose and Morrisons. Furthermore, the Danish grocery network has restricted customers to three bottles of edible oil. Meanwhile, the Norwegian supermarket chain Rema 1000 is contemplating reintroducing the sale of palm oil, which it had previously forbidden due to environmental concerns.
The market prospects for edible oil
Indonesia’s current export embargo on palm oil is anticipated to temporarily solve the country’s inhabitants’ high costs and supply problems. Since Indonesia only uses less than 40% of its yearly palm oil production, the prospect of a longer-term absolute ban on palm oil exports does not appear to be a viable alternative.
However, fast recovery in soybean and sunflower oil supply is doubtful, given the ambiguity surrounding Argentina’s climate and the conflict in the Black Sea region.