Edible Oil Price Volatility: Strategies for Stability in 2024-25

The edible oil industry in 2024-25 is poised to experience significant price volatility due to various global and domestic factors. Edible oil prices are influenced by disruptions in supply chains, demand fluctuations, trade policies, weather events, and macroeconomic conditions. India, which relies heavily on imports for its edible oil needs, is particularly vulnerable to these market dynamics, as the country imports more than 65% of its total edible oil consumption. In 2023-24, India imported approximately 14 million metric tons (MMT) of edible oil, including palm oil, soybean oil, and sunflower oil, to meet its demand, which was estimated at 21-22 MMT. The dependency on international markets means that any disruption in global production or supply chain constraints can have a direct and immediate impact on domestic prices.

One of the major contributors to price volatility is the fluctuating supply of Crude Palm Oil (CPO), which accounts for a significant portion of India’s edible oil imports. Indonesia and Malaysia, which produce more than 85% of the world's CPO, have experienced erratic weather conditions, largely due to the El Ni?o phenomenon. These conditions have adversely affected palm oil yields, leading to reduced supply and a spike in prices. Between February and April 2024, CPO prices surged by 15-20%, causing a ripple effect in India, where palm oil is widely used for cooking and food production. The impact of these price increases has been felt across the country, as palm oil is an essential ingredient in several consumer products, and its price influences the overall edible oil market.

In addition to external supply chain disruptions, domestic production challenges have contributed to the volatility in edible oil prices. Soybean oil, which is one of the major edible oils produced domestically in India, has been impacted by erratic monsoon patterns. In 2023-24, India’s soybean production was recorded at 11.5 MMT, slightly lower than the previous year’s output of 12 MMT, primarily due to inconsistent rainfall during the critical sowing months. This reduction in production, coupled with strong global demand, has caused soybean oil prices to rise by around 25% since January 2024. The domestic edible oil industry is thus caught between fluctuating international prices and inconsistent local production, both of which contribute to price instability.

The demand side of the equation is also playing a significant role in driving price volatility. In 2024, China, a major global consumer of edible oils, increased its imports of soybean oil and sunflower oil by 8% as it sought to replenish its stocks following the pandemic-related disruptions. This surge in demand, coupled with ongoing supply challenges, has further driven up prices. Sunflower oil, which has traditionally been one of the more stable segments of the edible oil market, has seen significant price increases in recent months. In India, the wholesale price of sunflower oil increased by over 12% in the first quarter of 2024, largely due to global demand and supply constraints. The geopolitical situation in Ukraine, which is the largest exporter of sunflower oil, has also exacerbated the price volatility. Ongoing tensions between Ukraine and Russia have disrupted Ukraine’s ability to maintain normal export levels, leading to a significant shortfall in the global supply of sunflower oil.

Another key factor contributing to price volatility is the growing use of edible oils in biodiesel production. As countries around the world look for alternatives to fossil fuels, edible oils like soybean oil and rapeseed oil are increasingly being diverted toward biodiesel production. In Brazil and the United States, a substantial portion of soybean oil is now being used for biodiesel, leading to a tightening of supplies for food production. By mid-2024, approximately 40% of the soybean oil produced in the U.S. was being used for biodiesel production, up from 33% in the previous year. This shift in supply allocation has caused a significant surge in soybean oil prices, with global prices rising by 30% between 2023 and 2024. The diversion of edible oils for energy production is expected to continue influencing price volatility in the years to come.

The Indian government has taken several measures to manage the volatility in edible oil prices, including adjusting import tariffs. In January 2024, the government reduced the import duty on Crude Palm Oil from 7.5% to 5% in an effort to curb inflation in the domestic edible oil market. While this move provided some temporary relief, lowering palm oil prices by 3-5%, the underlying global supply constraints soon caused prices to rebound. By August 2024, the landed price of Crude Palm Oil in India had risen to INR 987 per 10 kg, up from INR 760 per 10 kg at the beginning of the year. The Indian government’s tariff adjustments highlight the delicate balance between controlling domestic inflation and responding to global market forces.

In response to these challenges, stakeholders in the edible oil industry are increasingly turning to commodity exchanges to manage risk and stabilize prices. Commodity exchanges, such as the National Commodity and Derivatives Exchange (NCDEX), offer futures contracts that allow market participants to hedge against price fluctuations. By locking in future prices, processors, refiners, and traders can protect their margins from sudden price spikes or declines. This risk management strategy is particularly valuable for small-scale refiners, who often face tight margins and fluctuating procurement costs. Since the start of 2024, procurement costs for raw edible oils have increased by an average of 18%, putting additional pressure on oilseed crushers and refiners. Futures contracts provide these businesses with a tool to manage their input costs and ensure more stable operations.

In addition to futures contracts, currency risk is another major concern for edible oil traders. The depreciation of the Indian Rupee against the U.S. Dollar has further complicated the price volatility in edible oils. Since edible oils are primarily imported in USD, fluctuations in the exchange rate can significantly impact the cost of imports. In the first half of 2024, the Indian Rupee depreciated by 5% against the U.S. Dollar, adding another layer of risk for edible oil traders. As a result, the cost of Crude Palm Oil imports rose by an additional 3-4% due to currency depreciation in June 2024. This, in turn, pushed up domestic prices further. To mitigate the impact of currency fluctuations, traders are increasingly using currency futures and options to hedge their exposure to exchange rate volatility.

The broader edible oil market also continues to face pressure from the global shift toward biodiesel production. In Europe, rapeseed oil is widely used as a feedstock for biodiesel, and rising demand for biodiesel has contributed to tightening supplies of rapeseed oil for food production. In India, rapeseed oil prices have risen by 15% between January and September 2024, despite a 6% increase in domestic rapeseed production to 12 million metric tons. The increase in biodiesel production is expected to continue influencing edible oil markets as countries pursue renewable energy targets. Stakeholders in the edible oil industry can manage this exposure by using commodity exchanges to hedge their positions in related products, such as rapeseed oil and soybean oil futures.

The edible oil market in 2024-25 is likely to remain volatile, driven by a combination of global supply disruptions, rising demand, government interventions, and currency fluctuations. Stakeholders must adopt proactive risk management strategies to navigate these uncertainties. Commodity exchanges play a critical role in providing market participants with the tools to manage price risks, stabilize costs, and ensure profitability. By leveraging futures contracts and other derivative products, businesses in the edible oil sector can better manage their exposure to market fluctuations and maintain long-term stability.

Furthermore, government policies aimed at promoting domestic edible oil production could help mitigate some of the risks associated with high dependency on imports. Initiatives to improve oilseed yields, increase the area under cultivation, and invest in processing infrastructure can help reduce India’s reliance on imported edible oils and stabilize domestic prices. Over the long term, a focus on increasing domestic production, along with effective risk management strategies, will be essential for ensuring the sustainability of the edible oil sector in India.

As the edible oil market continues to evolve, businesses will need to remain agile and responsive to global and domestic market trends. Effective use of commodity exchanges, combined with government support for domestic production, will be key to navigating the challenges and opportunities in the edible oil complex in 2024-25.