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Explained | How will decline in edible oil price impact FMCG companies, consumers

Profit margins of top FMCG companies like Hindustan Unilever and Godrej Consumer Products have been under stress for several quarters now on account of a significant jump in the prices of commodities such as palm oil

June 21, 2022 / 12:40 PM IST
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After climbing steadily for several quarters, edible oil prices have finally started to decline, bringing much-needed relief to Fast-Moving Consumer Goods (FMCG) makers.

Edible oils such as palm oil are a key commodity used by FMCG makers like Hindustan Unilever, Marico, Dabur, Godrej Consumer Products, ITC and Tata Consumer Products and the skyrocketing price of the commodity led to inflated input costs for these companies.

Most companies have indicated that they expect inflation to abate towards the second half of the year. Moneycontrol explains what led to the jump in edible oil prices, what has prompted the fall now, how this will impact FMCG companies, and which entities stand to benefit the most. Also, will companies pass on the decline to consumers?

What led to the jump in edible oil prices?

Palm oil prices rose because of a fall in production in major edible-oil producing countries like Indonesia, Malaysia, Argentina, Ukraine and Russia due to unfavourable weather.

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Almost all of India’s palm oil requirements are met by Indonesia and Malaysia. According to ICRA, palm oil makes up about 40 percent of total edible oil consumption in India and 60 percent of it is imported.

Similarly, prices of other edible oils such as soybean rose last year because of dry weather in Argentina, the largest exporter.

Prices of most edible oils had shown signs of stabilising at the start of 2022, but the outbreak in February of the war between Russia and Ukraine, major exporters of sunflower oil, led to even higher prices.

To plug the shortfall in sunflower oil, companies started looking for alternatives, leading to higher demand, price jumps and shortages. As a result, Indonesia, grappling with a shortage in the domestic market banned the export of palm oil, leading to chaos in the market as prices surged to as high as $1,800-1,900 per metric tonne (MT).

What has helped the fall now?

After several quarters, palm oil prices are finally in a downward trend. Palm oil is trading at $1,300 per MT compared to its peak of $1,800-1,900 per MT. The steep reduction in prices followed government intervention. The Indian government late in May scrapped import duties on sunflower oil and soyabean oil.

A lifting of the palm oil import ban by Indonesia and higher availability of sunflower oil, including an improved domestic crop, have also helped.

Following a drop in prices, companies such as Adani Wilmar, which sells edible oil under the Fortune brand, and Mother Dairy, which owns Dhara, have already reduced prices. The maximum retail price (MRP) of Dhara edible oils are being reduced by up to Rs 15 a litre across variants, Mother Dairy said in a recent press statement. Adani Wilmar has slashed edible oil prices by Rs 10.

“Adani Wilmar has reduced the MRP of Fortune refined Sunflower oil’s 1-litre pack from Rs. 220 to Rs. 210 and MRP of Fortune Soyabean and Fortune Kachi Ghani (mustard oil) 1-litre pack from Rs 205 to Rs 195,” the company said.

How will the development impact FMCG companies?

A drop in edible prices, especially palm oil, augurs well for FMCG companies, which incur a significant amount of their input costs on these commodities. Sample this, palm oil accounts for 50-60 percent of input costs in soap. Palm oil and its derivatives are key commodities used in other FMCG products such as skin care products, shampoos, biscuits and noodles.

The cost of several products of daily use had climbed substantially due to inflation in the past year; unable to contain rising costs, FMCG companies passed on the price increase to consumers.

The price increases brought on temporary relief to companies and reinforced their margins but the move took a toll on demand, especially in rural India.

FMCG companies such as HUL reported the first signs of a slowdown in the rural economy in the first quarter of FY22. A sluggish economy made it challenging for these companies to pass on the cost increase to consumers, denting their margins further.

The gross margin of HUL, for instance, contracted by 331 basis points (bps) year-on-year (YoY) in Q4. Dabur reported a 130-bps YoY contraction in gross margin to 47.4 percent due to inflation.

A fall in input prices benefits food and beverage companies such as Parle Products, Britannia, Nestle, and also companies that have a large presence in the personal care segment.

“The sharp correction in palm oil (price) bodes well for many FMCG players, especially HUL, Britannia, GCPL and Nestle,” said Abneesh Roy, executive director, Edelweiss.

“Palm oil has come down from peak levels. Malaysia and Indonesia have become competitive in terms of exports, which bodes well for Indian companies and consumers. We are enthused by this deflation, but need to see its sustainability,” he added.

Will the fall in commodity prices benefit consumers?

Consumers will have to wait a bit longer to see a reduction in the prices of packaged consumer goods.

“The palm oil prices have dropped significantly in the last 20 days and this will definitely have a cool-down effect on input costs. However, we will have to see which direction the prices go in the days ahead. We will have to wait for some time and then take a call on reducing the prices as it is too early right now,” said Amit Kumat, CEO and MD, Prataap Snacks, which sells potato chips, snacks and Indian savouries under the brand Yellow Diamond.

Mayank Shah, senior category head, Parle Products, too, said he does not anticipate a reduction in prices immediately as most companies are yet to factor in the increase in input costs. He also indicated that it is very unlikely that FMCG companies will reduce prices.

Consumer demand in the country hinges on the price of commodities in the months ahead.
Devika Singh
first published: Jun 21, 2022 12:40 pm
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