Curbs on Soybean Futures may be counterproductive

Soybean going beyond Rs.10,000 a quintal? Maybe it's possible in the near term. It is up nearly 120% so far this season that started on Oct 1.  But that’s not a big surprise when the edible oil index posted over 120% rise, as gauged by the Food & Agricultural Organization of United Nations two months ago. Not just the edible oils, but surge in food prices has been relentless across the world leaving a large population deprived of food.

Drought in Brazil has been hurting crops from corn to coffee, Argentina is grappling with water availability and vegetable oil production growth has slowed in Southeast Asia due to weather and Pandemic-led disruptions. Record surge in Covid cases in Indonesia, the world’s largest palm oil producer and exporter is fuelling further the rally in edible oil and oilseeds. On the benchmark US markets, CBOT, soybean futures have risen from higher single digits to almost $16 a bushel a few weeks ago.

Globally, the situation has put livestock producers in trouble boosting their costs by almost 100% or even more. As a result, many small businesses in this sector may have gone bust even in India and big ones benefiting from the supply vacuums created by the closure of unorganised smaller players.

Since India meets 70% of its edible oil consumption through imports, the country is a price taker as far as oilseeds are concerned. In fact, the existing supply deficit in India is even worse and sowing in the ensuing kharif season is lagging by a big margin from initial estimates of 10-20% rise. This is a prime cause for why Indian soybean is slightly higher in comparison to global prices. Precisely, this is reflected in the current peak in soybean futures price in India. Today, the front-month August Soybean futures was trading around Rs. 9,500 a quintal after hitting a record Rs. 10,000 plus couple of times in the last week.

We haven’t seen any protest against futures trading anywhere in the world, but in India, where we have been witnessing lean-season supply squeeze and resultant price spikes being labelled as the product of excessive speculation in futures trading. In the past, we have seen suspensions of various commodities after spike in prices, but it turned out to be counterproductive as prices continued the uptrend with more vigour in absence of delivery threat on the parallel futures market.

Poultry sector and feed producers have been on warpath against rise in soybean prices simply attributing it to alleged speculation in the futures market. For the sector, soybean at Rs. 43/kg in Oct-Nov was also a speculative spike and today at Rs.100 also the speculation.  No doubt rising prices of soymeal, which accounts for around 18-20% of feed cost for the poultry sector, hurt the viability of some poultry units.  But then prices of Chicken, Meat and Eggs have also risen significantly. Currently, Chicken is sold at Rs. 120-125 a kg in wholesale as against Rs. 70-75 a few months ago. If quarterly financial performance of a leading poultry brand Venky’s is any indication, then the poultry sector has been successful in passing on the cost increases on the last mile consumer. Venky’s had reported a net profit of nearly Rs. 78 crores in the quarter ending March from a loss of nearly Rs. 97 crore a year ago. Numbers are likely to improve further due to buoyancy in prices of its products in Apr-Jun quarter.  If we are talking about the demand destruction for poultry products, the record number of home delivery of chicken biryani and other non-vegetarian cuisines by Swiggy & Zomato tell a different story.

But leave aside the macro economic situation and global situation.  There are many local factors why soybean is outperforming in India. First & the foremost, Indian soybean is non-genetically-modified, which fetches a significant premium in the global market when it comes to export of soymeal. The premium has widened this year by a big margin after the US, and Asian majors diverted a significant part of their sourcing to India.

Secondly, lopsided data on supply-side has taken a huge toll on Soybean prices. For example, a leading industry body (Soybean Processors Association) has trimmed its estimate for India’s 2020-21 crop from 125 lakh tonnes in the beginning of the season to a little above 100 lakh tonnes midway.  Leading market research firm GGN has put the number below 94 lakh tonnes. The industry sources are saying the actual number could even be lower, which has created the current situation. This view can be justified by a situation in Madhya Pradesh where the state government itself requested farmers to sow other crops due to their inability to make available soybean for even seeding purposes.  Farmers were unable to get seeds even at a record Rs. 12,000 per quintal, almost three-fold rise from last year.

“The shortage is real and so acute that each grain of the oilseed will derive its own price this year,” said an Indore-based soybean processor.

Let us look at the demand-supply equation which is the right barometer to assess the element of alleged speculation in soybean futures.

According to industry sources, who have alleged heavy speculation in soybean futures behind current spike in prices, have projected domestic soymeal demand at 60 lakh tonnes and another 24 lakh tonnes of the oilmeal to be shipped overseas. As 100 kg soybean crush gives 80 kg meal, the 84 lakh tonnes of soymeal will require over 100 lakh tonne soybean. Besides, over 10 lakh tonnes of soybeans are required for sowing in the Kharif season. As against the conservative demand of 110 lakh tonnes, the total supply has been estimated at 102.5 lakh tonnes consisting of 95 lakh tonnes of production, 5 lakh tonnes of carry over stock and 2.5 lakh tonnes of import.  The equation shows India will remain in nearly 7 lakh tonnes of deficit by the end of the year on September 30, which justifies outperformance of Indian soybean futures.

They say that in the volatile markets not hedging the price risk is bigger speculation, that prices will always go in your favour.  The industry has been carefully monitoring the evolving tight supply situation in India and the global market, not probably in the next season also. Some entities have survived by substituting their feed requirement with cheaper grains like Maize, Bajra or even wheat, but that’s not the sustainable solution. Fortunately, there is a liquid futures contract available for producers and user industries in the domestic market to hedge prices of raw materials or finished product as the case may be. “The ongoing saga in Soybean futures has once again underlined the importance of having a systematic and disciplined approach towards price risk management among corporates engaged in the value chain,” said a senior risk management official with an over 150-year old global agri-commodity conglomerate.

Regulators like Securities and Exchange Board of India and Reserve Bank of India and commodity exchanges in India have been alerting all the commodity value chain participants to adopt a policy for price risk management for sustainability of the business which strengthens the governance and improves the shareholder value in the eyes of investors.