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  • 1. Analysis of Oil Seeds & Grain Price Volatility in India:A VEC-MVGARCH Approach Nitesh Kumar Pandey England

2. Background

  • Oilseeds and wheat grains have witnessed unprecedented volatilities and price fluctuations in the recent past.
  • Extreme volatility in commodity prices, particularly of food commodities, affects producers, consumers, traders, exporters & food procurement agencies of the central and state Government.

3. Commodities Under Study

  • Wheat
  • Selected Edible Oil seeds and Oil
  • Wheat & Edible Oil Price Forecast World Bank.xls

4. Wheat Price Volatility

  • Who plays the biggest role in pushing the global wheat prices now?
  • It is India.
  • Following Indias plan to buy more wheat for buffer stock, the commoditys prices soared across the world with the World Food Programme (WFP) expressing concern over the impact of dwindling stocks of the cereal.

5. Wheat Price Volatility

  • After India invited tenders for an unspecified quantity of wheat from the international market, the price of wheat crossed record levels on commodity exchanges on Thursday.
  • As grain traders reacted to urgent tenders from grain importers and the lowest global stock levels for 25 years, the prices shot up across the globe.
  • India is the worlds second-largest wheat producer after China, but orders from Delhi to build up buffer stocks pushed price of a bushel climbing 30 cents to $7.88 a bushel on the Chicago Board of Trade.

6. Wheat Price Volatility

  • In France, the price of November milling wheat also soared.
  • Natural calamities like droughts and floods and production shortfalls, burgeoning demand and dwindling stocks also created a harvest season panic that again pushed the prices of wheat further.
  • Since April, it has risen 75 per cent on both sides of the Atlantic after recent tenders from Egypt and India.

7. Wheat Price Volatility

  • India last year suffered a weak harvest and entered the world market aggressively to import wheat. The International Grains Council expects India to import more than three million tonnes this year, despite an improved harvest.Analysts believe that there is growing anxiety that the country had benefited from a succession of good monsoons.

8. Wheat Price Volatility

  • The International Grain Council cut its forecast of world grain production by seven million tonnes this month to 607 million tonnes, as it assessed the impact of a wet summer in Northern Europe, weak output in Ukraine and drought in Argentina and Australia.
  • Chicago Board of Trade wheat Futures contract set a new all-time high this week as crop concerns roil the market again. The December contract took out last weeks previous all-time high of $7.54.

9. Wheat Price Volatility

  • Paris wheat Futures settled just shy of their all-time high and London-based wheat Futures surpassed their previous top.More talk of Australian drought conditions and wheat crop woes there was another reason for bulls to buy.

10. Spot Price Volatility (Wheat) 11. Oil & Oilseeds

  • Oil & Oilseeds
  • Caster Seed/Caster Oil
  • Coconut Oil/Copra
  • Cotton Seed/Cottonseed Oil
  • Crude Palm Oil
  • Ground Nut/Groundnut Oil
  • Kapasia Khalli
  • Linseed/Linseed Oil

12. Oil & Oilseeds

  • Mustard Oil/Mustard Seed/Mustard Seed Oil
  • RBD Palmolein/Refined Soy Oil
  • Refined Sunflower Oil
  • Rice Bran Refined Oil
  • Safflower/Safflower Oil
  • Sesam Oil
  • Soy Meal/Soybean/Soyabean Oil/Sunflower Oil /Sunflower Seed

13. Oil & Oil Seeds

  • India is the worlds fourth largest edible oil economy with 15,000 oil mills, 689 solvent extraction units, 251 Vanaspati plants and over 1,000 refineries employing more than one million people.
  • The total market size is at Rs. 600,000 Mln. and import export trade is worth Rs.130,000 Mln.

14. Oil & Oil Seeds

  • India being deficient in oils has to import 40% of its consumption requirements.
  • With an annual consumption of about 11 mln. Tonnes, the per capita consumption is at 11.50 kgs, which is very low compared to world average of 20 kgs.
  • China is currently at 17 kg.

15. Overview of Edible Oil Economy

  • Indian vegetable oilis world's fourth largest after USA, China and Brazil.
  • Oilseed cultivation is undertaken across the country in two seasons, in about 26 million hectares; mainly on marginal lands, dependent on monsoon rains (un-irrigated) and with low levels of input usage.
  • Yields are rather low at less than one ton per hectare.

16.

  • Three oilseeds - Groundnut, Soybean and Rapeseed/ Mustard - together account for over 80 per cent of aggregate cultivated oilseeds output.
  • Mustard seed alone contributes Rs.120,000 Mln. turnover out of Rs.600,000 Mln. oilseed based Sector domestic turnover.
  • Cottonseed, Copra and other oil-bearing material too contribute to domestic vegetable oil pool

Overview of Edible Oil Economy 17.

  • Currently, India accounts for 7.0% of world oilseeds output; 7.0% of world oil meal production; 6.0% of world oil meal export; 6.0% of world veg. oil production; 14% of world veg. oil import; and 10 % of the world edible oil consumption
  • With steady growth in population and personal income, Indian per capita consumption of edible oil has been growing steadily.
  • However, oilseeds output and in turn, vegetable oil production have been trailing consumption growth, necessitating imports to meet supply shortfall.

Overview of Edible Oil Economy 18. Overview of Edible Oil Economy (Quantity in Million Tonnes) Crop 2-Jan 3-Feb 4-Mar 5-Apr 05-06 (F) Major Oilseeds Groundnut 7 4.4 8.2 6 6.4 Rape/Mustard 5.1 3.9 6.2 6.6 7 Soybean 5.6 4.6 7.9 5.8 6.5 Other Six 3 2.2 3 3.7 3.6 Sub-Total 20.7 15.1 * 25.3 22.1 23.5 Others Cottonseed 5.1 4.5 5.5 6.6 8.5 Copra 0.9 0.7 0.7 0.7 0.6 Grand Total 26.7 20.3 31.5 29.4 32.6 * Reduced due to Drought. 19.

  • 80 per cent of India's domestic oil output comes from the primary source that is nine cultivated oilseeds and two major oil-bearing materials (Cottonseed and Copra). The secondary source comprises of solvent extracted oils, Rice bran oil, oils from minor and tree-borne oilseeds etc.

Overview of Edible Oil Economy 20. Market Potential

  • The per capita consumption of oil in India is 11.5 kg/year is way below the world average of 18 kg. Even china is at 17 kg. By 2010 the per capita consumption of oil in India is likely to be 15.6 kg. There is huge potential of growth.
  • The demand for edible oils is expected to increase from Oil Year 2004-05 levels of 10.9 Mln. tonnes to 12.3 Mln. tonnes by 2006-07 (two years). This assumes a per capita consumption increase of 4% and a population growth of 1.9% which translates to an overall growth in demand @ 6% p.a. Based on the above assumptions, edible oil demand in the year 2015 is expected to be 21.3 million tonnes.

21. Demand Projection Edible Oil 2004 2010 2015 Total Demand (Mln. Tonnes) 10.9 15.6 21.3 Total Area under Oilseeds (Mln. Hectares) 23.4 28 32 Yield (Tonnes/hectare) 1.07 1.2 1.4 Production of Oilseeds (Mln. tonnes) 25.1 33.6 44.8 Domestic supply of edible oils (Mln. tonnes) 7 10.1 13.4 Total edible oil imports - (Mln. tonnes) 4.3 5.9 8.3 Imports as share of demand 39.40% 38.10% 39.50% 22. Demand Projection (Contd.)

  • India will continue dependence on imports to the extent of 40% of its consumption requirements. The improvement in yields and the increase in area under cultivation will ensure that the domestic oilseed production is sufficient to meet 60% of consumption requirements.

23. Increased support from the GovernmentYear Minimum support Price Rs. per MT FY2001 11,000 FY2002 12,000 FY2003 13,000 FY2004 16,000 FY2005 17,000 FY2006 17,250 24. Increased support from the Government

  • The government is increasing its focus on the edible oil industry, given that it has the second largest import bill after crude petroleum. The supported price of mustard seed, which was Rs 11,000 per MT in 2001, was increased to Rs 17,250 per MT by 2006. Consequently, mustard seed cultivation also increased from 5 MMT to 7.0 MMT in 2006. The main emphasis of the government is on reducing the import bill, and this step has helped to a certain extent.

25. Spot Price Volatility (Wheat) 26. Spot Price Volatility (RM Seed Oil) 27. Spot Price Volatility (Refined Soy Oil) 28. Objectives

  • This paper proposes amultivariate vector error-correction generalized autoregressive conditional heteroscedasticity model to investigate the effect of oilseeds and wheat grain prices in neighbouring countries of Asia on its Indian equivalents.
  • We propose to test whether in the long run the law of one price holds and whether in the short run the model captures the salient features of Indian commodity prices (oilseeds and wheat grain).

29. Objectives (Contd.)

  • This model will be used to compute rolling forecasts of the conditional means, variances and covariance of th