Edible Oil

Edible Oils

Background

Edible oil processing consists of three operations: crushing and expelling (separating oil from the solids), solvent extraction (to chemically remove residual oil from the oilcake solids), and oil refining. In many countries, these three separate processing operations are conducted by one vertically integrated plant. In India, however, only a small share of oilseed production undergoes solvent extraction and oil refining. Instead, India’s oilseeds processing sector is made up of the three groups viz Ghanis, solvent extractors and oil refiners engaged separately.

Edible oils constitute an important component of Indian households’ expenditure on food. According to NSS 60^th Round (January-June 2004), average monthly per capita consumption expenditure (MPCE) of edible oil in food was 8.2% in rural India, and 8.2% in urban India. The share of edible oil has increased in successive NSSO surveys.

According to the Second Advance Estimates released by the Ministry of Agriculture on February 5, 2007, total oilseeds production during 2006-07 is expected at 23.62 million tonnes (mt), representing a decline of 15.6% over 2005-06. The decline in oilseeds production is due to lower output of rapeseed, groundnut and castorseed.

Size

India is world’s third largest edible oil economy, after China and US. India’s annual consumption is around 10 million tones vis-à-vis China’s 14.5 million tonnes. However, India’s per capita consumption at 10.2 kgs per annum is considerably lower compared to global standards.
India is also a leading producer of oilseeds, contributing 7-8% of world oilseed production. India is estimated to account for around 6% of the world’s production of edible oils. Though it has the largest cultivated area under oilseeds in the world), crop yields tantamount to only 50-60% of the world’s average.
India is the fifth largest producer of oilseeds in the world, behind US, China, Brazil, and Argentina. Since 1995, Indian share in world production of oilseeds has been around 8-10%.

Structural Characterstics

Broadly, edible oil/fat products can be categorised into four categories, vegetable refined oil, hydrogenated oil (vanaspati), bakery fats/margarine, and de-oiled cakes.
The Indian edible oil industry can be classified into the following segments. Ghanis (over one lakh units), small.scale expellers (15,000 mills), solvent extractors (600 units), oil refiners (400 units) and vanaspati manufacturers (204 units).
Oil mills crush oil seeds and extract oil, 70% of which is sold in the open market. The remaining 30% is refined and sold as branded oil. After the extraction of oil, residual seeds are processed further by solvent extractors, to make solvent-extracted oil. Most of the solvent extracted oil is used to make ‘vanaspati'.
The Indian edible oil industry is highly fragmented with a large number of small scale producers. The ghanis belong to the SSI segment and usually serve the rural markets.
Small scale expellers, much like the ghanis, use metal screws to press or expel oil from seeds. However, they are larger than the ghanis, oil expelling capacity being in the range of 5-10 tonnes per day, compared to around 50-60 kilos a day for ghanis.
Solvent extractors belong to the organised segment and are also the second largest after the SSI segment, in the domestic edible oil industry. They use modern technology to process low oil & high meal seeds (eg.soyabean, cottonseed) into edible oil and de-oiled cake.
Oil refining also belongs to the organised sector and has recorded rapid growth in recent times. Refiners generally refine both expeller oils and solvent extracted oils.
Vanaspati is made by hydrogenation of refined oil to vegetable shortening or spread and is similar to the milk product ghee and absorbs around 10% of the total edible oil supply in India.
Due to increased consumer preference for non traditional oils such as soyabean and sunflower oil, the organised sector has emerged as one of the fastest growing sectors in recent times clocking double digit growth. Branded products, though small portion of the total edible oils market, have been one of the main drivers of rapid growth.
The production of edible oils in India is dependent on the production and availability of oilseeds. While oilseeds production increased from 10.83 million tonnes (mt) in 1985-86 to 24.75 mt in 1998-99, yield per hectare increased from 570 kg to 944 kg. during 1999 to 2003, oilseed output stagnated and also declined. As oilseeds are mostly sown in the non-irrigated regions of the country (viz, Rajasthan, Gujarat, Maharashtra and Madhya Pradesh), its production suffers from high dependence on the monsoon.
Moreover, the raw material costs account for over 92% of the total cost of sales due to volatile prices of oilseeds. Besides the increase in raw material prices cannot be passed on entirely to the consumers, edible oil prices being governed by trends in international prices due to substantial imports.
Therefore the edible oil industry is characterised by very low profit margins, which is a manifestation of a variety of factors, the most important of all being availability of oilseeds.

Policy

In order to increase the domestic supply of oil seeds, the government has been frequently freezing the MSP for wheat and rice while increasing the MSP for oil seeds, thereby prompting a diversification from wheat-rice to oil seeds. This is intended to improve the supply of oil seeds. However, despite these measures, the demand-supply gap is likely to continue in the medium term. Again this does not push up prices, due to availability of low priced imports, as edible oil is the common man’s utility item.
Free imports (since 1994) have further lowered the entry barrier to the industry as crude or refined oil can be imported, packed and distributed doing away with the need of having manufacturing facility in the domestic market.
Customs tariff on edible oil continues to be the most important and dynamic area of government intervention. India adopted a modified tariff schedule for agricultural products in March 2000. The tariff bindings, subsequent to revision in 1996 and renegotiations within the WTO in 1999, retain the overall structure notified after the Uruguay Round: 100% for commodities, 150% for processed products, and 300% for edible oils. Departures from this pattern are mainly with respect of tariff lines that were negotiated as special cases. India's bound rates for edible oil are as high as 300% ad valorem, except for 45% on soybean oil, and 75% for rapeseed oil. On all other oils, the GoI can raise the level of customs duty up to 300%.

Outlook

The country’s consumption places India behind only China and the European Union in total edible oil consumption. The growth in consumption of edible oil has been driven by increased population and growing incomes.
With its large population and continued strong economic growth, India is likely to register strong gains in total and per-capita edible oil consumption in the medium term. Per capita consumption is expected to increase to 11 kgs in FY2006 and 11.3 kgs in FY2007.
Production is expected to increase at a slower rate during OY2007 mainly because of an expected decline in India’s oilseeds and edible oil production. India’s production of vegetable oils has been stagnating except for a rise in rapeseed oil. According to the Solvent Extractors Association of India (SEA), India’s vegetable oil production is expected to decline 4.4% during OY2007 to around 6.8 mt.
By 2010, India’s total requirement of edible oils for the projected population of 1.25 billion at the projected per capita consumption of about 15 kg per annum is expected to be around 19 mt, which is equivalent to an estimated 57 mt of oilseeds.
The industry has to contend with increasing competition from imports, the rising cost of oil seeds and the expanding demand-supply gap. Since the production of oil seeds is heavily dependent on monsoons, around 40% of the demand for edible oils within the country has to be met by imports which may continue.

References: ICRA, CRISIL and CMIE reports