Policies hurting oilseeds sector

Yields much below global standards, processing sector hopelessly fragmented

India's oilseed sector is beset by a number of structural and policy-induced problems that have hindered its ability to meet rising demand.

These are the findings of a research project undertaken by the economic research services (ERS) wing of the United States Department of Agriculture (USDA).

India is the world's leading importer of edible oils and is likely to remain an important source of global import demand for the foreseeable future.

A large population and steady economic growth are important contributors to India's increasing consumption and imports, but policy has also played a key role.

In a report titled 'India's edible oil sector: Imports fill rising demand', authors Erik Dohlman, Suresh Persaud, and Rip Landes have said that trade policy reforms in the mid-1990s have increased market access and domestic price support policies have generally favoured production of crops that compete with oilseeds, resulting in waning oil crop production and stagnant yields.

Efficiency gains in the oilseed processing sector have also been hampered by poor infrastructure and policies restricting the scale of processing plants.

Despite increased imports, US prospects for market share gains in India are likely to be limited by competition from palm oil producers in Malaysia and Indonesia, and soybean oil exports from Argentina and Brazil.

One factor contributing to insufficient domestic supply of oilseeds is India's domestic price support programme which has often favored crops that compete for area with oilseeds.

Under the minimum support price (MSP) program, the Indian Government annually sets minimum prices, based primarily on estimated production costs, for crops such as rice, wheat, coarse grains, pulses, and various oilseeds, and is supposed to defend these prices by making purchases after harvest.

The Indian government attempted to boost oilseed production in the late 1980s and early 1990s under its Technology Mission on Oilseeds (TMO) programme.

During that time, MSPs for grains were kept in check relative to oilseeds. The government-controlled import monopoly dramatically lowered oil imports.

This contributed to a sharp improvement in oilseed prices relative to competing crops and 70 per cent increase in oilseed production, between 1987-88 (14 mmt) and 1994-95 (24 mmt).

Beginning in the late 1990s, however, oilseed prices have declined relative to other crops, initially in response to the earlier increase in domestic oilseed supplies and subsequently owing to the liberalisation of edible oil imports initiated in 1994. MSP levels for grains have also been raised more than for oilseeds since the mid-1990s.

In addition, the government regularly supported wheat and rice MSPs, mainly in several important cereal-producing states. However, price support operations for oilseeds have usually not been funded.

As a result, increasingly favourable returns to wheat and rice have drawn area away from oilseeds, lowering oilseed production from an average of 26 mmt annually between 1994-95 and 1996-97 to 23.3 mmt in years 1999-2000 and 2001-02.

In contrast to the significant progress India has made with wheat and rice yields and production, oilseed yields in India are well below the world average, and yield trends have been flat to negative in recent years.

National average soybean yields, for example, peaked in 1990-91 at just 15 bushels per acre and averaged only 13 bushels per acre between 1993-94 and 2002-03 compared with a 32-bushel per acre world average.

Yields for other oilseeds like peanuts, rapeseed, and sunflowerseed also rank far below the rest of the world, typically at 50-60 per cent of the world average.

In addition to the low oilseed yields at the farm level, the ability of India's oilseed sector to compete with vegetable oil imports is further hampered by a processing and crushing sector that is fragmented, small-scale, and suffers from low capacity utilisation.