Global Vegetable Oil Price Outlook 2009

-2010

Paper by Dorab E Mistry, Director, Godrej International Limited

At 4th China International Oils Conference

hosted by DCE and BMD On 8 November 2009

At Shangri- La Hotel in Guangzhou

Ladies and Gentlemen

I am delighted be speaking once again at this 4th CIOC conference as a guest of the
Dalian Commodity Exchange and of Bursa Malaysia.

Over the last few years, the DCE has gained in prominence and today it ranks as the
second busiest exchange for agricultural commodities. The success of the palm oil
contract has been quite staggering and has impressed everyone. As someone put it to
me recently, we can no longer afford not to follow the price action on the DCE each
day. Dalian also has an almost unique advantage in terms of being the first exchange
in the time zone. Therefore, DCE price action influences the BMD, the overnight
Chicago sessions and even smaller exchanges in India and in Europe.

The importance of China and India

In terms of the entire oilseeds complex, China continues to be the dominant influence
as far is demand is concerned. However in 2009, we saw India emerge as the biggest
importer of palm oil. There is an interesting similarity in the development of
consumption and of demand in the case of China and India with regard to vegetable
oil. Between them, they dominate palm oil import demand and exert a massive
influence on overall worldwide demand for vegetable oils. In terms of economic
development and per capita income, China is perhaps 10 to 12 years ahead of India.
Therefore it is very instructive to study where China was in the Nineties and to see
how demand and per capita consumption developed.

One area where India has a lot to learn from China is in the development of
Commodity Exchanges. The Indian government has made it a habit to interfere with
the working of Commodity Exchanges. China can provide a shining example of how to
nurture and develop commodity exchanges which are to become the envy of the world.
The Dalian Commodity Exchange has come to represent the modern,
enterprising and competitive face of a resurgent China.

Market Developments so far

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After the Bull Market of the Century as we witnessed in late 2007 and early 2008, we
saw a massive collapse. That has been followed by an even more amazing recovery in
prices. This recovery is said to have been made possible by the Stimulus package
executed in China and the impressive recovery in the manufacturing sector in China.
The re-building of raw material stocks also contributed in a big way towards this
recovery. The questions now on everyone’s lips are:

Has the re-building of stocks been completed and if so, how will this affect raw
material prices?

And secondly,

Will the Stimulus package be renewed or will it be allowed to fade away and will some
more monetary tightening be unleashed?

I am not going to attempt to answer these questions but I can assure you, the
answers to these 2 questions will have a profound impact on price behaviour.

Markets in 2009 have been very treacherous and have called for strong nerves. They
have tended to chop and change direction on the slightest pretext. Overall it can be
said that it has paid off to be friendly to prices. Fundamentals have not really taken
centre stage and the direction of markets has been largely determined by money flow
and by the activity of investors. For today’s paper, I shall use my last paper delivered
in Mumbai on 27 September at Globoil India as a starting point.

My prognosis so far

I had forecast in Mumbai that I expected Palm oil markets to undergo a short sharp
correction, from the then prevailing level of almost 2200 Ringgits to as low as 1900
Ringgits and to then bounce back and forge ahead to a level of 2400 to 2500 Ringgits.
My forecast has been largely proven correct as within days of my speech, the market
corrected sharply and declined to a low of 2020 Ringgits. Since that low, the market
has rallied and looks set to move further ahead.

I can say today that when I made that forecast, I was quite nervous. Over the years I
have observed that such forecasts (which we shall call a Two Step forecast ) -first
Down and then Up - have a poor chance of success. In fact the chance of a sell off
followed by a rally is usually proportional to the cost of holding inventory or in other
words, interest rates. Given the current Zero interest rate scenario, a Two Step
forecast was fraught with danger. The producers, particularly plantation companies
(given their financial strength) would take a more relaxed view of stocks and would
prefer to hold or to hide stocks rather than sell at lower prices.

When market participants can see with clarity and confidence that higher prices are on
the horizon, they will prefer to hold stocks and wait for those higher prices.
Speculators will in such circumstances deploy their fire power to bring up an early rally
and to burn out the bears. At such times markets do not behave rationally or perhaps
the rational thing is in fact to go long and play for higher levels. As someone quipped :

“With Zero interest rates, Palm oil in tank;

Is worth more than money in the bank”

Therefore, I am very pleased that my Two Step forecast has indeed come true. It is for
this reason that I am no longer bearish and am quite happy to accept that the lows are
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now past and that the bearish phase was very short. It was a buying opportunity,
albeit a very short-lived buying opportunity.

INDIA

Before I go on to discuss the price outlook for the next several months, I shall first
discuss the situation and the S&Ds for India.

Indian oilseed crops have turned out to be in line with my Mumbai paper. I am
however, raising my estimate of Indian per capita consumption of vegetable
oil due to the strong economic growth that the Indian economy is enjoying.
Recent provincial election results are confirming the trend seen in the last general
elections and as a result the same enlightened policies will be continued. The
government is headed by the same team which has now a proven record of
competence. India’s industry has weathered the recession in very good shape and is
now poised to grow strongly. This will have an effect on per capita consumption.

I take a cue from the performance of China during a similar period of rapid growth.
During the period post 1993, China’s economy grew strongly and this
translated into strong annual growth in per capita consumption of vegetable
oil. It is quite likely that Indian consumption will also follow that model. Recent
anecdotal evidence also points in that direction. Therefore I am now more confident
that India’s total consumption of vegetable oil in the year November 2009 to October
2010 will rise by about 500,000 tonnes and this will mean Indian imports will be more
or less the same as in 2008-09 at about 8.6 million tonnes.

Inflation will start to become a problem for India from March onwards. Food prices are
already quite high and these may lead to dis-satisfaction with the government.
Therefore, it appears unlikely that India will restore or impose any additional import
taxes on vegetable oil.

Prospects for the Rape-Mustard crop to be planted at present for harvest in March
appear to be satisfactory. As I have previously said, it does not matter a great deal in
terms of world S&Ds if India has a bumper oilseed crop or a poor crop. India now
produces such a small proportion of its annual consumption of vegetable oil.

Vegetable oil prices in India have already started to climb up in view of the stronger
economic environment in the country.

India’s vegetable oil S&Ds

000 tonnes 2009-10 2008-09 2007-08

Op Stock 1200 1025 750

Production 6900 6600 7145

Imports 8600 8600 6300

Consumption 15500 14925 12,995

Exports 100 100 175

Closing Stock 1100 1200 1025

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Per cap 13.10 12.86 11.40

We can now see the break- up of various oils imported

000 2009-10 2008-09 2007-08

Soya oil 900 1000 750

Palm oil 6900 6650 5270

Sun oil 500 600 30

Lauric oils 250 250 200

Vanaspati 50 50 50

Others ------ 50 ---

Total 8600 8600 6300

Having discussed India, I shall now turn to the World Scenario.

WEATHER:

We started 2009 with severe drought in Argentina and then we had severe drought in
India. The year 2009 was supposed to be a year of El Nino which would bring drought
to Australia, Indonesia and Malaysia also. So far we have had what can only be
described as a mild El Nino with some rainfall deficits in Indonesia, Malaysia and
Australia. From August onwards the El Nino seemed to withdraw and we have had
good rains and as a result strong CPO production in Malaysia and in Indonesia.
However, in the last 3 to 4 weeks, the Southern Oscillation Index has turned
sharply negative and this is usually a clear pointer to a strengthening El Nino.
Does it mean that as the 2009 comes to an end, it will have a sting in its tail?

I am neither a meteorologist nor an astrologer. However, the job of a forecaster is to

anticipate and discount all possible scenarios and finally work on the best fitting and
most likely scenario. I am choosing my words carefully because I know I am now
treading into uncharted territory. Based on information in hand at present it appears
that we are on the brink of dry weather and rainfall deficits in Malaysia as well as
Indonesia. This may affect Australia also but it will not matter to our markets because
the Australian Canola crop will have been harvested. However, a new stronger El Nino
will have a profound effect on CPO production in the June to September period of
2010. I do not have to tell you what it will do to sentiment in the palm oil
market from the day that Drew Lerner of World Weather pronounces a start of
a new stronger El Nino !

So far it has been too dry in Argentina but I am proceeding on the basis that a
resurgence of El Nino will bring greater wet weather in Brazil as well as in Argentina
and that soya prospects in both countries will be very good. I am also presuming that
India will have a good Rabi crop of Rape-Mustard seed this year.

The General Economic Environment

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I am presuming that the developed economies of the world will grow modestly from
now onwards with growth rates of at least 2 to 3 percent during 2010. There is no
doubt that China will continue to lead the world with growth in excess of 8 percent and
other emerging countries like India, Brazil and Indonesia will also keep growing
strongly.

Energy Prices

It follows from the growth expectation that energy prices will be, at worst be stable at
current levels or will be rising as world demand expands. One of the surprising
developments of 2009 was the remarkable strength of energy prices despite low or
even negative growth in the world. Higher energy prices are critical to the price
outlook for vegetable oil given our relationship to bio fuels.\

Interest Rates

I am also presuming that the world’s central bankers will retain low interest rates for
most of 2010 and will also continue their policy of easy credit to their banks. My own
view is that a dose of some inflation is necessary today in order to repair the damage
done to asset values by this recession. Several pundits have talked recently of the
possible crash in commercial property values expected in USA and in the EU in the
coming months. This will do great damage to this nascent recovery. Therefore, low or
Zero interest rates are necessary for several months more. Low or Nil interest rates
will also mean that the cost of carrying inventory is negligible and will remove the
incentive to sell quickly. This will have an effect in the recovery of commodity prices in
2010.

I shall now discuss the prospects for each vegetable oil.

PALM: It seems confirmed that CPO production began a new High Cycle in September
and we shall see a peak in production in October. We are likely to see an all time
record for monthly CPO production in Malaysia for October and this will lead to a big
increase in stocks. Seasonally production will decline from November onwards but it
will still remain at a high level. I am maintaining my estimate for Malaysian CPO
production for 2009 at 17.5 million tonnes and Indonesian CPO production to reach
21.5 million mt. I expect Malaysian stocks to peak at the end of December at 2.1
million tonnes. Whilst this figure may seem daunting, it will represent less than 6
weeks consumption. It is likely that stocks will decline from January or latest from
February onwards.

In my previous papers, I have estimated 2010 CPO production in Malaysia to expand

by half a million tonnes and Indonesian production to expand by 2 million tonnes. The
most recent prognosis on a possible revival of the El Nino puts a question
mark on those optimistic estimates.

SOYA: In the last 4 weeks we have seen a strong rally in Chicago soybean futures as
a result of harvest delays. It is clear that soybean and soybean oil futures have
bottomed out. The period November to March is expected to see tightness in the
availability of soybean oil. However in recent weeks demand for soybean oil has been
very soft. The presence of large quantities of attractively priced sunflower oil is also a
factor in the market. It may take until December for soya oil tightness to translate into
higher prices.

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As I have said earlier, the story of soya oil in 2009 – 2010 will be a Tale of Two
Halves. In the first half, up to March 2010, soya oil availability will remain tight and its
premium over other oils will expand. Post April 2010, once soya crushing in South
America gathers momentum, it will be a different story.

SUNFLOWER OIL: In recent weeks the prospects for production of sunflower seed in
Argentina have worsened. On the other hand the availability of sunflower oil from the
Black Sea has continued at a brisk pace and buyers like Iran have continued to
disappoint the market. Therefore we must expect sunflower oil to continue to be
available at a discount to soya oil until December. After that, we must expect
sunflower oil to move to a swift premium over soya oil as its availability gets tighter. I
expect India to resume imports of sunflower oil once again in the next few months. In
fact sunflower oil is much better placed for Indian importers than soya oil. Overall in
2010, the production of sunflower oil will be lower than in 2009 by at least half a
million tonnes, perhaps by more.

RAPESEED OIL: Harvesting delays and some doubts about the size of the Canola
crop in Canada have led to revision in estimates for availability of Rapeseed oil for
2009-2010. Overall I am now expecting the availability of Rape oil to increase by only
800,000 tonnes.

Bio Fuel and Energy Demand: The recent buoyancy in the price of crude oil has
translated into better Energy demand for palm oil and other oils. We have also seen an
improvement in the demand for soya methyl ester. I have said previously that in 2010
World bio fuel demand can be higher by at least 1 million tonnes and possibly by as
much as 2.5 million tonnes over the previous year. New mandates in Europe and
elsewhere will play their part but the biggest growth is likely to come from South
America. There is a possibility of improvement in USA also. If crude oil can remain at
around US$ 80 a barrel, energy demand will play a greater role in price making for
palm oil in particular

FOOD DEMAND

The latest information on the brisk pace of growth in China, India, Brazil and in most of
the emerging markets gives room for optimism on the prospects for growth in Food
Demand. The developed world is also likely to grow at a rate of at least 2 percent.
Therefore we must expect Food Demand to grow by 4 million tonnes.

Let us presume Bio Diesel demand expands by only 1.5 million tonnes.

Hence 2009-10 demand will expand by about 5.5 million tonnes overall as against
demand expansion by 4.5 million tonnes in 2008-09.

We can now see the world S&Ds for 2009-10 together with revised up-to-date figures
for 2008-09:

World Incremental Supply for 2008-09 and for 2009-10

000 Oct 08 to Sept 09 Oct 09 to Sept 10

Soya oil - 1,500 + 1,500
Rape oil + 1,600 + 800
Sunflower oil + 2,000 - 500
Groundnut oil - 200 - 200
Cottonseed oil - 200 - 150
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 Palm oil + 1,500 + 2,500
Lauric oils + 250 + 500
TOTAL + 3,450 + 4,450

For 2008-2009, Incremental Demand exceeded Incremental Supply by almost

1million tonnes.

For 2009-2010, it appears at present that Incremental Demand will again exceed
Incremental Supply by about 1 million tonnes.

The Overall Incremental S&Ds can be seen as follows

000 Oct 08 – Sept 09 Oct 09 – Sept 10

SUPPLY + 3,450 + 4,450

DEMAND + 4,500 + 5,500

RSPO

The RT 7 conference of Round Table on Sustainable Palm Oil is just concluding in

Kuala Lumpur this week. We must all applaud the progress that has been achieved so
far and renew our commitment to the RSPO. It will be very interesting to see if the
developed world will put its money where its mouth is at the forthcoming Summit in
Copenhagen.

PRICE OUTLOOK

I am now presuming that crude oil prices will trade around US$ 80 per barrel for the
next few months. Also that the US Dollar will not crumble and nor will it strengthen.
My presumption is that the Dollar against the Euro will trade around 1.50 and against
the Rupiah around 9400.

It is quite possible that palm oil stocks will build up in the next few weeks as we
approach the end of the calendar year 2009. Both China and India appear to be well
covered at present. Therefore, it is quite possible that markets may come under
pressure and CPO BMD futures may decline to around 2100 or may even break 2100
temporarily. I no longer expect CPO futures to decline to 1900 and believe they have
bottomed out at the recent low of 2020. After a few weeks, as demand from China
and India returns, I expect CPO futures to begin to rise and to attain my
target of 2400 in the first quarter of 2010.

A lot will depend on the development of the new spell of El Nino. If dry weather takes
hold in the second half of November and early December, it will turn sentiment and we
may see higher prices much sooner.

I must caution you and say that markets from equities to metals to agri commodities
are all tending to move in unison. If equities tank for any reason or if the US Dollar
rallies strongly, palm oil prices will also be affected.

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Soya oil will remain tight in Q4 2009 and Q1 2010. However, we need to see some
good buying interest for soya oil quickly in order to preserve its premium over palm oil.
At present soya faces strong competition from sunflower oil.

Finally, I expect lauric oils to follow palm oil which means they will first decline and
then rise in Q1 2010. Lauric oils are linked to economic and industrial growth. As
growth accelerates, their premium over palm will expand.

Conclusion

The outlook for prices in 2010 at this juncture appears to be friendly. A lot will depend
on energy prices. Supply and Demand fundamentals will not be as important on their
used to be in previous years.

My next paper will be in Bali at the GAPKI conference on 4th December by which time,
we shall know more about the fresh El Nino.

In conclusion I once again congratulate the Dalian Commodity Exchange on the

success of its Palm contract and I also congratulate Bursa Malaysia on its tie-up with
the CME.

GOOD LUCK and GOD BLESS