OVERVIEW OF THE CASTOR OIL INDUSTRY

OVERVIEW OF THE CASTOR OIL INDUSTRY
                                  Abhay V. Udeshi
                                      Chairman
                          SEA Castor Seed & Oil Council, SEA

Dear Friends,

Namaste and Good Morning to everyone.

I heartily welcome Shri. Mohanbhai K. Kundariya, Hon’ble Minister of State for
Agriculture, Govt. of India, Shri. Babubhai Bokhiriya, Hon’ble Minister of
Agriculture, Government of Gujarat and our Guests of Honour Shri. Ajit Chavan,
Director, Ministry of Commerce, Government of India, Shri. Ashok Patel, Vice
Chancellor, S.D. Agriculture University, Sardarkrushinagar (Gujarat), Shri. Samir
Shah, Managing Director, M/s. NCDEX, Mumbai and this eminent gathering –

This is an annual event providing the Castor fraternity the right platform to
exchange information and knowledge on this vital product – castor oil.

Talking about the current Global Economic Scenario –

Barring major geopolitical upheaval, it is said that the global economic growth in
2015 will hold around 3.4 percent. The United States will continue to grow.
European economies have dark clouds—from slowing exports and a dysfunctional
policy environment to tackle deflationary pressures. China will continue its “soft
fall”, as government stimuli will have less effect and monetary policy will become
tighter. Other major emerging markets will continue to grow, but growth will vary,
depending on the pace of the reforms. Downsides to the global outlook relate to
intensifying political and economic risks; upsides relate to the ability of policy and
business to invest in people, raise productivity, and rebuild trust and confidence.

For India - it is important to strengthen the “Make-in-India” and “Clean India” goals
laid down by our Prime Minister. Castor Oil industry is one such ideal example.
Castor oil is a vegetable oil but not an edible oil and its usage is mainly for Industrial
applications replacing the crude oil – thus not only assisting “Clean India” but
creating a “Green and better World”. 90% of the castor oil production is for
exports catering to over 85 % of the world demand and thus it is important that
India continues to remain “The Source of Castor to the World”. However, many
initiatives are required to be taken at various levels – both at Government levels
and at the Industry level.

The Industry has faced many challenges and I will only focus on the year gone by –
2014 being an El Nino year – the weather had been erratic – especially the
monsoon and also the temperatures which led to the speculators jumping on the
market suspecting a lower new crop and playing a havoc on both the physical and
futures market. For a good period of time – the gap between the physical and the
futures market yielded returns to the tune ranging from 40% to 90% on an
annualized basis resulting in most physical stocks being diverted to warehouse
instead of - to the industry. Fortunately, the overall monsoon turned out to be
normal. During the period June to Dec 2014, the castor prices firmed up by 18 %
whereas crude oil prices dropped by over 50% and most vegoils dropped between
10 – 25%. To add to this grim situation, exports continued to fall month after
month. The overall scenario – exports during 2013 – 480,000 mtons whereas during
2014, we are down to 430,000 mtons of which we understand about 20,000 mtons
have been shipped unsold – thus in reality it is about 410,000 mtons – down by
70,000 mtons which is about 15% lower.

Financialization of commodities – with the nationwide accessibility of trading on
commodity exchanges, commodities like castor seeds are increasingly attracting
investors who look upon castor seeds as a financial product for earning speculative
or fixed returns on the arbitrage opportunities being available on the exchanges as
a competitive alternative to equity and debt markets. Being a shallow volume
commodity, and for this reason alone, the carry-over stock to the demand ratio
should be at least 25%. This carry-over stock can play an important role in tiding
over the hardships, including that of any weather uncertainties, and bring more
stability for the long-term sustainability to the castor industry. I would thus like to
assure my Indian farmers, that a higher crop and a good carry-over, should not
deter them from growing more castor seeds. Financialization of commodities, if
implemented in the right spirit coupled with the long shelf life of castor seeds,
could ensure remunerative prices for the farmers and stable affordable prices for
the industry enabling them to take up new projects based on castor oil with
confidence.

In a shallow volume for the product commodity like castor seeds, which again is
export oriented, any lapse in the system yields disruption of the price discovery
which may have long term ill-effects on the entire supply-chain, and more
particularly the end-product markets.

I personally request FMC that a good and transparent policy in a timely manner
should be put in place as a pre-emptive measure rather then taking post-measures
as the damage otherwise would have already been done as seen in 2014.

Vegetable Oil Industry runs on very thin margins and the same is true for Castor oil.
Plant Capacity Utilization is less then 40% and with these facts – speculation with

poor regulatory controls translates to artificial prices which is highly detrimental to
all the stake holders –
            Farmers
                 o They get confused
                        don’t know what to grow and
                        what will be their earnings
            Industry
                 o Absolutely Uncertain
                        not sure of the future as lack of confidence in the product
                           leading to –
                               threats by competing products
                               no new R&D and
                               no new investments
            Institutions – Banks, NBFC’s, Commodity Exchanges, etc.
                 o high default risks
                 o defaults lead to loss of confidence in the iInstitutions
            Country at large –
                 o Loss of market
                 o Loss of export revenue
                 o And much more including employment

There are many Myths relating to castor oil which supports high degree of
speculation -
          Demand for castor oil is inelastic irrespective of price
          There are no substitutes to castor oil based products
          There is fat margin for international traders and consumers to absorb
             any increases in the castor seed prices

Let me remind you – when the castor oil prices went up during 2011 from USD
1200 pmton to USD 2750 pmton – the earnings did go up for everyone, but silently
the true demand for castor oil started disappearing and one can see this in 2014.
One of the major applications is for manufacturing of Sebacic Acid which is mainly
produced in China. Sebacic Acid is replaced by other crude oil based product Adipic
Acid just on price. This is just one example. It is true for most of the castor
products. Castor has competition not only from crude oil but also other vegetable
oils. Castor always has competition and if we need to grow this industry, we all
have to ensure its sustainability.

Speculation is a zero sum game - usually played with an intention “You lose, I win”.

It reminds me of a phrase by Abraham Lincoln

“You can fool some people for some of the time, some people for all the time, you
can even fool all the people for some of the time - but you cannot fool all the
people all the time”

I hope we can all make this industry more mature with these experiences.

A thrust in the right direction by both the Central and the State Governments could
benefit the country in realizing its full potential of the castor industry. Particularly,
more emphasis and support is required from the Central Government by
incentivizing exports of value added products based on Castor Oil. Thereby, I
request our Honorable Ministers to assist the trade in providing the right impetus
in this difficult market.

For the Government of Gujarat, the industry is faced with immense difficulties in
claiming VAT refund as the process is too lengthy and time consuming. Substantial
amount is blocked leading to financial strain to the exporters. I thus request the
Gujarat Government to take pro-active steps and simplify and/or substitute ‘VAT
Refund’ to ‘VAT Exemption’ for the exporting community. I am confident that such
a policy will go a long way in strengthening the industry and promoting exports.

As have said in my earlier addresses, the growth of the castor oil industry per se is
in line with the global GDP growth i.e. 2-3% p.a., however, in India the 8-10%
growth that we have seen per annum over the last decade is mainly on account of
crop shrinkage in other parts of the world. With India now supplying over 85% of
the world demand – the growth will be not only be limited but there will also be a
shrinkage if speculation targeting unnatural prices would rule the industry as
experienced in 2014.

The Indian farmers over the years have substantially improved their farm
realization in castor as compared to growing other crops. Thanks to the State
governments and specially the Gujarat government – where the agricultural land
under irrigation is now well over 85%. This should help the farmers - as in the
previous years, the farmers were more dependent upon the rainfall. Having said
this, the most concerning point is that the yields on castor harvesting have fallen
during the last 2-3 years in all the growing states. Most disheartening is in the State
of Gujarat where the yields have fallen from an average of about 1800 kgs/hectare
a few years ago to less then 1500 kgs/hectare. We have farmers providing yields of
as high as 5000 - 6000 kgs/hectare. I urge the Agricultural Universities and the
Gujarat Government to seriously look into this aspect on a priority basis. I also seek
the support of the Government to continue and collaborate the good work in R&D
for better quality parental lines and hybrid seeds; provide and promote the
necessary agri-infrastructure to the farmers; and further take pro-active measures
by providing resources to educate, campaign and market to grow more castor

seeds through its various agencies to keep its leading position in castor in the
world.

I request the farmers to use the certified quality hybrid seeds and use the best
farming practices to achieve higher yields as higher productivity is the only answer
to make the best economic sense in this highly competitive and complex world.

The sustained growth of the industry is dependent on the delicate balance i.e.
reasonable and remunerative price for the farmers on one hand, and affordable
and stable price for the industry on the other. As projected by me in the Vision
Document 2025 of SEA for India – Potential for the crop is 2.9 million tonnes (1.3
million tonnes of Castor Oil).

This can be achieved with a positive, constructive and a win-win approach that will
help this wonderful industry to grow to its full potential.

Today at the 13th Global Castor Conference, we have many eminent speakers on
the dais to share their views and knowledge. Today’s program has already been
circulated to all the delegates.

However, let me share some information.

Castor is an annual crop and the picking of the seeds can vary from 3 to 5 or
sometimes even 6 pickings. If pricing is favourable to the farmers, farmers would
take more care and try maximum pickings, in which case the yields could be
different then estimated or vice-a-versa. The same is true for weather conditions.
Thus, unlike other oilseeds crop, which are generally harvested at one time – the
estimation of yields and thus the productivity for castor seeds is a bit more difficult.
Further, to have an estimation of the sowing acreage – due to past discrepancies on
the crop size, SEA together with Neilson have attempted this year to provide the
crop size estimate based on both the Government information and also Neilson’s
estimation on acreage – thus providing a range for the crop size. We will hear more
about the current years’ crop estimation by Neilson in the afternoon session.

Going forward, the SEA Castor Council is of the opinion that we should follow the
Government acreage number for arriving at the crop number. I take this
opportunity to request both the Central and the Gujarat Government to help the
industry in its proper assessment of the crop size through Government machineries
and modern technology like the BISAG (Bhaskaracharya Institute of Space
Application and Geo Information) – the Satellite Technology to ascertain the crop
acreage. This will go a long way in bringing more transparency and stability to the
market and help grow this industry further.

I would like to appreciate Dr. B V Mehta’s efforts since the inception of this event. I
am pleased to inform you that the attendance at this meeting is well over 400
delegates.

I am sure today’s Conference, with its presentations and thought provoking
discussions, will enrich and benefit this gathering to make this Castor world wiser.

Thank you for your patient hearing.
                                       -o-o-o-