Oil fall down

The Indian Express, April 28, 2020

Last week saw a virtual bloodbath in oil, with US crude prices crashing to an unprecedented minus $40.32 per barrel before ending at $16.94. But it wasn’t just oil. Raw sugar futures prices for May delivery in New York closed at 9.73 cents per pound, the lowest since June 9, 2008. The front-month corn contract at Chicago, too, fell to $3.01 a bushel, a level it breached last on September 11, 2009. Crude palm oil prices in Malaysia, likewise, plunged by 7.5 per cent on April 21, while now trading nearly 31 per cent lower since the start of the year. The link with oil is obvious here: Sugarcane and corn are as much sources of food as substrates for ethanol that can be blended with petrol. Only 34 per cent of cane crushed by Brazilian mills in 2019-20 went for sugar production, the rest to make ethanol. Palm oil is used to manufacture bio-diesel. Indonesia, last year, mandated a 30 per cent mix of bio-diesel in the regular transport fuel, while India requires 10 per cent ethanol-blending in petrol.
The above diversion of “food crops” for fuel made economic sense so long as oil prices were reasonably high; both US and Brent crude ruled well above $50 per barrel till two months ago. Oil’s collapse — refineries have significantly curtailed operations, with the coronavirus-induced worldwide lockdowns leading to a plunge in road, sea and air traffic volumes — has meant that ethanol processors are shutting plants and Brazil’s mills will allocate more cane for sugar. It is a matter of time before the transmission from crude to sugar, corn and palm oil also spreads to other grains and oilseeds. Low oil prices have brought down the prices of cotton and natural rubber as well, because of synthetic substitutes becoming much cheaper. Simply put, oil producers, refiners and drilling services firms aren’t the only ones feeling the heat. Farmers will also suffer. Payment arrears to cane growers in Uttar Pradesh are already mounting as there’s little domestic or export demand for sugar. Moreover, given weak petrol sales, oil companies are reluctant to lift ethanol from mills. And with liquor vends shut, no offtake of potable alcohol is happening either.
The ray of hope, if any, is the fact that the demand for food should recover once hotels, restaurants, sweetmeat shops and ice-cream, beverage and snack makers start running after lockdown restrictions are lifted. Food consumption cannot be put off for too long — unlike travel, tourism, entertainment or real estate investments, which will be the last to emerge from the damage wrought by COVID-19. Indian farmers have done well to feed the nation in this hour of crisis. The prospect of global production shortfalls reasserting themselves — in rice, for instance — should open up opportunities for them to feed the world too.




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