It’s a residue, produced during the crushing of soybean to produce soybean oil. Despite not having a very high profile – it’s mostly used as animal feed – soybean meal exports, until a year back, used to contribute multiple billion dollars to India’s forex reserves. Recent developments, though, have seen exports drop off a cliff

Neha Dewan | The Dollar Business

Jamnalal Shah, an exporter of soybean meal, or soymeal, is not having a good run this year. His shipments to Iran have reduced significantly. This, thanks to the easing of western sanctions on Iran, as well as a drop in international soymeal prices. Shah is among a host of exporters in India, who are hard hit by the changing winds in the global soymeal market. For, until recently, Indian soymeal exporters had a ready market in Iran, a trade in which they were the price makers. But when the West struck a deal with Iran in November 2013, thereby easing some of the trade restrictions on it, it took no time for the floodgates of cheaper imports from sources like Argentina and Brazil to open up.

Tailspin

Today, soymeal price in South America, on an average, is at least 15% cheaper than that in India. As a result, even traditional buyers such as Japan and Vietnam have been shying away from India and looking at purchases from more price lucrative sources. A look at the data comparative unravels the story further. As per industry body Soybean Processors Association of India (SOPA), only 1.04 lakh MT soymeal was exported during January 2015 as against 3.64 MT last year – a huge drop of 71.5%. Even for the first nine months of FY2015, exports are 77.9% lower at just 5.35 lakh MT, as compared to 24.25 lakh MT in FY2014. And the reasons for this decline are not many but just two. One, India’s preposterous food grain procurement policy, which has broken all relationships between domestic and international prices – while the latter is a function of demand and supply, the former is a function of the whims & fancies of policymakers. And two, low duties on edible oil imports which are discouraging soyabean crushing and in turn production of soymeal.

Whose Duty?

According to The Solvent Extractors’ Association (SEA), India’s average FOB price of soymeal exports have dropped sharply from $569/MT in September 2014 to $460/MT in January 2015. This, because soymeal futures trading on Chicago Mercantile Exchange (CME), after collapsing from a high of $618.7/MT to a low of $340.3/MT in September 2014, are currently trading in a tight range in the higher 300s and lower 400s. But why have volumes dropped as well? Indian exporters blame the drop on government policies, which are acting as a deterrent to exports. An exporter, on condition of anonymity, told The Dollar Business, “India is an edible oil deficit country and hence, is dependent on imports. However, the import duties on crude edible oil and refined edible oil are just 7.5% and 15% respectively. Such low rates are helping foreigners to easily sell their oil in the Indian market. As a result, Indian crude/refined oil is not getting its price in India. Consequently, soya processors are struggling to export soymeal at internationally competitive prices.”

Animal Spirit

Soybean is basically processed into two products – soymeal and soybean oil (although some label soymeal as a byproduct in the soybean oil crushing process). And most of the soymeal – over 95% – serves as an animal feed ingredient, while the rest is used in human food items. Qualities such as high digestibility, energy content and consistency are factors that make soymeal a much sought-after product. They are also known to lower cholesterol levels and are high in B-complex vitamins. Major global soymeal producers include US, China, Brazil, Argentina and India, with Brazil and Argentina being its biggest exporters. Another interesting aspect of soybean is that while its crop arrives in US, India and China in August and September, in South America, it arrives in January and February. This aspect also gives soymeal trade its own dynamics.

In India, soybean is a kharif crop for which sowing begins around end-June and the crop is ready for harvest by the end of September. Hence, post soybean crushing, soymeal starts arriving in the market in October-November. Some of India’s most important trading centres for soymeal are Indore and Ujjain in Madhya Pradesh, Nagpur in Maharashtra and Kota in Rajasthan. 

Cast Away

The factors that tend to have a bearing on the Indian soymeal market include global demand for protein, fluctuations in the value of the dollar, quantity and quality of the soybean harvest, weather conditions in importing nations, as well as competition from other protein sources. But until recently, the main reason for strong soymeal exports by India was western sanctions against Iran, which had meant that it had no choice but import from the only major non-western exporter – India. In fact, even as recent as FY2014, India’s soymeal exports to Iran had seen a 67.4% (y-o-y) growth. But as discussed, all that is now history.

So, is it game over for India’s soymeal exporters? It’s a tough market, confessed experts in the trade. Speaking to The Dollar Business, K. R. Ravindran, Senior Manager (Exports), Ruchi Soya Industries, said, “We don’t have any margins at present and are operating at breakeven. We are concentrating more on Pakistan and Bangladesh, where we have increased our volumes by at least 25-30% as compared to earlier.” Ravindran also highlighted that while the transit time to Iran from India is only 7-8 days, it can take as many as 35-40 days for South American consignments to reach Iran. Despite this, cheaper prices have forced it to import the product from Brazil and Argentina, instead of India.

Thin as Paper

Industry insiders claim that in soymeal processing, about 85-90% is the raw material cost. After adding processing, administrative, finance and selling costs, net margins are, even at the best of times, less than even 5%. And it goes without saying that the recent developments have made things only worse. At the same time, fall in finished goods prices and/or increase in raw material prices also make the margins very volatile. Another factor that goes against India’s soymeal trade is the fact that Brazil and Argentina also benefit from large farm sizes and better cultivation techniques, which have, for obvious reasons, always been difficult to replicate in India. Validating this, Dr. Davish Jain, Chairman, SOPA, told The Dollar Business, “The average productivity in these countries is about 3 MT/hectare as compared to just 1 MT/hectare in India.” However, he is optimistic that with some minor adjustments, India can definitely raise productivity to at least 2 MT/hectare.

For Resurrection

For India to re-establish itself as a major soymeal exporters, it needs to get two things in place. Firstly, the government need to rethink its procurement policy, which has often made Indian food grains internationally uncompetitive. Secondly, the government needs to examine if the customs duty on edible oil is good enough to incentivise more domestic crushing. Else, Indian exporters will always be at the mercy of external factors, like sanctions against Iran.