| | |Sources of Price Variation in Mustard Oil In India | | |Abstract | |This report discusses the sources of price variation of Mustard Oil in India. Mustard Oil is one of the primary edible oil especially in | |Northern India.
Mustard Oil is extracted out of mustard/rape seed, which is extensively cultivated in India. The variation in cultivation of | |the seed is one of the major sources of price variation in Mustard Oil price. Besides this the report tries to investigate any other sources | |of price variation such as geo-political factors, freight rates and local issues. For doing this price of mustard oil in various cities across| |India for the last 29 months were collected. We shall especially look at arbitrage opportunities of Mustard Oil within the state of Uttar | |Pradesh. Introduction The role of mustard in India’s edible oil sector is vital as it contributes about 40% of total edible oil production. The country is self sufficient in mustard production and there is no exportable surplus. Most of the country’s mustard oil consumption is based in Eastern and Northern India. Besides being used for cooking, it is used for preparation of hydrogenated fats (vanaspati) and the residue (oilmeal) is used for poultry feed. Two forms of mustard oil are traded in the Indian market namely Kacchi Ghani and Pakki Ghani.
About 80% of the mustard oil industry comprises of the small-scale sector that markets the oil in loose and the rest contribution is made by the organized sector. Mustard Seed Mustard/Rapeseed cultivation is done chiefly in Northern India. It is basically a winter crop and it requires a temperate climate to prosper. The planting season or the sowing period in India is during October-November. The crop starts flowering in the months of November to February. The harvesting period is from February to March. It needs a right proportion of rainfall that is provided by the monsoon during the sowing seasons of the crop.
The arrival of this crop in the markets is in its peak period during March- May. [pic] While the production in 2008-2009 was 6. 4 million tonnes, due to significant increase in cultivation area and expected rise in yield, the production is expected to be close to 7 million tonnes in 2009-2010. The minimum support price for mustard is Rs 1,830 per quintal. Mustard oil is consumed wholly in the domestic market. Methodology Used for Arbitrage Calculations For the purpose of determining the arbitrage opportunities in India, we have chosen the state of Uttar Pradesh, which is both a leading producer and consumer of mustard oil.
In order to calculate the price arbitrage opportunities for mustard oil prices, we have calculated price of the mustard oil at the destination city. • Mustard oil prices at the destination are calculated by taking an assumption that the average freight rate/tonne across these cities is constant. We have taken freight rate/tonne as Rs. 2. 08/km and average toll tax/tonne as Rs. 0. 23/km • We have price of diesel at Rs 31 per litre and assumed average expenditure of 1 litre of diesel per km for 9 tonnes truckload. So destination prices are calculated as a sum of source price and cost of transportation between source and destination. • Cost of transportation between source and destination is calculated as a sum of the cost of fuel and total freight rates for a fully loaded truck (with a standard capacity of 9 tonnes) for the distance travelled between source and destination. • We have calculated the average price of mustard oil at five cities for the time period January, 2007 to June, 2009. • We have calculated the standard deviation of all this prices so as to calculate the price range for mustard oil at these places. If the calculated destination price falls in between this price range (Range_Min at Destination, Range_Max at Destination), we conclude that there is no arbitrage opportunity between the two places. • But if the destination price lies outside this price range (Range_Min at Destination, Range_Max at Destination) than price arbitrage opportunity exists between the two places. Pricing of Mustard Oil The Maximum Price in June 2009 was in Tripura while the Minimum Price was in Ghaziabad (U. P. ). The mean of average price for each place in the 29 month span was Rs. 68. 57 and the standard deviation was close to Rs. . | |Max |Min |Mean |Standard Deviation | |June 2009 |150. 00 |50. 05 |75. 21 |24. 03 | |Average |103. 37 |55. 27 |68. 57 |9. 15 | The graph shows the variation of Mustard Oil Price across 53 cities across India for both June 2009 and the Average Price spanning 29 months [January 2007 – June 2009]. [pic]
The data for the Major Mustard Seed producing states are shown next. [pic] Rajasthan, which is the leading producer of Mustard Seed, winessed strong variance in the prices of the commodity within its various places. The prices in Ajmer were 25% higher than those in Jaipur. [pic] On the other hand prices in West Bengal were more or less uniform with the maximum difference being not greater than 9% during any month in the last 3 years. [pic] The Price Variation across capital cities is shown next. Although the prices seem to differ across the cities, the rise and fall of prices seem to follow the same trend across all of them.
Arbitrage Opportunities in Mustard Oil in Uttar Pradesh Ensuring stability in the prices of essential commodities is an area of major concern for policy-makers. Price instability affects both producers and consumers and has macroeconomic implications as well. Bearing this mind, the current study examines the price behavior of mustard oil in five cities in Uttar-Pradesh (Lucknow, Agra, Ghaziabad, Varanasi and Kanpur) and tries to find out if any price arbitrage opportunity exists in between theses cities. Source |Destination |Price at Source |Price at Dest. Range_Min at Dest. |Range_Max at Dest. |Arbitrage Opportunity | |Lucknow |Kanpur |65. 23 |65. 70 |50. 46 |64. 73 |YES | |Lucknow |Varanasi |65. 23 |66. 78 |55. 36 |76. 78 |NO | |Lucknow |Agra |65. 23 |66. 93 |48. 59 |61. 95 |YES | |Lucknow |Ghaziabad |65. 23 |67. 58 |51. 91 |66. 16 |YES | |Varanasi |Kanpur |66. 07 |67. 94 |50. 46 |64. 73 |YES | |Varanasi |Agra |66. 07 |69. 55 |48. 59 |61. 95 |YES | |Varanasi |Ghaziabad |66. 07 |70. 09 |51. 91 |66. 16 |YES | |Kanpur |Agra |57. 6 |59. 02 |48. 59 |61. 95 |NO | |Kanpur |Ghaziabad |57. 6 |59. 76 |51. 91 |66. 6 |NO | |The result of this study clearly shows that an arbitrage opportunity exists between various cities in U. P. There may be various reasons for the difference in prices in these places such as 1. Prices of substitutes (Soya, Palm, Groundnut oil etc) affect mustard oil prices. 2. The Southwest monsoon determines area under cultivation, and crop yield during the forthcoming Rabi season. This also determines the Khariff oilseed production, which also has a significant influence on mustard oil prices. 3. Disease and pest infestations can affect the production of Mustard which in turn can affect the prices of mustard oil at these places. . Market players like stockists, oil mills and speculators dominate the Rapeseed market and thus influence the market price of mustard oil. 5. Price of mustard oil varies with the procurement cost of rapeseed oil. There may be other expenses also which may reduce the difference between the prices in source and destination places and thus reduce the arbitrage opportunities. But, for places like Agra and Varanasi, where there is a large difference between the observed and expected prices, there is a definite opportunity for price arbitrage.
Conclusion There is significant variation in the price of mustard oil across the country. While the average price stands at Rs. 69 per litre, the standard deviation is close to Rs. 10. This can be primarily attributed to factors such as local taxes, concentration of production of mustard in selected states and geo-political factors. Prices in the north-eastern states are abnormally high as compared to the rest of the country due to difficulty in transportation and political disturbances in the region.
The recent inflation witnessed in India also had major impact on the prices rising by close to 50 per cent in three metros. Mustard oil prices rose by 49 per cent in Ahmedabad, 48 per cent in Lucknow, 46 per cent each in Shimla and Bhubaneswar, and 22 per cent in Hyderabad during this time. References 1. http://www. businessworld. in/index. php/The-Economics-of-a-Highway-Cruise. html 2. www. indianrail. gov. in 3. http://labourbureau. nic. in/CPI_Prices. htm 4. http://www. financialexpress. com/news/mustard-seed-production-to-rise-significantly/431470/