| | |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. |
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/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.
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...
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