Business Today
Monsoon woes: Should you invest in agri-commodities?
With the monsoon rains below normal so far, commodity prices are rising. Should you invest?
Under Dark Clouds
Former finance minister Pranab Mukherjee once termed monsoon as the real finance minister of India. He was right. After all, 60 per cent of India's arable land depends on rain , agriculture contributes 15 per cent to India's gross domestic product, and last but not the least, sustains 55 per cent of India's population.

So, it's not surprising that everybody, right from companies selling products in rural India to governments fighting inflation, prays for optimum rain.

MUST READ:9 common myths about commodities trading

However, both should be worried this year. According to the India Meteorological Department (IMD), as on July 1, the rainfall in this monsoon season has been 31 per cent deficient with a deviation of -23 per cent from the Long-Period Average or LPA (See Dry June).

IMPORTANCE OF RAIN

May to July is critical for kharif production, says Ajitesh Mullick, assistant vice president, retail research, Religare Broking. The season accounts for 40 per cent of the country's total farm output.

Quote

Even if monsoon fails to pick up, India has no need to worry as record production of cereals in the last two years will keep supply comfortable.

Naveen Mathur

Associate Director, Commodities and Currencies, Angel Broking

"Excess or deficient rain can affect sowing. A delay can make prices of farm commodities shoot up," he says.

The main kharif crops are rice, pulses, soyabean, maize, millet and sugarcane. Sowing usually begins in the second week of June. However, with monsoon below normal so far, most farmers have delayed sowing.

CP Krishnan, wholetime director, Geojit Comtrade, says, "Rain has been below normal in North West and Central India. Non-availability of water has affected sowing of almost all major oilseeds, pulses, cotton, chilli, coriander, turmeric, rice and sugarcane. Paddy sowing, too, is down 26 per cent."

COMMODITIES IMPACTED

Not all farm commodity prices are impacted by rain.

"Even if monsoon fails to pick up this year, India has no need to worry as it has huge stocks of cereals such as wheat and rice due to record production in the last two years, which will keep supply comfortable and prices under control," says Naveen Mathur, associate director, commodities & currencies, Angel Broking.

"Even though India is a leading producer of commodities, a large part of some commodities consumed in the country is imported, which means we are price takers, not makers," says Dharmesh Bhatia, assistant vice president, research, Kotak Commodities. For instance, 50 per cent oilseeds we consume come from abroad.

Commodity Trends


SOYABEAN:
Due to dry weather in central India (rain 34 per cent less than normal), soyabean prices have risen 15 per cent in June alone. The increase is 60 per cent since the start of year, from Rs 2,500 per quintal in January to Rs 4,000 on 2 July (See Commodity Trends).

Sowing is yet to pick up pace in Madhya Pradesh, which accounts for nearly two-third of the country's output. Krishnan of Geojit Comtrade says the key kharif oilseed has been the worst hit so far, with area under cultivation down 73 per cent year-on-year.

Soyabean is important for India's agriculture. Of the total production in India, only 10-20 per cent is consumed, while the rest is crushed to produce soya meal and soya oil for exports that fetch a high price for their quality. Still, soya oil is not allowed to be exported in bulk and we import huge quantities from Argentina, Brazil and the US.

"Another reason for the rise in prices is drought in major producing countries like Argentina and Brazil and high demand in China," says Krishnan. He expects prices to remain rising in the near term and touch Rs 4,200-4,350 levels.

PULSES:
The price of chana has risen from Rs 3,500 per quintal in April to Rs 4,500 per quintal. Most pulses have become dearer by 15-20 per cent in the last two months. Bhatia of Kotak Commodities blames the 26 per cent rain shortfall in Karnataka, Rajasthan and Maharashtra, the major producers.

Lower production has increased imports at high prices from Myanmar and Australia. The fall in rupee's value against the US dollar has also made imports costlier. Mullick of Religare says the impact of these factors is so strong that even raising/lowering of the minimum price the government pays to farmers will not have much impact in the market.

The demand is expected to rise further after August as the festival season starts. Bhatia says chana may touch Rs 5,000 per quintal in the near term while tur and urad may rise 25-30 per cent due to fear of lower output.

COTTON AND SUGAR:
Prices of cash crops like sugar and cotton have also been hit, though sufficient supply has limited the fall, says Mathur of Angel Broking.

Cotton saw a volatile 2011 with prices reaching a multi-decade high and falling to half thereafter. Of late, they have been regaining ground due to a 15 per cent fall in acreage as a result of sharply fluctuating prices last year that made farmers shift to crops that pay more.

Further, sowing in central and western zones is lagging due to low rainfall. Mathur says cotton can be a good buy at Rs 950-975 per 20 kg and can rise to Rs 1,250 per 20 kg towards the end of September.

This season also he expects acreage to fall as farmers have shifted to other remunerative crops in North India, and may shift to soyabean in Maharashtra. With robust exports in 2011-12, the stocks, too, have fallen drastically.

"Thus, before the new crop season starts, prices may rise sharply given the below-normal rain," he says. However, the rise may be limited if the government restricts exports.

SUGAR:
Sugarcane planting is almost over, with a 3 per cent rise in acreage. The crop is at the growing phase and so a good southwest monsoon is crucial for a good yield.

"Expectation of below-normal rain may affect sugarcane crop and thereby sugar output in 2012-13 and this has led to pressure on sugar prices in the last two-three weeks," says Mathur.

He recommends buying at Rs 2,850 per quintal and pegs the target at Rs 3,100 per quintal. His logic is that prices are at levels below which the government will have to intervene to protect the interests of millers.

Any report about less rain will add to the upside. Further, global markets may recover in view of concerns over Brazil's sugarcane output.

But there, too, there is a big risk. Last year, with a view to tackle bumper harvest, India had allowed unrestricted exports to support the falling prices. However, if concerns over next year's output increase, the government may restrict exports, which will cap the upside.

Rainfall between June 1-27


WHAT NEXT?

Although June accounts for 18 per cent of the season's total rainfall, Mathur says it may be too early to predict the impact of below-normal rain on agriculture output. Things may change soon, he says, and thus sowing may pick up. The only impact may be delayed sowing and harvesting.

Further, farmers may switch to commodities that pay them more, affecting prices. Mathur expects area under oilseeds and pulses to increase this season on the back of higher returns last year and the increase in minimum support prices, or MSP, this year.

Quote

Rain has been below normal in North West and Central India. Non-availability of water has affected sowing of oilseeds, pulses and cotton.

CP Krishnan

Wholetime Director, Geojit Comtrade

MSP is the price at which the government buys from farmers directly. The government recently increased the MSP of kharif crops for 2012-13 by up to 53 per cent for different commodities to boost production, thereby aiming to reduce dependence on imports of oil crops and pulses.

Having said that, July will be critical for guar, soyabean and cotton, which are grown in Rajasthan, Punjab and Gujarat, says Mullick of Religare. Deficient rain could delay sowing in these states, lower productivity and push up prices of farm commodities as a whole.

Since there are various factors at play while investing in commodities, investors must understand this asset class entirely before investing. Not only is it a volatile investment, it is highly leveraged in nature.

Take turmeric, which was trading at Rs 2,500 a quintal in 2007. High demand and low production took prices to a record Rs 20,000 a quintal in just two years. After this, more and more farmers shifted to producing turmeric and it is now trading at Rs 3,500 a quintal.

Further, we could see a fall in prices of commodities by 15-20 per cent if the rupee were to drop to Rs 52-53, says Bhatia of Kotak. Or after the October-November period when there are no festivals.

AGRI COMMODITY PRICES TO STAY STRONG DUE TO...

>> Possibility of weak monsoon (leading to lower production of kharif crops). Even if rains pick up in the next few weeks, as the weather department hopes, sowing will be delayed, thus affecting the overall output. This may also delay sowing for the next season.

>> Dollar gaining strengthversus the rupee (leading to higher import cost), though the Indian currency has been stable for a while.

>> Increased imports (due to lower production), leading to a further rise in price in the international markets and having a corresponding similar impact on prices in India.
Get latest news & live updates on the go on your phone with our News App. Download The Business Today news app on your device
More from Markets