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How investors can make gains from a deficit monsoon
As a commodity investor, you can take advantage of the resulting shortages pushing up prices. For instance, in 2002-03, when El Nino disrupted the monsoon, castor seed production fell 34 per cent. As a result, its price zoomed 30 per cent during the summer season.
Less rainfall likely to affect kharif crops production

Less rainfall likely to affect kharif crops production

This could be another El Nino year, the weather phenomenon that occurs in the Pacific Ocean, disrupting weather patterns across the globe. In India, El Nino leads to deficit monsoon, even drought, in some years. That's not good news for the country's agriculture sector, which is heavily dependant on good rainfall.

President Pranab Mukherjee, in his address at the Central Hall of Parliament, also mentioned the likelihood of rainfall deficit . "My government is alert about the possibility of a subnormal monsoon this year and contingency plans are being prepared," he said.

But as a commodity investor, you can take advantage of the resulting shortages pushing up prices. For instance, in 2002-03, when El Nino disrupted the monsoon, castor seed production fell 34%. As a result, its price zoomed 30% during the summer season.

This year, too, the output of kharif crops sown in the rainy season may fall. Sowing for the season starts with the first rains in July, when the south-west monsoon hits the country.

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Monsoon forecasts for the current year are gloomy. The India Meteorological Department (IMD) expects 38% probability that the southwest monsoon will be below normal at 93% of Long Period Average (LPA); also, there is a 33% chance of drought (below 90% LPA) and a 70% chance of El Nino.

Skymet, a private forecaster, has said that there is a 40% probability of the southwest monsoon being below normal, 25% chance of drought and 30% chance of El Nino. The Australian Bureau of Meteorology says there is at least a 70% chance of El Nino occurring this year. Some models have predicted a transition to El Nino as early as July.

Naveen Mathur, associate director, commodities and currencies, Angel Commodities Broking, says, "Taking into consideration the forecasts by the various agencies, we expect that the southwest monsoon will be below normal. And if El Nino is strong, we may face drought."

Kunal Shah, head, commodity research, Nirmal Bang Commodities, seconds Mathur and says, "El Nino, which is expected to develop during July-August, has brought drought concerns."

WHAT IS EL NINO?

EL Nino is a weather condition caused by warming of tropical Pacific Ocean which occurs every two to seven years and lasts for about a year on an average. It affects wind patterns, causing floods and drought in different parts of the world. Some early signs of El Nino are rise in surface pressure over the Indian Ocean, Indonesia, and Australia, and fall in air pressure over Tahiti and the rest of the central and eastern Pacific Ocean. Trade winds in the south Pacific weaken or head east and warm water spreads from the west Pacific and the Indian Ocean to the east Pacific.

El Nino takes the rain with it, causing extensive drought in the western Pacific and rainfall in the normally dry eastern Pacific. It affects rainfall in India during monsoon. Due to more heating, warm waters at the eastern coast of South America increase sea surface temperatures and result in diversion of flow of moist winds from the Indian Ocean towards the eastern coast of South America. This reduces the amount of rainfall in received by the Indian sub-continent.

Prerana Desai, vice president, research, Kotak Commodity Services, says, "India has got lower-thannormal rainfall in seven out of the last 10 El Nino years."

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IMPACT ON COMMODITIES

According to market experts, El Nino is expected to affect kharif output as 55-60% of the country's sown area is still rain-fed. In oilseeds, soybean, groundnut and castor seeds may be hit, while among pulses, tur, urad and moong may be the worst affected, apart from sugarcane, cotton and rice.

We give you the outlook for kharif crops which are available for trading on the National Commodity and Derivatives Exchange (NCDEX) and can be impacted by below normal rains.

Castor Seed: The sowing of castor seed takes place in June-September and harvesting in November-March. Prices were at a record Rs 4,664 per quintal in December 2013 but stabilised as harvesting started and remained low in the first half of 2014. They have fallen 12.17% to Rs 3,908.35 per quintal this year till May 30. India accounts for 50% global castor production.

Abhijit Tambe, senior research analyst, WealthRays Securities, says, "Fall in export demand and heavy profitbooking kept prices under pressure in January-May." Tambe is bullish on castor seed and says, "El Nino can lower production of castor and lead to a rise in prices. Another issue is the impact of El Nino on Brazil, a big contributor to the global production."

The major producers are India, China and Brazil. With China consuming most of the castor seed it produces, India is a major exporter. It produced 12.05 lakh tonnes in 2013-14. At present, we have reserves of 12-13 lakh tonnes. Annual demand (domestic and for export) is close to 15 lakh tonnes. Thus, supply constraints are likely, pushing up prices.

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El Nino, which is expected to develop during July-August, has brought concerns over drought in India: Kunal Shah, Head, Commodity Research, Nirmal Bang Commodities


Production and domestic/export demand indicates a surge in prices. Tambe of WealthRays Securities says, "As prices are speculative in nature, the possibility of El Nino may drive them further up from June. As the monsoon picture becomes clear, some stability can be expected by August. Technically, the long-term trend is bullish, and prices are expected to move to Rs 5,000-5200 per quintal by the end of December."

Sugar: Sugar prices have risen 14% since February due to demand from bulk consumers. Sugar was trading at Rs 3,050 per quintal on May 30 as against Rs 2,656 per quintal on February 1.

Rohit Gadia, founder and chief executive officer, CapitalVia Global Research, says, "Forecast of below normal rain this year coupled with fall in output due to heavy rainfall in Uttar Pradesh last year contributed to the rise in prices. Some crop was damaged by a disease called 'white crop'. Technically, sugar broke its major resistance level of Rs 2,850 per quintal in March, and has been trading above that since then."

70% is the likelihood of El Nino affecting this year's monsoon, according to the India Meteorological Department

The delay in payments by sugar factories also discouraged farmers from increasing acreage. Sale to producers of alternative sweeteners to make way for sowing of wheat due to late start of production by sugar mills also supported the upward movement. The government also notified an incentive of Rs 3,300 per tonne for exports in March 2014.

Well-distributed rainfall from June to September is required for good growth of the crop. This is the active growth period for sugarcane when rainfall encourages rapid growth, elongation and inter-node formation. Experts say that El Nino may reduce the production of sugarcane, causing a spike in prices. Other factors that may support prices are zero addition to Brazil's milling capacity, forecast of strong demand and fall in area under sugarcane in Russia and Ukraine.

Gadia of CapitalVia Global Research says, "Technically, sugar is weak on the charts for the short term. In three-six months we expect a fall in prices. It is sustaining below its major resistance of Rs 3100 per quintal. We expect prices to come down to Rs 2,900 per quintal, which will be a very strong level for the commodity. There may be a bounce in the long term. Till the end of the year we expect prices to go up to Rs 3,250 per quintal and thereafter to Rs 3,600."

Cotton seed oil cake: When cotton seed is crushed for extraction of oil, the by-product which remains after the extraction is called cotton seed oil cake. It is mainly used as cattle feed.

Buoyed by strong demand, prices of cotton seed oil cake rose 13% to Rs 1,645 per quintal this year till April 30. However, after that, prices fell 5%; they were at Rs 1562.5 per quintal on May 30 on the NCDEX.

Ajitesh Mullick, AVP, retail research, Religare Commodities, says, "Robust demand in December and January kept prices firm. The prospect of a poor monsoon, however, supported the sentiment. Prices again touched a high of Rs 1,600 per quintal by the end of April this year. But fall in demand for both cotton and cotton seed oil cakes put prices under pressure again."

According to experts, sowing of cotton is expected to start from June, and the progress of monsoon is critical in determining the short- to medium-term prices trends. Late arrival of monsoon will delay sowing and lower productivity.

"Delayed monsoon can create a significant bullish trend for practically all agri commodities but will have the maximum impact on kharif crops that are sown in June. Till December, support is at Rs 1,450-1,470 per quintal. Resistance is at Rs 1,700-1,750 per quintal," says Mullick. Soybean: Since the start of 2014, soybean prices have risen by 16% to Rs 4,523 per quintal. During the period, they touched a high of Rs 4,863 per quintal on May 7.

DK Aggarwal, chairman and managing director, SMC Investments and Advisors, says, "Factors that fuelled this bullish momentum were concerns that production of oil seeds may fall in the next season if the country receives less rainfall. On the demand side, steady export enquiries from Iran, South Korea and Thailand have added to the momentum."

In the international market, US soybean prices climbed to the highest level in more than 10 months after a report showed record demand from US mills, boosting concerns that supplies from the world's second-biggest exporter would be reduced.

Data compiled by the Ministry of Agriculture showed that India requires 3,42,906 tonnes quality hybrid soybean seeds for the 2014 kharif sowing season. Availability is 2,73,289 tonnes. The shortage may affect India's soybean output.

In the 35th All India Rabi Seminar of Oilseeds, Oil Trade & Industry held in March, the estimate of soybean crop and availability from the kharif crop in 2013-14 was pegged at 102.30 lakh tonnes as compared to 107 lakh tonnes in 2012-13. The marketable surplus for crushing has been estimated at 89.80 lakh tonnes as compared to 97 lakh tonnes in 2012-13.

Aggarwal of SMC Investments and Advisors is bullish on the commodity and says, "In the long term, the counter may continue to find support above Rs 4,200 per quintal. The gains may get extended towards Rs 5,000 per quintal by the end of December. The fundamental factor supporting the positive sentiment will possibly be concerns over the shortage of soybean seeds." Refined soy oil: Refined soy oil prices in the Mumbai spot market have risen 1.15% since the start of the current year, tracking a sharp rise in prices of soybean.

Mathur of Angel Commodities Broking says, "We may see a fall in yield, which will lead to lower availability of soybean. Lower availability in turn will lead to a rise in prices of refined soy oil. We expect refined soy oil to trade in the range of Rs 625 per 10 kg to Rs 760 per 10 kg till the end of the year. Prices are likely to remain on a high till the third quarter of 2014 due to tight supply. Prices will also take cue from factors such as the onset of monsoon, sowing progress as well as condition of the soybean crop, and withdrawal of monsoon.

However, prices may start declining once the new crop enters the market after the beginning of the fourth quarter. Movement in the Indian rupee will also be an important factor."

Crude Palm Oil: Since March 11, the prices of crude palm oil have plunged 14.3% to Rs 546 per 10 kg on the NCDEX.

Crude palm oil price at the Bursa Malaysia Derivatives Exchange exchange fell to a five-month low due to lower exports from Malaysia despite festival season demand and strengthening of the ringgit against the dollar.

Tarun Satsangi, head, commodity and currency research, Globe Commodities, says, "Crude palm oil prices have been falling since the start of this year on account of high global production, subdued demand from consuming nations, expanding stocks in Malaysia and Indonesia and firm Malaysian ringgit, making exports uncompetitive."

El Nino may hit rains at the world's two-largest palm oil producers Indonesia and Malaysia.

Satsangi of Globe Capital says, "El Nino can hit production and yield, which will result in firm prices next year. Right now the supply is enough but we need to see the situation at the start of the next crop year. If production figures for 2014-15 remain robust, prices will soften 5-7%, but any disappointment in production numbers will trigger a rally and in that case prices are going to rise, probably by similar percentage points."

Vibhu Ratnadhara, assistant vice president, commodities, Bonanza Commodity Brokers, says, "July-September 2014 is a very important period for the crop. El Nino will definitely hurt palm production next year as damage to the fruits will show its results from October this year. Domestic crude palm oil prices largely depend on rupee movement and monsoon.

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