Agri commodity futures hot up

Last Updated: Sat, Aug 04, 2012 05:32 hrs
A farmer removes dried-up rice plants in his field in Zap village

Most kharif-sown agri commodities hit the upper circuit today on the National Commodity & Derivatives Exchange (NCDEX) amid concerns of lower output after the India Meteorological Department (IMD) declared partial drought for this year.

Consequently, the benchmark Dhanya Index on the NCDEX rose 1.23 per cent to 2855.07.

The progress of the monsoon, so far, has not been satisfactory with the country receiving only 374.1 mm of rainfall till August 1, against a normal 461.7 mm a deficit of 19 per cent.

The comfort of having back-up in the form of irrigation in the northern states has also taken a setback with the reservoir levels being at an all-time low, which cannot make up for the monsoon deficiency.

Commodity Aug 2 3-Aug Change (%)
Chilli 6,218 6,468 4.0
Turmeric 6,056 6,300 4.0
Jeera 16,685 17,352 4.0
Coriander 5,342 5,555 4.0
Soybean 3,839 3,972 3.5
Maize 1,514 1,555 2.7
Sugar M 3,628 3,689 1.7
Pepper 43,950 44,600 1.5
Chana 4,921 4,970 1.0
Contracts for October delivery. Source: NCDEX

The overall prospect for kharif output this year, hence, appears to be faltering further given the slow progress of the monsoon and the limited time span.

The IMD has already officially signalled a deficient monsoon at 85 per cent of long term average for the year. This comes at a time when the overall economic situation too, is gloomy: with low industrial growth, high food inflation, fiscal pressures, depreciating rupee and tight policy stance.

"The impact of the drought will be manifold. Kharif production will get affected. Pulses, oilseeds and coarse grains are vulnerable today. The buffer stock in rice will though help us out on this front,” said Madan Sabnavis, chief economist of Care Ratings.

But for other commodities, prices will increase on inflationary expectations. Besides, India's reliance on imports would increase, especially for edible oils and pulses (tur, urad and moong). This will create pressure on global prices, too.

Meanwhile, the Reserve Bank of India (RBI) has already lowered the growth projections for the year to 6.5 per cent from 7.3 per cent at the beginning of the year. Progress in area under cultivation looks dismal for certain crops, while the implications for supplies as well as prices are grim.

"The US too, is moving into a drought-like situation and soybean is likely to be affected, along with corn. This will also make imports more expensive. While rabi can make up partly for the overall production, the price impact will not be negated and food inflation will be pressurised at 10 per cent for the year. Lower production will affect demand for industrial goods, which is already at a low, thus affecting the growth in gross domestic product, which will be lower than 6.5 per cent as projected by RBI. Higher import of edible oils and pulses will put pressure on the trade deficit and rupee and, hence, negate the impact of declining commodity prices, especially crude oil,” he said.

Looking at the lower rainfall this season, Crisil, India's largest rating agency is all set to revise the inflation figures upwards. Confirming this, D K Joshi, economist, Crisil, said, "Anything below 90 per cent of rainfall is considered as drought. Hence, with 85 per cent rainfall it is estimated that half of the sowing area under agriculture would be hit. Therefore, we would revise our inflation figure certainly upwards from the past estimates of seven per cent. Because of spiraling agri prices, food inflation would certainly remain in double digits.”

The latest report by the ministry of agriculture showed sowing area under coarse grains and pulses has declined by 27 per cent and 21 per cent to 11.75 million hectares and 6.3 million hectares, respectively.

The acreage area under rice also plunged 4.4 per cent to 19.11 million hectares this year as against 19.98 million hectares from the normal area as of date.

Total area under foodgrains cultivation also reported a decline of 27.3 per cent at 37.2 million hectares as on July 27, compared to 44 million hectares on the same day previous year.

Lower rainfall would reduce groundwater level resulting in a negative impact on rabi crop as well, Joshi said.

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