The year 2012 may be tough for commodity investors, especially those who have exposure to agricultural commodities and edible oils. A World Bank report, Global Economic Prospects, released in January, says prices of agricultural commodities and edible oils are likely to remain under pressure due to improved supply. The report says the global price of rubber is expected to decline 30 per cent, while prices of wheat, maize, refi ned soya oil and crude palm oil are likely to fall nine per cent, 12 per cent, 16 per cent and 20 per cent, respectively, from 2011 levels. What will this mean for Indian investors? While global trends may be refl ected in some commodities, experts feel domestic prices of maize and soya oil may move in a different direction from the global market.
SPECIAL: Will returns from commodities improve?
World Bank View: Rubber prices reached their historic high in 2011 due to weather-related supply disruptions in South-East Asian rubber-producing countries, which account for 90 per cent global production of natural rubber. However, due to lower prices of crude oil, a key input of synthetic rubber, and weak demand for tyres due to the general economic downturn, prices moderated and ended the year 46 per cent below their February 2011 peak. The bank has predicted that global prices of natural rubber will fall 30 per cent in 2012 from the December 2011 level.
Domestic Outlook: Indian experts too expect rubber prices in the country to fall in 2012. C.P. Krishnan, a whole time director at Geojit Comtrade, says: "On the back of rising production and slowing car sales, the price of natural rubber can touch Rs 17,500 per 100 kg in the ongoing calendar year." In India, rubber in Kochi touched a high of Rs 24,100 per 100 kg in April 2011. On December 31, 2011, it was trading at Rs 19,750 per 100 kg. Between January 2011 and December 2011, the price fell five per cent due to higher production and lower demand.
On January 30, 2012, rubber was trading at Rs 19,566 per 100 kg on the National Commodity and Derivatives Exchange (NCDEX). "Uncertain global and domestic economic outlook and slowing car sales hit the demand for natural rubber in 2011. Favourable weather also increased output and lowered prices," says Krishnan. According to the Rubber Board of India, rubber trees planted over 14,000 hectares seven years ago are now turning productive. In the last quarter of 2011, India's natural rubber production was 288,000 tonnes while consumption was 242,000 tonnes. On the fl ipside, the Society of Indian Automobile Manufacturers Association expects car sales to recover in 2012/13 as economic conditions improve. Market experts feel this may arrest any sharp fall in prices.
WHEATWorld Bank view:
The World Bank is anticipating that global prices of wheat will decline nine per cent in 2012, compared to the December 2011 level.Domestic Outlook:
Experts say wheat prices in India have very little correlation with global prices. Being an essential commodity, its free trade is restricted. India has been creating new records in wheat production for the last couple of years.
According to a report by SMC Investments and Advisors, wheat can fi nd strong support at Rs 1,050 per quintal in the current calendar year. On February 1, it was trading at Rs 1,240.75 per quintal on NCDEX. Dharmesh Bhatia, Associate Vice President (Research) Kotak Commodities, says: "Good weather is expected to help production touch a record. The buffer stock is at record levels. The Food Security Bill will require the government to store huge stocks of foodgrain. So, it has been cautious in allowing export of foodgrain despite record availability.
Therefore, it seems that the commodity is likely to remain under pressure in the domestic market." Experts feel a comfortable supply situation will soften prices when the harvest starts in April. "Assuming normal weather and record production, wheat prices in Delhi can drop to Rs 1,150 per quintal in 2012.
Private sector buying could emerge below these levels," says Bhatia.
CRUDE PALM OIL
World Bank view: The supply of crude palm oil, used in consumer products ranging from shampoo to chocolates and cosmetics, is expected to increase in 2012. The bank has predicted that prices will fall 20 per cent this year. Domestic view: According to a SMC report, Malaysian crude palm oil production this year will be more or less fl at at 186,000-189,000 tonnes as compared to the 2011 forecast of 188,000 tonnes.
Badruddin Khan, Assistant Vice President, Agriculture, Angel Commodities, says: "Palm oil is expected to trade lower this year on account of higher global production. The price can decline 16 per cent from the December 2011 level." In 2011, crude palm oil declined four per cent and was at Rs 546 per 10 kg on December 30, 2011. Khan says it could touch Rs 460 per 10 kg in 2012.
Prices of crude palm oil remained fi rm in the early part of 2011 and touched a high of Rs 584 per 10 kg on February 10, 2011. Thereafter, they declined 13.16 per cent and touched Rs 507.10 on November 30, 2011. "Crude palm oil prices declined after February due to reports of better production in Indonesia and Malaysia," says Khan.
Prices bounced back in November 2011 after fl oods in Malaysia.Out of Sync
REFINED SOYA OIL
World Bank view: The price of refi ned soya oil will slide another 16 per cent from the level of December 30, 2011.
Domestic view: Kunal Shah, Head of Research, Nirmal Bang Commodities, believes the downside in refi ned soya oil is limited and the outlook for the domestic market is bright. "By the end of the ongoing calendar year, we expect prices to test the Rs 740 per 10 kg level," he says. On February 1, the price was Rs 689 per 10 kg.
Assuming normal weather and record production, wheat prices in Delhi can drop to `1,150 per quintal in 2012: Dharmesh Bhatia
In 2011, the price of refi ned soya oil jumped 14.16 per cent to Rs 723.20. According to experts, this sharp movement in refi ned soya oil prices can be attributed to the weakening rupee and bad weather in Argentina. "Besides, a weakening rupee made imports expensive, with the result that prices jumped in the domestic market," says Shah. India is the world's top buyer of edible oil and imports half the vegetable oil it consumes. That is why prices of the commodity are heavily infl uenced by the movement of the rupee.
World Bank view: Global maize price will fall 12 per cent in 2012. The US Department of Agriculture, in its fi rst assessment for 2011/12, has projected that global food supply conditions will improve and maize production is expected to rise 6.4 per cent over the last year.
Domestic view: Experts do not agree and say maize prices could rise in 2012. They say the global output scenario is looking bleak with more crop damage in Argentina, the second-largest producer of maize. Also, cob-setting may reduce yields. Vimala Reddy, Research Analyst, Karvy Comtrade, says: "China is looking forward to refi ll its grain reserves, which could boost prices in India. Faster growth in poultry sectors in South-East Asian countries might also help."
Experts say rabi production of 2011/12 might be fi ve million tonnes, which would reach the market by March-April. However, in 2012, demand may increase by 5 to 10 per cent, including for domestic consumption and export.
Also, corn production in Argentina is estimated to fall 20-25 per cent this year, which will keep prices on the uptrend. "Global export demand might shift towards India to compensate for the supply shortfall in Argentina and Mexico. Depending on export demand, prices could touch a high of Rs 1,400 per quintal," says Bhatia. On February 1, maize was trading at Rs 1,300 per quintal in Delhi. In 2011, the price rose 12.82 per cent to Rs 1,131 per quintal on the back of a healthy surge in exports.
"Maize exports are likely to touch 40 lakh tonnes in 2011/12," says Reddy. Exports were 31 lakh tonnes in 2010/11, according to the US Department of Agriculture.
Courtesy: Money Today