On Slippery Ground

Prices of farm commodities will fall if Met's rain forecast is right. Invest carefully.
Rahul Oberoi/Money Today        Print Edition: August 2013

The farm sector is the backbone of India's economy. And monsoon is what keeps this backbone in good health. This is because in spite of the rapid expansion of irrigation over the years, 60% of India's total area under agriculture depends upon rains.

Monsoon rains are vital not only for kharif crops, which account for 55-60% of the country's farm output, but also provide moisture to the soil for the rabi season. Agriculture accounts for 15% of India's gross domestic product and sustains 55% population.

This year, the monsoon has covered the country a month ahead of schedule. Till June 26, the total rainfall was 48% above normal. Rains in almost all parts of the country were above normal, barring east and northeast India. This augurs well for farm output. Higher supply, say experts, is likely to bring down prices of farm commodities.

Farmers have so far planted kharif crops over 10.91 million hectares, higher than the 10.83 million hectares in the year-ago period, according to the agriculture ministry.

Between June 1 and June 25, rainfall was 47% above normal in the southern peninsula. This figure was 88% for central India and 116% for northwest India. However, east and northeast had received 47% belownormal rainfall. During the period, 92% country received normal/excess rains. The Indian Meteorological Department (IMD) has said that the southwest monsoon, from June to September, will be normal at 98% long-period (50-year) average, which is 89 cm.

OUTPUT EQUATION
Kharif output is likely to improve significantly if the monsoon plays out as expected. "Kharif foodgrain production is likely to rise 8.09% to 135 million tonnes," says Hanish Kumar Sinha, head of trade and commodity intelligence group, NCML, which helps people manage risk in the two key areas of commodities and inventories.

Vivek Gupta, head of research, CapitalVia Global Research, says, "The IMD is expecting a normal southwest monsoon this year. This will be beneficial for the country's agriculture sector and economy. The monsoon is crucial for kharif production."

A normal monsoon provides moisture to the soil in time, which encourages early sowing; the result is that crops get sufficient time to mature, which means a rise in yields.

According to market experts, these rains have led to early sowing of pulses and soybean. While pulses have been sown over 3,74,000 hectares till June 25, compared with negligible area a year ago, soyabean has been sown over 1,32,000 hectares, as against 15,600 hectares in the year-ago period.

COMMODITIES IMPACTED

A normal monsoon will be good for the output of soybean, cotton, sugarcane and castor seed, plus their by-products such as refined soya oil and cotton seed oil cake. This means returns from these farm commodities that trade on exchanges will be lower this year, say experts.

SOYABEAN:
It accounts for 46% of the country's total oilseed production. The major growers are Madhya Pradesh, Maharashtra and Rajasthan, accounting for 51%, 32% and 11%, respectively, of the country's total production.

Between April 15 and June 25, soyabean prices fell over 7% to Rs 3,810 per quintal. "Prediction of good monsoon raised hope that yields will rise. Good returns in 2012 also led to higher sowing, putting downward pressure on prices," says Vedika Narvekar, chief manager, agricultural commodities, Angel Commodities.

Two of the biggest producers, Madhya Pradesh and Maharashtra, received above normal rains in June. According to the agriculture ministry, oilseeds had been sown over 8.13 lakh hectares this year till June 25 as against 3.37 lakh hectares in the year-ago period. Soybean has been planted over 1.32 lakh hectares as against 0.16 lakh hectares in June last year.

"After harvesting in September, prices may fall to Rs 3,000-3,100 per quintal in October if the monsoon is normal. One can buy at these levels and expect the price to touch Rs 3,750-3,800 by the end of the year," says Narvekar.

The Solvent Extractors Association of India, or SEA, expects 2012-13 soyabean production at 113.4 lakh tonnes, out of which 7.5 lakh tonnes will be retained for sowing and 2.5 lakh tonnes will be consumed directly. The 103.4 lakh tonnes that will be available for crushing is estimated to produce 17.58 lakh tonnes oil in 2012-13.

CASTOR SEED:
India, China and Brazil account for 90% global production of castor seed. India dominates the global trade in castor oil. Gujarat accounts for 77-80% domestic production, followed by Andhra Pradesh and Rajasthan. "Production is expected to be 12.70 lakh tonnes, a 10.47% rise over last year," says Sinha of NCML.

The SEA says that on June 20 this year, the area under castor seed was 0.19 lakh hectares as against 0.04 lakh hectares on June 20 last year.

Since the start of 2013, castor seed prices have fallen over 6% to Rs 3,537 per quintal. "Supply of oilseeds is likely to rise in 2013-14 while the demand for castor seed may be low. Castor seed prices are likely to fall by the end of the year. The price at the end of 2012 was Rs 3,797 per quintal. The expected range for 2013 is Rs 2,870-4,170 per quintal, the average being Rs 3,520 per quintal," says Aurobinda Prasad, chief research analyst, commodities, Karvy Comtrade.

COTTON:
Cotton is an important cash crop grown widely across India. Central India accounts for more than 50% production. In the irrigated areas of North India, sowing starts in May, while in areas that depend upon rains, farmers wait for the monsoon. Timely and well-distributed rains boost yields. As India is the world's second-largest exporter of cotton, the monsoon has a big impact on the global market as well.

According to the agriculture ministry, cotton had been sown over 5.58 million hectares till June 27 this year as against 3.14 million hectares in the corresponding period a year ago.

On July 1, cotton futures on the National Commodity and Derivatives Exchange (NCDEX) were trading at Rs 1,052 per 20 kg. "Prices are likely to remain under pressure due to more sowing this year. NCDEX prices can touch Rs 970 per 20 kg in the next six months. However, steady exports can support prices," says Subhranil Dey, senior analyst, SMC Comtrade.

"We expect cotton prices to fall 20% from the current levels by the end of 2013," says Nithin Kamath, chief executive, Zerodha, a brokerage.

Cotton prices have risen 10% this year. "The reason is high demand in export markets. Domestic mills were also heavy buyers due to expectations about higher yarn exports. Spinners were active in the market due to higher yarn exports while ginners refused to sell as they expected a further price rise," says Kunal Shah, head, commodities research, Nirmal Bang Commodities.

CHILLI:
Chilli is grown mainly during February- March and July-September. Andhra Pradesh accounts for 58% output, followed by Karnataka (12%).

Prices rose 22% in the spot market between January 1 and June 25. Sowing in Andhra Pradesh was 71% lower than in the previous year despite good rains, data from the state's Department of Agriculture showed.

Quote

Amid expectation of normal monsoon, kharif foodgrain production is likely to rise 8.09% to 135 million tonnes.

HANISH KUMAR SINHA

Head of Trade and Commodity Intelligence Group, NCML

Sowing has not yet begun in Guntur, the largest producing district. According to the IMD, the Telangana region in Andhra received 180.4 mm rainfall between June 1 and June 26, 64% above normal, while coastal Andhra received 96.7 mm, 12% above normal.

"Chilli output in the kharif season may rise as better prices and prediction of a normal monsoon encourage farmers to plant more. By the end of this year, chilli may trade in the range of Rs 5,400-4,800 per quintal." On July 1, it was at Rs 6,300 per quintal.

SUGAR:
Sugarcane is another important cash crop that depends upon the southwest monsoon. The major producers are Uttar Pradesh, Maharashtra, Karnataka and Tamil Nadu.

In India, sugarcane is planted thrice a year-in October-November, January and July. Planting of the crop in July is common in Maharashtra while North India prefers autumn and spring.

Sugar has fallen 6.5% to Rs 3,058 per quintal on the NCDEX this year till July 25. According to market experts, production in the 2013-14 crop year is expected to decline due to fall in acreage. The industry has forecast that the production will fall to 22 million tonnes from 24.5 million tonnes last year. However, prices may still remain stable.

"Sugar prices may not go up much due to availability of sufficient stocks and low export demand. Despite partial decontrol of the sector, prices are under pressure due to higher stocks. We expect prices to remain in the range of Rs 2,800-Rs 3,200 per quintal," says Chowda Reddy, senior analyst, JRG Wealth Management.

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