Reaping High Returns

Rupee volatility was a major factor, with the currency's fall supporting exports. Chinese economic growth and its demand for agricultural commodities will be the other crucial factor in 2014, says ADMISI Commodities' Tushar Rathod.
Print Edition: January 2014
Tushar Rathod, Senior Research Analyst, ADMISI Commodities
Tushar Rathod, Senior Research Analyst, ADMISI Commodities

Tushar Rathod
Tushar Rathod
The past year was eventful for agricultural commodities. The rabi harvest (sown in winter 2012-13) was strong for wheat, maize and oilseeds. Further, the monsoons were 5.6% above normal this year. So, rice, maize, soybean, groundnut, coarse cereals, pulses and cotton recorded strong production this Kharif season. Sugar production continued to exceed consumption, ending 2012-13 with high surplus. The rupee's volatility was also a major factor for farm commodities, with the currency's fall supporting some commodity prices (export). Globally, supply of most agricultural commodities improved in 2013, resulting in lower prices for corn, wheat, soybeans, sugar and vegetable oils.

Chinese economic growth and its demand for agricultural commodities is the other crucial factor in 2014.

Indian soybean prices rose significantly in 2013 due to the falling rupee, despite sluggish overseas prices. Global prices were limited by strong production in South America and the US, while Chinese demand supported it further. Supply from Argentina and Brazil is likely to be high in 2014 with output nearing record levels, while China will continue to be a driver of demand.

Indian soybean price rose in the first half of 2013 due to demand from Iran. Tough sanctions on Iran had forced it to import soy from India, but a repeat is unlikely as sanctions have been eased. Prices may fluctuate in 2014, with the possibility of lower prices due to increase in global supply.

Soy oil:
Price of Indian soy oil rose slightly, despite an 8% fall in overseas prices, due to the weak rupee. Global vegetable oil prices fell in 2013 following increased supply of palm, soy and sunflower oils. The edible oil refining industry in India has demanded an increase in import duty for refined vegetable oils, which should increase the price of refined Indian soy oil. Supply of soy oil and palm oil is likely to be strong in 2014 as well, but higher production of bio-diesel could absorb the increased production.

Cotton gained about 15%, once again owing to the weak rupee and demand from yarn manufacturers. Overseas prices have increased by about 4%. China's massive reserve, which account for 55-60% of global cotton inventory, and its reserve policy were the major factors in pricing. Despite holding reserves, China continued to import Cotton, supporting prices. The price of March 2014 ICE Cotton future ranged between 80-95 cents per pound for most of the year. However, by the end of the year, prices fell after cotton came from the US and India as well as estimates of high production of Indian cotton this season. There were also fears that China may offload reserves and not import less. China's cotton policy is still the most critical factor affecting cotton prices in 2014.

Prices fell by 13% and was bearish through 2013 due to a huge inventory and strong domestic production. The fall in prices was despite a weaker rupee and an increase in import duty from 10% to 15%. The other factors were lower overseas prices and distress sale by Maharashtra and Karnataka mills to pay arrears to farmers.

Globally, sugar prices fell to a three-year low. High production in India, Brazil and Thailand, along with already available stocks, put pressure on prices.

In 2014, low prices may lead to increased use of sugar cane for ethanol production in Brazil, which could use up supply and boost prices. In India, the industry is struggling with low sugar prices and high sugar cane costs. There is now a demand to hike import duty from 15% to 40%.

Chana (chickpea):
Chana prices breached the Minimum Support Price (MSP) of Rs 3,000 per 100 Kg set for 2012-13 following high production estimates of 8.88 million tonnes and imports of 0.697 million tonnes, ensuring ample supply. Australian and Canadian chickpea prices remained low following record crops of 0.817 million tonnes and 0.161 million tonnes, respectively, and low demand from India.

The government has raised the MSP for 2013-14 to Rs 3,100 per 100 Kg, which may prompt farmers to plant more chana. However, farmers in Madhya Pradesh may shift to wheat as government buying provides support for the cereal. Favourable weather in the next few months is a key factor.

The price of Indian maize in spot markets fell in 2013 following a high production estimate of 22.23 million tonnes for 2012-13. Internationally, corn prices fell in 2013 from the highs of 2012. Crop estimate of 355.33 million tonnes from the US lowered prices.

Globally, decline in corn prices could result in farmers substituting corn for soybean. Even so, according to the US Department of Agriculture (USDA), existing stock of 164.32 million tonnes may limit the resultant rise in prices. Focus on South American crops and the weather in Argentina and Brazil in 2014.

Initially, a low production estimate increased prices by 5.2% in 2013, following which low stocks and domestic demand supported wheat prices. Official data also shows the country exported a record 5.3 million tonnes in 2012-13 and the government's wheat procurement in 2013 (till November) was 394.95 million tonnes as compared with 405.89 million tonnes for the same period last year.

Prices might fall in 2014 on expectation of better supply in global markets. According to USDA, ending stocks is expected to be 178.47 million tonnes in 2013-14, 1.6% higher year-on-year, while world wheat production is up 7% year-on-year.

Black pepper prices has gained 34% in 2013 (till November). The fall of the rupee aided pepper exports, while production forecast, at 55,000 tonnes, was higher than market estimates-between 40,000 and 45,000 tonnes. The heavy monsoon affected crop production. Internationally, prices were stable in the first half of 2013 as stocks with key producers, such as Indonesia and Brazil, was expected to be low.

Again, weather will be a key factor. Strong demand for Indian pepper might continue to support prices. However, Indian prices remained higher compared with other varieties, which might slow down trade due to competition from Indonesia and Vietnam.

Senior Research Analyst, ADMISI Commodities

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