Farm commodities: Limited output, big profits

If you are worried about the performance of your equity portfolio, you can divert some of your investment to the agri-commodities market, which experts believe, could give handsome returns during 2011.

Rahul Oberoi/Money Today        Print Edition: February 2011

If you are worried about the performance of your equity portfolio, you can divert some of your investment to the agricommodities market, which experts believe, could give handsome returns during 2011.

It is being widely expected that consumption growth amid production constraints could lead to a big hike in prices of farm commodities represented in the National Commodity and Derivatives Exchange (NCDEX) bag of 10 commodities, called Dhaanya.

The index comprises chickpea (chana), cottonseed oil cake, guar seed, jaggery (gur), cumin (jeera), pepper, mustard seed, soyabean, turmeric and wheat. The components of Dhaanya are selected from diverse sub-sectors of the Indian farm industry and account for nearly 70 per cent of trading on the NCDEX platform.

Experts say that guar, pepper, cumin, mustard seed, turmeric, cottonseed oil cake and soyabean are likely to give positive returns by the end of the year, while chickpea would be a good investment for only the first quarter of 2011. However, jaggery and wheat could disappoint.

"The overall outlook for agri commodities for 2011 is positive, with exceptions such as wheat, where the prices have a heavy bearing on the government's policy intervention," says Subhranil Dey, research analyst (commodities), SMC Global Securities. Veeresh Hiremath, chief analyst, Karvy Comtrade, agrees. "We expect the commodities market to remain on the bull run this year," he says.

Going by the trend, Hiremath believes that the bullish trend is likely to generate a huge retail interest in the commodities market, which has so far been lacking compared with other asset classes. "In the recent past, we have been witnessing higher retail participation due to good price movement and decent returns," he says.

Anil Singh Thakur, associate vice-president of Gupta Equities, feels that retail investors will be back once awareness is generated about the benefits of commodity investment. "Retail participation in agri commodities has been lower compared with that on metals and energy. This is due to several reasons, the biggest being the drawbacks in the delivery system. These can be resolved once the Forward Contracts (Regulation) Act, 1952, is amended to give autonomy to the Forward Markets Commission."

To help MONEY TODAY readers take an informed investment decision, we bring you the outlook of the 10 commodities which comprise the Dhaanya index.

Pepper consumption in India, estimated at around 45,000 tonnes, is slated to grow in 2011, keeping prices strong.
Anand James
Chief Analyst, Geojit Comtrade

Pepper: The price of pepper could rise this year in anticipation of lower output. The recent International Pepper Community (IPC) meeting estimated the yield of pepper crop in 2011 to be lower by 2 per cent at 3.10 lakh tonnes against 3.16 lakh tonnes in 2010 and 3.19 lakh tonnes in 2009.

"Indian pepper consumption is estimated at around 45,000 tonnes, and is slated to grow in 2011, which would keep prices firm, making it attractive from an investor's point of view," says Anand James, chief analyst, Geojit Comtrade. Last year, the prices of pepper surged to around 54 per cent.

Turmeric: The price of turmeric surged to around 58 per cent in 2010 and is likely to rise further on growing demand. The commodity has remained firm over the past few years. However, higher production estimates of 67 lakh bags (70 kg each) compared with 46.5 lakh bags last year, have seen prices cascading lately. "These low prices are expected to attract bargain hunting and should lift prices, which would be supported by export demand. However, from a year-long perspective, prices are unlikely to beat last year's record prices unless weather plays havoc," says James.

Cottonseed oil cake: The prices of cottonseed oil cake are mainly influenced by two factors-supply of cottonseed and availability of other substitutes such as mustard meal and groundnut meal. According to the Solvent Extractors' Association, production estimates of cottonseed oil cake stood at around 85.62 lakh tonnes in 2010-11, compared with 75.68 lakh tonnes in 2009-10. This is because the production of cotton this year is estimated higher at 330 lakh bales, against 295 lakh bales in the previous year.

"Despite higher production, prices of cottonseed oil cake will not decline as other alternatives are trading at higher prices. Cotton-seed oilcake is mainly used as cattle feed. Its prices may bottom out in January as the peak arrival period would end and, thus, one can hold a buy position from a long-term perspective," says Vedika Narvekar, Research Analyst, Angel Commodities.

Soyabean: According to market experts, for 2010-11, on the domestic front, soyabean production is estimated at 93.5 lakh tonnes compared with 85 lakh tonnes last year. Though the acreage has declined marginally from last year, the yield is likely to improve. Of the total production, 80 per cent is used for crushing to produce soymeal and oil. The remaining produce is used for direct consumption and as raw material for other products.

"Soyabean supply is likely to tighten further due to lower output in Argentina. We are expecting soyabean to trade higher in the medium term," says Hiremath.

Increased demand for guar-gum and certification required for export to the EU will keep the confidence high.
Subhranil Dey
Research Analyst (Commodities), SMC Global Securities
Guar seed: Experts estimate guar seed prices to remain firm in the coming months and provide good returns to investors. "Increased demand for guar-gum and compulsory certification required for shipments to the European Union may continue to give export business more confidence. In such a scenario, investors can claim good returns as any major downturn looks limited till the arrival of the new crop in November-December," says Dey.

Cumin and mustard seed: The two are major components of Indian cuisines without which the Indian tadka (tempering) is incomplete. The production of cumin in 2011 is expected to be lower than the previous year and is posted at 19-20 lakh bags (55 kg each) compared with 25 lakh bags in 2010.

Mustard seed sowing for the year 2010-11 as of 9 December was seen at 62.07 lakh hectares, marginally up by 1.21 lakh hectares. Rajasthan saw an increase in rapeseed acreage from 22.55 lakh hectares in 2010 to 28.27 lakh hectares this year. The unusual cold weather conditions could affect the yield of cumin and mustard seed. As both the crops are sensitive to cold, their yield may go down by 10-15 per cent from the 2011 estimates due to the La Nina phenomena, which has increased the chances of severe frost weather, especially in the northern and north-western part of the country.

According to Thakur, "Cumin and mustard seed stand out as very lucrative investments in 2011. Cumin is trading in its lower berth compared with other spices such as pepper and turmeric. The current cold wave in the north belt and the cumin-growing areas shall provide the launch pad for the prices to move up in 2011, supported by low carry-over stocks."

Retail participation in wheat will be low as the government will try to keep its price in a comfortable zone.
Veeresh Hiremath
Chief Analyst, Karvy Comtrade
The price of mustard seed are also expected to rise. "Mustard seed, which mostly follows the oil seed complex, is expected to witness a spill-over effect from the majors such as soyabean and refined soy oil prices. The prices of oil seed majors are expected to increase due to reallocation in the index globally along with supportive fundamentals such as increasing demand from China and rise in crude oil prices," says Thakur.


Chickpea: The king of pulses recorded a bumper production for the second consecutive year in 2010 due to favourable weather conditions and increase in acreage. "From an investment point of view, one can take a long position in chickpea for the first quarter of 2011. However, prices may start correcting thereafter as arrivals would be at their peak during April. The price trend in the second half would depend on the forecast and advancement of the monsoon and sowing progress of kharif (summer crop) pulses," says Narvekar.

The chickpea output in 2010 stood at 73.5 lakh tonnes compared with 70.6 lakh tonnes in 2009. The annual consumption of chickpea stood at around 60 lakh tonnes. For 2011, the government has targeted 65.8 lakh tonnes of production. To achieve this, the government has also increased the minimum support price (MSP) for chickpea by around 19 per cent from Rs 1,760 per quintal to Rs 2,100 per quintal. The overall acreage under chickpea has increased and is around 87.79 lakh hectares as on 24 December 2010, against 81.89 lakh hectares during the same period in 2009.

Wheat: The production of wheat touched a record 807 lakh tonnes in 2009-10. This, along with government policies, led to a decline of around 5 per cent in wheat prices in 2010. The drought situation in the Black Sea region reduced the production in Russia, Ukraine and Kazakhstan to a large extent. "We feel that retail participation in the commodity will be low as wheat is one of the essential commodities and witnesses strong government intervention. The government will take all necessary steps to keep the wheat price in a comfortable zone," says Hiremath.

Jaggery: The prices of jaggery may take a U-shaped recovery due to steady consumption. Higher sugar inventory and production of sugarcane might keep availability of jaggery on the higher side. In the current crop year, sugarcane production is pegged at 34.6 crore tonnes and crushing 20 per cent more compared with the previous year. "Jaggery futures may continue to slide towards Rs 900-850 levels. Thanks to the higher MSP, its acreage has increased in major sugarcane producing states like Maharashtra and Uttar Pradesh. In the long term, prices may see a U-shaped recovery due to rising consumption of jaggery and khandsari in the country," says Dey.

Some tips that can help you benefit from commodity trading
  • Gather knowledge about the demand-supply situation, climatic conditions and relevant policy actions.
  • Figure out your risk appetite and trade within your limits.
  • Let profits run, but exit investments when losses cross your tolerance level.
  • Don't try to average a lossmaking trade.
  • Trade in commodities which have adequate volumes and liquidity.

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