Weather drives world agriculture market
At a time when global commodity markets, especially energy and metals markets have come under pressure due to weak macroeconomic sentiment and demand concerns and as a result, prices of some commodities have recently declined to levels last seen in 2009-2010, agricultural markets have been booming in the wake of serious weather aberrations affecting some of the major origins in the northern hemisphere.
The worst drought in several decades currently threatening the US crops (mainly corn and soyabean ), weather concerns in the Black Sea region (Russia, Ukraine and Kazakhstan) impacting grains as also near-drought conditions faced in the Indian sub-continent have catapulted grains and oilseeds prices to record highs.
Meanwhile, India too continues to be the focus of attention with the forecast that the southwest monsoon will be less than 90 per cent of the long-period average which signifies drought. Forecast of El Nino is likely to reduce rains in the second half of the June-September season impacting a range of crops including rice, coarse cereals, pulses, oilseeds, cotton and sugarcane.
Of course, for the world market and particularly for investors, the US drought remains the key factor setting sentiment and prices. Soyabean and corn seem to be the most favoured in terms of price performance.
Despite expanded acreages, yields are set to take a hit due to acute moisture stress. In case of wheat, on current reckoning, 2012-13 output is forecast down by 30 million tonne due to geographically widespread downgrades, but comfortable carry-over stocks are expected to cap the upside risks to prices.
While crop prospects and harvest size continue to come under close scrutiny in this weather-market, market participants are also concerned about precipitate policy intervention by governments. For instance, the anticipated decline in the US corn output may prompt the government to discourage diversion of the crop for bioethanol production.Wheat too may come under this ambit.
At home, it should come as no surprise if the Union government unleashes a series of measures – fiscal, monetary, trade, tariff and administrative — to fight food inflation. Ban or sharp curtailment of export of essential commodities would be the most logical step to expect, followed by imposition of stringent storage restrictions.On the futures platform there may be stricter regulatory oversight. Even re-imposition of selective credit control on essential goods may be considered.
Simply put, the policy context has now become complex. Countries will be forced to undertake extraordinary measures to respond to the extant extraordinary situation. The most unfortunate part for India is that our own drought has coincided with similar conditions in the US, the world’s largest agriculture producer and exporter.
The focus must now turn to the southern hemisphere. Whether expansion in crop production in the second half of the year will at least partially compensate for the decline in the first half and bring about some price relief is a conjecture at this point of time. But if current high prices are any guide, there will be supply response soon, subject again, of course, to normal weather.