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.
Expanded acreages
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.
-Umesh Shanmugam
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