If 2008 ended with global commodity market prices falling, 2009 is expected to show similar trends, at least till June. The five commodity indices tracking energy, metals and agriculture markets showed an average 40.5% fall in the fourth quarter of 2008, taking the full-year fall to 42.35%. Wheat dropped by 33%, soya beans lost 22% and corn prices slipped by 14%, not to forget the over 60% fall in crude oil prices, the main driver of commodity prices. The price direction going forward doesn?t signal any major shift in the case of agricultural commodities. Funds that shunned commodities as prices dropped in the second half of 2008 don?t look like coming back very soon because the global meltdown will continue to make them focus on relatively risk-free assets. Fundamentally, too, factors are not in favour of a strong recovery in commodity prices in 2009. The slowdown has led to fewer export orders and higher closing stocks. World wheat ending stocks are projected to rise by almost 21% in 2008-09 to 187 million tonnes, palm oil stocks are estimated at 9.6 million tonnes in 2009, up 25% from last year, rice ending stocks are projected at 80.8 million tonnes, almost 2.3 million tonnes more than 2007-08.
Closer home, commodity prices have shown a definite softening trend since July 2008 and if the fundamentals remain as they are now, then barring sugar, price of no other commodity should increase substantially. Going by the pace of sowing, wheat production this year could reach 80 million tonnes. And if weather remains favourable during the crop growing stage, coupled with huge foodgrain inventories in excess of 25 million tonnes prices may fall to below MSP level of Rs 1,000 per quintal by March. The same applies to oilseeds. Soya beans and cotton are already selling at below MSP in many places and the new mustard crop due for harvest could also sell below the MSP of Rs 1,700 per quintal. Initial indications are that India should harvest a bumper mustard crop in excess of 6 million tonnes in 2009. The big question for Indian policymakers is whether this period of falling prices calls for government intervention. Disintermediation helps farmers realise better prices but this will call for changes all along the supply chain and close coordination with state governments. This is unlikely to be attempted by a government with three months or so left before elections. On the other hand, election worries may increase the pressure for irrational schemes. That will need to be guarded against.