Over the last five to six months, corn, wheat and soybean prices have crashed.
FOR the last 10 years, farmers in India benefited from both increased production and higher price realisations, leading to rising rural incomes and declining poverty rates. That happy story may now be near its end. The main reason is declining global prices for most agri-commodities (see Table 1).
Over the last five to six months, corn, wheat and soybean prices have crashed to $3.70, $5.40 and $10.30 a bushel, respectively, at the Chicago Board of Trade (CBOT) exchange. Even these represent a minor recovery from the lows reached in early October.
Just for comparison, CBOT corn futures had peaked at $8.49 per bushel in August 2012. The highs for soybean and wheat were $17.94 (reached in September 2012) and $13.34 (February 2008), respectively.
“The prices now are almost going back to the Jurassic Age,” said BK Anand, director (grains & oilseeds crush), Cargill India, one of the country’s biggest commodity traders.
CBOT is the world’s premier exchange where futures and options contracts in commodities are traded.
The current situation is dramatically different from the one prevailing between 2003-04 and 2013-14, a decade during which production of most crops rose significantly (see Table 2), partly enabled by technologies that arrived at just the right time — Bt cotton, single-cross corn hybrids and Pusa-1121 basmati.
Farmers also gained from higher price realisations: While overall inflation based on the GDP deflator — a more accurate measure — averaged 6.8% in the last 10 years, the annual price increase for “agriculture” was even more at 9.7%.
As farmers experienced rising incomes from both higher production and improved terms of trade, India registered the sharpest decline in rural poverty rates for any decade since independence.
The decade-long global commodity price boom helped farmers by making India’s agricultural exports competitive; these soared from $7.5 billion in 2003-04 to $42.6 billion in 2013-14.
It also forced the Centre to substantially raise the minimum support prices (MSP). The MSP of wheat, for instance, went up from R630 to R1,400 per quintal; the Madhya Pradesh and Rajasthan governments paid a bonus of R150 on top of that.
The impact of the crash in grain prices isn’t small for India, which in the last two years exported an average 6 million tonnes (mt) of wheat and 4.5 mt of corn annually worth $1.75 billion and $1.2 billion, respectively.
In corn, export demand and the spread of single-cross hybrids had resulted in even a state like Bihar despatching over 600 rail rakes (of 2,600 tonnes each) last year, much of which was shipped out from Kakinada and other east coast ports.
However, the economics has since turned adverse.
India’s exports of wheat and corn were last contracted in April-May, at prices of $275-280 and $235-240 a tonne, respectively, free-on-board.
“While you can export wheat today at $220-230 a tonne and corn at $175-180, the fact that these work out below even their corresponding MSPs of Rs 14,500 ($236) and Rs 13,100 ($212) means there can be no shipments really,” said Tejinder Narang, an independent grains trade analyst.
But what this also does is limit the scope for MSP hikes that would only widen the wedge between domestic and international prices, apart from adding to public grain stocks already tow and a half times the required levels.
No wonder the Centre last week raised the MSP for the 2014-15 wheat crop by a modest Rs 50 per quintal. It has also sought to reduce procurement by permitting states to impose a maximum levy of 25% on production by rice mills; some like Andhra Pradesh had fixed this mandatory quota as high as 75%. The Chhattisgarh government, at the Centre’s instance, has decided to cap official paddy procurement to 10 quintals per acre.
But foodgrain farmers aren’t the only ones to be affected by declining global prices.
Soybean is selling in MP mandis at around Rs 3,000 a quintal, against Rs 3,500 at this time last year. The main reason is a slowdown in soybean meal exports. While these amounted to 2.8 mt valued at $1.6 billion in 2013-14, the April-September period this year has seen the country ship out just over 0.1 mt.
“Last time, prices even crossed Rs 4,500, whereas this time hardly 5% of the crop has arrived so far and prices only seem headed lower,” said Rajesh Agarwal, chief coordinator, Soybean Processors Association of India.
While no agri-commodity has been spared from the global price crash, Ashok Gulati, former chairman of the Commission for Agricultural Costs and Prices, felt it was still early to conclude that “we are in a bear cycle”.
“I prefer calling it a price moderation or correction. Basically, prices peaked towards 2011-12, and that led to a significant supply response. Its effects are being felt particularly now, as we have had benign weather and bumper crops everywhere, be it the US, Latin America, Russia or Ukraine. Even the drought in India hasn’t been as bad as was initially feared,” he pointed out.
But what could reinforce any kind of bearishness in agri-commodities from supply gluts is the simultaneous softening of international crude prices currently under way.
“It restricts the scope for diversion of corn and palm oil for biofuel usage. Also, it makes commodities that much less attractive (as an asset class) for fund managers,” Gulati said.
While all this isn’t great news for Indian farmers, the silver lining is it will enable a further easing of inflationary pressures — which may then embolden the Reserve Bank to finally start cutting interest rates.
By Harish Damodaran