Normal monsoon to support economic recovery; will agri commodity price rally continue in coming days?

June 19, 2021 12:18 PM

At a time when the Second Covid wave is spreading across the country, the good news is that both the IMD and private weather forecaster Skymet have predicted that India is likely to have a normal monsoon

Monsoon, Indian agriculture, Kharif, rabiThe South West monsoon is crucial for India. It delivers 70% of India’s rainfall and most Agricultural activities depend upon it. Image: Reuters

By NS Ramaswamy

At a time when the Second Covid wave is spreading across the country, the good news is that both the IMD and private weather forecaster Skymet have predicted that India is likely to have a normal monsoon again this year. The South West monsoon is crucial for India. It delivers 70% of India’s rainfall and most Agricultural activities depend upon it. Further, the Agriculture sector accounts for about 18% of India’s GDP and employs more than half of the country’s 1.39 billion population.

Last year, Agriculture was the only sector that supported the Indian economy while it recorded a slump in manufacturing and other sectors, which were badly hit, mainly due to a nationwide lockdown. Similarly, we expect that this year, normal rains will help support an economic recovery, which is facing new risks from resurgence in Covid cases, during the second wave of the pandemic.

Source: IMD, Skymet, Ventura Securities Ltd

Agricultural commodity prices recovered and outperformed in FY 2020-2021 supported by factors:
– Global stimulus packages, weaker dollar and adverse weather patterns
– Lower interest rates by global central banks

Source: Ticker plant, Ventura Securities Ltd

The table above suggests that NCDEX/MCX Agri commodity prices outperformed mainly supported by better fiscal policy measures taken by global central banks and the RBI.
Most of the Agricultural commodity prices of Kharif (Expect Cotton) & Rabi Crops prices cooled down mainly due to South west monsoon (June to Sept) predicted by IMD to be ‘Normal’

Source: Tickerplant, Ventura Securities Ltd
Source: NCDEX, Ventura Securities Ltd

Moving forward, we expect Rabi commodity prices to start the next leg of the rally after the peak arrivals seasons. The rally will be mainly supported by the festival season, which lasts all through August to December.

Is the Agri Commodity price rally set to continue in the coming days/months?

Excess Rainfall in Central Region; a Hat-trick performance of commodity prices expected: According to the IMD forecast, excess rainfall over 106% is likely in Central India region which may impact the Kharif crops Cotton, Soybean and Sugar. This could damage or lower the crop production and the commodity prices might head northward.

Higher crude oil prices may support the Oil seeds complex, Guar complex and Sugar prices: Over the past one month period, Brent Crude Oil Prices were trading above USD 70/barrel. Mostly, Oilseed complex, Guar complex, and Sugar price have a positive correlation with prices. Any further increase in Crude oil price will fuel these commodity prices to north.

Higher MSP price will increase agri-prices: Cabinet Committee on Economic Affairs (CCEA) recently approved a higher minimum support price (MSP) for all mandated kharif crops for marketing season 2021-22. This is likely to result in higher agri-commodity prices.

– Speculative “net long” in agricultural commodities is at historical highs.

The second lockdown could disrupt the supply chain of Agri commodities and demand from industry: Due to APMC Markets and Mandi’s remaining closed due to lockdown, it’s likely to create supply chain disruptions resulting in an increase in demand for essential commodities like Rice, Edible oil & Spices complex (viz, Pepper & Turmeric) ; Demand from the cotton textile industry is also going to be impacted. We expect the industrial usage of commodities like maize & oil cake for poultry farming to go lower.

– Globally, dry weather conditions in Brazil and Argentina are supportive for a price rise with also a strong post-covid demand from China.

– On the flip side, As per Reuters, Fed to announce QE taper in Aug or Sept on rising inflation concerns that could pressure the international commodities such as Cotton, Soybean and Sugar prices on the downside. Internally, peak arrival season for Rabi Crops and a positive south west monsoon forecast by IMD and Sky met are price dampeners.

Monsoon Distribution to give Price Direction – Finally, the monsoon distribution of the excess/lower or normal rainfall would give the reaction to the Agri commodities prices. Agri-commodity price are also impacted by other factors, such as movements in oil prices and the Rupee exchange rate, import/export duties, etc. Depending on how these factors move, they could exert an upward or downward pressure on agri-commodity prices.

(NS Ramaswamy is Head of Commodities, Ventura Securities. Views expressed are the author’s own.)

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