Financial Daily from THE HINDU group of publications
Sunday, Jan 19, 2003
Agri-Biz & Commodities
Columns - Focus
No rise in agri produce prices despite drought
MUMBAI, Jan, 18
DESPITE drought affecting as many as 14 States and agricultural output showing an alarming decline, prices of food products have not shown any appreciable increase. Inflation which is wont to raise its head at the slightest provocation is under reasonable control.
The price behaviour appears abnormal because one tends to associate drought and lower farm output with higher prices and inflation. But clearly, a combination of favourable circumstances is helping the country tide over the drag of the most telling monsoon deficiency in two decades.
Large buffer stocks, market intervention measures, relief programmes, continuing imports, low global prices and falling interest rates are all seen contributing to inflation control, effectively neutralising the adverse effect of lower output.
For kharif 2002-03, the advance estimate of the Agriculture Ministry shows significant crop losses as compared with kharif 2001-02. Among the important crop losses are a 12.5 million tonnes (mt) decline in rice production to 66.86 mt; 7.52 mt decline in coarse cereals output to 19.54 mt; a 3.31 mt decline in oilseeds to a new low of 9.89 mt; 2.61 million bales lower cotton production to 9.08 million bales (170 kgs each); and 15.82 mt decline in sugarcane output to 276.39 mt.
Apart from these major foodgrain and commercial crops, horticulture products such as fruits and vegetables have also suffered production losses. In addition, advance signals for rabi crops are far from encouraging because of poor soil moisture. Under ordinary conditions, all these must combine to produce a potentially explosive situation.
The reality is different, however. The wholesale price index published by the Office of the Economic Advisor in the Ministry of Commerce shows the index for "all commodities'' at 166.9 as of December 21, unchanged from the number as on August 10 when the adverse impact of poor rains in July was beginning to be felt.
For a large number of commodities, the wholesale price index number at the end of 2002 was not significantly different from that in July and August. The last four months of 2002 provided ideal conditions for a strident price rise lower domestic output, a free trade regime with no restrictions on storage and movement, easier credit access and falling interest rates.
Despite the provocation, agri-produce prices have shown very limited volatility. Traders are not too keen to build inventory. No one talks of hoarding or black marketing, the catch-phrases so popular until the early 1990s. Clearly, business conditions of the 1980s are well and truly behind us.
Business Line spoke to a number of processors, traders, speculators, brokers, representatives of marketing yards (mandis) and senior corporate executives in agri-business to find out why the agri-produce market this season is behaving the way it does, so different from our earlier experience and so different from the way we have been programmed to expect market behaviour.
Very clearly, the Indian agri-produce market has undergone a perceptible change over recent years. Gone are the days when traders made money because of an imminent price rise caused by shortages and restrictions on trade including imports.
Gone are the days when one invested funds to purchase stocks of agri-produce at the time of harvest in October/November, held on to the stocks for a few months, waited for prices to rise and disposed of the material for a hefty profit, and went laughing all the way to the bank.
With the removal of internal trade-related restrictions on storage, movement and credit access, the agri-commodity markets have become freer than before. Interest rates have started to fall and access to funds is easier today than ever before. Opening up of the borders for foreign trade following removal of quantitative restrictions on import and export has added another dimension to the free trade regime.
The process of trade and economic liberalisation over the last few years has impacted the market as a result of which it is undergoing transformation. Importantly, the risk-reward profile of the commodity markets is continually changing in line with market dynamics.
Intermediaries have, of late, become risk-averse in the wake of increasing free-market conditions and rising competition. Earlier, it used to be rather easy for stockists to go long - invest to buy goods, wait for prices to rise and sell to earn profit; but no more. Prices do not any more move unidirectionally, that is up and up.
Experience of the last three years when domestic prices of major commodities ruled weak following bearish conditions in the international markets has made traders turn cautious. Low and occasionally falling prices of major foodgrains (wheat, rice, maize), oilseeds and vegetable oils, cotton, sugar, coffee and a host of other goods frustrated speculators and prevented them from making money in their usual way.
The Indian market is rapidly integrating with the global markets and becoming increasingly import-driven in case of select commodities like cotton and edible oils. Indeed, the very threat of import from abroad at lower prices is reining-in prices.
Many players are now discovering to their dismay that the days of "going long'' are over, and they perhaps have to change their strategy, and "go short''. That of course is easier said than done because going short demands tremendous insight into the market and a thorough knowledge of latest changes in the marketplace. The risks are far higher in going short.
On the demand side, a sharp fall in rural incomes - it has happened in three out of last four years has affected offtake of even essential commodities. Little growth is seen in the consumption of items like sugar and edible oils despite consumer-friendly prices. Foodgrains are being distributed at low prices under various relief programmes of the Government including the food-for-work programme in many regions.
Large buffer stocks of wheat, rice and sugar;
Real possibility of Government intervention measures to curb price rise;
Continuing imports of edible oils, pulses and cotton;
* Free trade regime that fosters competition and prevents undue gains or windfall profits for anyone;
Falling interest rates lowering carrying cost; and
Unattractive risk-reward ratio for speculators
These factors have combined to contain a potentially inflationary situation. In addition, heavy arrival of kharif harvested crops during September and October ensured that prices remained under leash.
Indeed, even from farmers' perspective, incremental income in the form of higher prices may not materialise because currently the market is not producer-friendly and the grower has already suffered because of lower yield.
Many believe, prices of essential commodities will spurt after April/May by which time most of the crops would have been marketed. Lean period of June-September and festival season will push demand up.
Also, the international commodity markets are bottoming out and world prices of many crops are on the recovery path. Of course, the rupee has been gaining vis-a-vis the dollar which makes imports so much more attractive and exports less profitable.
While the crop losses during 2002-03 and decline in rural incomes are real, the domestic agri-commodity market has remained largely unaffected because of the aforesaid combination of circumstances. The consumer-friendly prices for whatever reason that we see despite drought are good for the Government; but that should not lull the policy makers into complacency or make them slacken efforts to deliver relief to those affected.
For the large rural population, the south-west monsoon due in June this year will be crucial. Confidence in agriculture and indeed in the economy will return only if we have a vigorous onset and smooth progress of monsoon that could pave way for a healthy growth in farm production and rural incomes.
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