Normal monsoon to support economic recovery; will the rally in agricultural commodity prices continue in the coming days?

The southwest monsoon is crucial for India. It provides 70% of India’s rainfall and most agricultural activities depend on it. Image: Reuters

Through NS Ramaswamy

As the second wave of Covid spreads across the country, the good news is that IMD and private meteorologist Skymet have predicted India will experience a normal monsoon again this year. The southwest monsoon is crucial for India. It provides 70% of India’s rainfall and most agricultural activities depend on it. In addition, the agricultural sector accounts for around 18% of India’s GDP and employs more than half of the country’s 1.39 billion people.

Last year, agriculture was the only sector that supported the Indian economy as it saw a slump in manufacturing and other sectors, which were hit hard, mainly due to a foreclosure in the nationwide. Likewise, we expect that normal rains this year will help support an economic recovery, which faces new risks of a resurgence of Covid cases, during the second wave of the pandemic.

Source: IMD, Skymet, Ventura Securities Ltd

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

Source: Factory Ticker, Ventura Securities Ltd

The above table suggests that NCDEX / MCX agricultural commodity prices have outperformed, mainly due to better fiscal policy measures taken by global central banks and the RBI.
Most of Kharif’s agricultural commodity prices (predict cotton) and Rabi crop prices cooled mainly due to the southwest monsoon (June to September) forecast by IMD as “normal”

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

Going forward, we expect Rabi commodity prices to kick off the next leg of the rally after peak arrivals seasons. The rally will be mainly supported by the festival season, which lasts from August to December.

Should the Agri Commodity price rally continue in the coming days / months?

Excessive precipitation in the central region; a Performance of the hat-trick of commodity prices expected: According to IMD forecast, excessive rainfall above 106% is likely in the central Indian region, which could impact Kharif crops of cotton, soybeans and sugar. This could damage or reduce agricultural production and commodity prices could head north.

Higher crude oil prices may support the prices of the oilseed complex, guar complex and sugar: Over the past month, Brent crude oil prices have been trading above $ 70 / bbl. Most of the time, the oilseed complex, the guar complex and the price of sugar have a positive correlation with the prices. Any further increase in the price of crude oil will drive the prices of these commodities north.

A higher MSP price will increase agricultural prices: The Cabinet Committee on Economic Affairs (CCEA) recently approved a higher Minimum Support Price (MSP) for all mandatory kharif crops for the 2021-22 marketing season. This should lead to higher prices for agricultural products.

– The speculative “net long” on agricultural commodities has reached historic highs.

The second lockdown could disrupt the agricultural commodity supply chain and industry demand: Due to the shutdown of APMC Markets and Mandi due to the lockdown, this is likely to create supply chain disruptions leading to increased demand for essential products like rice complex, edible oils and spices (namely, pepper and turmeric); Demand from the cotton textile sector will also be impacted. We expect the industrial use of raw materials like corn and meal for poultry to decrease.

– Overall, the dry weather conditions in Brazil and Argentina are favorable for higher prices with also strong post-covid demand from China.

– On the other hand, according to Reuters, the Fed will announce a reduction in quantitative easing in August or September due to growing concerns about inflation that could push down the prices of international commodities such as cotton, soy and sugar. Internally, the peak arrival season for Rabi crops and a positive southwest monsoon forecast by IMD and Sky encountered are price buffers.

Monsoon distribution to give direction of prices – Finally, the monsoon distribution of excess / lower or normal precipitation would give the reaction to agricultural commodity prices. The prices of agricultural products are also influenced by other factors, such as fluctuations in oil prices and rupee exchange rate, import / export duties, etc. Depending on the development of these factors, they could exert upward or downward pressure on the prices of agricultural products. .

(NS Ramaswamy is Head of Commodities, Ventura Securities. The views expressed are those of the author.)

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