April 28, 2009

life in general & financial markets: agricultural commodities production is falling in india

Here is something I contributed (for the magazine I write for) a story on agricultural commodities' production and prices:

No price crop in crop prices!

Even as the last one month's rally in equity prices on the stock market has activated many investors' imagination again, there has been a quiet upswing in the commodity markets, both spot (mandis) and derivatives. This has been happening since two months now (see chart below).

(click on the image below to see it enlarged and clearly:)

While the equity market's recent upsurge has been predominantly due to spike in liquidity of global equity investors the commodity markets have been affected primarily due to fundamentals. " Lower crop prospects and arrivals have led to an increase in the prices of farm products," says Madan Sabnavis, chief economist at National Commodity and Derivatives Exchange (NCDEX). "This holds for both products that are traded and not traded on the futures platform."
The Ministry of Agriculture's recently-released Second Advance Estimates for 2008-09 production figures reveal a sharp drop in many important agri crops as compared to the 2007-08 actual. Of the five most dominant cereals – wheat, rice, maize, jawar and bajra – except for rice the production estimates are lower by anywhere between two and 10 per cent. A similar situation holds in pulses crops such as tur, urad and moong.
The situation is perhaps the worst worse in oilseeds where the total production estimate for 2008-09 is 259.60 lakh tonnes as against 297.55 lakh tonnes actual production in 2007-08. Among these, groundnut and soybean have been the worst affected. In other agri crops, sugarcane has been the worst hit. Its production estimate for 2008-09 is down sharply to 2904 lakh tonnes compared to an actual of 3481 lakh tonnes in 2007-08 and the earlier government 2008-09 target of 3400 lakh tonnes.
Lower production has meant that both the agri commodities are facing an upward pressure on prices. This has resulted in a rise in trading interest in some commodities in spot and derivatives markets. For instance, the aggregate sugar futures volume on NCDEX has gone up by 36 per cent from Rs 94,942 crore in October-December 2008 to Rs 1,29,593 crore in January-March 2009.
Due to the upswing, some lobby groups, particularly the sugar lobby, have once again started a campaign against futures trading in agri products. "Futures trading and futures prices are a barometer which tell us the state of the market and we cannot blame this barometer in case the market fundamentals are not favourable," says NCDEX's Sabnavis.

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