Why this slump in the price of agri commodities…

One of the key trends in the last few years has been the consistent weakening in the price of agricultural commodities. Be it cotton, food-grains, pulses or edible oil, most of these agri commodities have seen a consistent fall in price. This downtrend has been secular as the Bloomberg Agricultural Commodities index below illustrates…

Over the last 5 years since 2012, the Bloomberg agri commodities index has lost nearly half of its value. Barring some minor blips, the broad trend has been trending downwards. What explains this trend and more importantly, why is this trend getting more accentuated. In fact, the arrow shows a near 22% fall in the commodity index in the last 1 year itself. What exactly are the triggers?

Two droughts and then a bumper crop…

That was the irony that India faced in the last 3 years. Year 2014 and 2015 were drought periods. These 2 years in succession had brought tremendous pain for the Indian farmer sinking most of them deep in debt. Therefore, when there was a normal monsoon in 2016, most farmers expanded Kharif output substantially. The food-grain production for 2016 was nearly 10% higher. This surely helped contain CPI inflation, but the oversupply led to a fall in the price of most agri commodities. Worse still, farmers had expanded the output of most agri commodities on the expectation that the government would fix a remunerative Minimum Selling Price (MSP) for these commodities. Eventually, these MSPs were below the break-even price in most cases and this resulted in farmers literally dumping their produce in the Mandis.

Demonetization leads to reversal of hoarded stocks…

The demonetization exercise undertaken in the month of November came as a big surprise for the hoarders. Now, these hoarders do play a key role in keeping the prices of agri-commodities buoyant and managing the supply flow in such a way that prices do not show sharp volatility. When demonetization came, most of them who were relying on cash hoards to finance the inventory had to indulge in a panic off-loading of stock in the open market. This also resulted in excess supply and eventually depressed the prices. As a result, the problem of a bumper Kharif crop in 2016 got accentuated by the fact that hoarders also off-loaded their stocks as they could no longer fund their inventories.

IMD monsoon estimates for the year 2017…

While the first actual estimates will be released by the IMD in June, there was already positive news in the May update. In the pre-monsoon estimates in April 2017, the IMD had predicted normal rainfall over India but had red-flagged the risk of an El Nino effect in 2017. However, in the subsequent May update, the IMD has confirmed that the El Nino effect had substantially weakened and hence the monsoon was likely to be at the upper end of the long period average (LPA). A normal monsoon is defined as rainfall in the range of (96% to 104%) of the LPA. Prospects of a good rainfall have already applied pressure on agri prices, which explains pressure on most agri commodities in the last month since the May estimates were released.

Effective Storage of perishables is a big challenge…

One of the key agri products in India, Chillies, is facing a real double whammy of excess supply and weak prices. In fact the price of chillies has fallen from Rs.12,000/quintal last year to as low as Rs.1000/quintal this year. The states of Telangana and Andhra Pradesh contribute nearly 55-60% of India’s total chilly output and they have been suffering from lack of cold storage. In fact, for the total chilly output, the state of Telangana alone will require another 100 cold storages of 3000 tonnes each. Spread out cold storage facilities will help manage the supply flow better and bring down the price risk. Farmers complain that at the current price, it is easier for farmers to dump their crops rather than try to sell at a loss.

Moral hazard of bank waivers is a big issue…

Ironically, the bank loan waivers to farmers have became one of the key issues contributing to the lower prices of agri commodities. The Uttar Pradesh government recently announced an Rs.36,000 crore farm loan waiver to small and marginal farmers as part of their election promise. After the farmer agitation in Maharashtra, the state government has also announced an Rs.30,000 crore write-off to distressed farmers. Now, these farm loan waivers play the role of moral hazard. More states are now likely to follow suit and UP and Maharashtra will become a template for farm loan waivers. Farmers are confident that even if they get into distress by selling at lower prices, they can always count on the government for an eventual farm loan waiver to bail them out. This has induced farmers to even sell their produce at non-remunerative prices.

Thanks to a strong INR, food imports have become cheaper…

Another of the key factors impacting food prices is the strong rupee. The INR has appreciated from a level of 68.75/$ in late November 2016 to a level of 64.35/$ by early June 2017. This 6.4% appreciation in the INR versus the dollar went a long way in making imports cheaper and exports costlier. Remember, when the INR was at 68.75/$, the rupee was already overpriced in REER terms. That overpricing has only become more pronounced now. Let us look at the case of food grains. India’s total grain imports in fiscal year 2016-17 stands at 3.4 million tonnes compared to just 1.8 million tonnes in the year 2015-16. This figure has gone up further in the year 2017-18. The crux of the story is that a strong rupee is discouraging exports and encouraging imports, putting pressure on agri commodity prices.

Thanks to technology, productivity yield is on the way up…

India is way below China when it comes to yield per hectare and the productivity of agriculture. But the world is seeing some massive improvements in technology that is taking yields up. Hybrid seeds, more granular use of data combined with drone technology, big data capabilities to track potential problem areas and the recent use of genomics have all contributed to the improvement in productivity of agriculture. The Economist, in a special issue last year, had noted that improvement in yield could be the one big factor which will result in an increase in the supply of agri commodities and a consequent fall in their prices.

Agricultural prices are falling across the board. Be it chillies in Telangana, Tur Dal in Karnataka or tea leaves in Coonoor; the common thread seems to be a fall in prices, almost to the point of making them non-remunerative. With technology being the driver of agri commodity supply, the narrative may have to change substantially. That may be the big challenge!