Agri commodities' price to decline by 5% on diesel price cut

The Centre decided to decontrol diesel leading to a Rs 3.37 a litre price cut

Agri commodity prices are likely to fall in a couple of days, as transportation costs have come down as a result of the diesel price cut. The government had on Monday decided to decontrol diesel prices, which led to a fall of Rs 3.37 a litre. With the global crude oil prices declining sharply in the past few months, the diesel price cut will reduce transportation cost of agri commodities by at least five per cent. It will also reduce the cost of commodity cultivation significantly, depending on the use of diesel gensset.

Commodity prices have started pulling down in the futures market. On the National Commodity & Derivatives Exchange, wheat for delivery in February 2015 fell 2.8 per cent to Rs 1,591 a quintal. Similarly, chana for February 2015 delivery fell 0.7 per cent to Rs 2,982 a quintal. Sugar M for December delivery, too, fell, albeit marginally, to Rs 2,786 a quintal.

“While the impact was not seen in the spot market on Tuesday, a five per cent fall across all agri commodities cannot be ruled out due to diesel price cut,” said Sharad Maru, president of the Grain, Rice & Oilseeds Merchants’ Association, a foodgrains trading body representing spot bulk traders, in the Agriculture Produce and Marketing Committee, Vashi.

Transportation costs include about five per cent of commodity price. With good kharif harvests awaited and favourable rabi sowing going on, the overall agri commodities are expected to remain normal.  Diesel prices affect the agriculture sector in two ways – direct cost as input and indirect cost in the form of transport charges.

“Here, the lower price - which is four-five per cent reduction on an average basis - will improve the cost of cultivation and, given the unchanged prices, will improve net income of the farmers,” said Madan Sabnavis, chief economist at CARE Ratings.  However, for farmers, the cost of diesel has gone up from the subsidised days. This applies only to the farmers who have been generating their own power for irrigation. The indirect cost of transport should ideally come down with the lower cost of diesel. However, in most cases, the transport cost - the price paid for a truck- or a tractor-load of goods - does not come down once it goes up. Hence, the cost might not quite come down.

Given these two implications, the final price of food products might not be impacted significantly as factors such as minimum support price and supply-demand mismatches will have a bearing on the final price. The decline will only be marginal given that the diesel price had actually gone up sharply and now come down by 4-5 per cent.

“We do need to see a sharp fall in diesel prices to really make transport costs come down. In fact, often the ‘transport cost’ has been held back by transporters even as the diesel price went up towards the market oriented rate. This reduction may be taken to cover earlier loss of margins,” Sabnavis added.

Therefore, on the whole, there will be a marginal downward impact given that the transport costs are normally rigid in downward direction. Therefore, food inflation on the whole will be impacted only marginally. Direct impact is likely to be more perceptible for fuel prices.