Sharp spike in agro commodities over tepid farm output, high import prices

Threat of poor weather conditions looms. Cold wave and pest attack could damage standing Rabi crops and elevate prices across the board in 2020

Most major commodities have been rallying for the past six weeks, largely on lower-than-expected production or higher import prices, as seen in the case of edible oil. Experts say farm prices in India are expected to remain firm. 

Crude palm oil, which is largely imported, has risen over 50 per cent in six months. The rally in the price of the commodity that followed Malaysia's opposition to India’s actions in Kashmir, tightened supply in the internataional market, causing a sharp surge in India's import bill. A spike in the demand for palm oil, which is used for ethanol blending, has supported the spurt in the value of imports.

Crop damage has also had a spiralling effect on farm commodity prices, particularly in Soy bean and mustard.

While Chana has risen over seven per cent, wheat prices are up by as much as 12 per cent. The rally in these two commodities is due to reports of weather irregularities in some area where rain and heat have impacted yield significantly. 

Extensive crop damage has even impacted the vegetables market. While onion is an oft-repeated story, even potato and garlic have risen sharply. And despite some moderation in recent weeks, tomato is still up by as much as 40 per cent. 

Ajay Kedia,director, Kedia commodities, says, “After the rally in onion prices, similar signs are being seen in other agriculture commodities. We have already seen a sharp increase in edible oil seeds. Soy bean gained 13 per cent, impacting refined soy oil prices which were up 15 per cent, Mustard gained about 14 per cent, and crude palm 0il skyrocketed 25 per cent the past three months, after unprecedented heavy rainfall in September-October adversely impacted kharif engenderment by 4-6 per cent.”

Sugar prices were kept high artificially the past one-and-a-half years to help mills pay dues to farmers. But now, a global supply crunch seems to be lending support as well. The International Sugar Organization (ISO) has raised its forecast of a global sugar deficit in CY20 to 6.12 million tonnes from its earlier estimate of 4.76 million tonnes made in September. This has pushed up global prices and paved the way for exports from India. 

Sugar output has already been cut by over 20 per cent to 26-26.5 million tonnes. If exports improve further, the glut in India will gradually come down. A sugar exporter said on condition of anonymity, “Millers have signed contracts for two million tonnes of sugar and another three million tonnes are likely in the upcoming months. Thus, lower cane production, higher diversion to ethanol and a pick-up in exports should lead to lower inventory levels in India by the end of the season.” This will improve the outlook for the commodity going forward. 

Globally sugar, coffee, edible oil prices have seen a good rally lately and following lower estimates of Australian wheat crop, the prices of the grain are also seen firming up. A JP Morgan global commodity research report says, ‘Looking into 2020, we see a flat to slightly positive return profile across agro commodities – with a bullish risk bias.”

The scene is India is no different. Kedia says, “With mundane Rabi sowing in 2019-20, the threat of adverse weather conditions still looms. Rabi standing crops also face threats of a cold wave and pest attack, which would damage crops and ultimately elevate prices of most crops in 2020.”