Supply pressure will limit the upside

During the first half of 2012, prices of oilseeds, pulses and other soft commodities rose sharply due to delay in monsoon. However, favourable weather conditions following the irregular monsoon benefited the farmers of the winter crop. Late monsoon provided soil moisture, which encouraged farmers to increase acreage under the rabi crop. All these resulted in an exponential growth in yield this year. According to the latest sowing figures released by the Ministry of Agriculture, the area under rabi crop touched 62.9 million hectares this year, as against the last five-year average of 61.9 million hectares.

Among the winter crops, mustard output this year is likely to rise compared to last year. Production in 2012-13 is set to rise to about seven million tonnes (mt), compared to 5.9 mt in the previous year. This is chiefly due to higher yield, up 20 per cent from the previous year to 1,100 kg per hectare in 2012-13. Useful showers helped increase the productivity of the crop. Interestingly, this year the Solvent Extractors' Association distributed Gujarat Mustard-3 (GM-3) variety among farmers, which has shown improved yield compared to conventional seeds. After the recent surge in prices, we feel correction in mustard seed till Rs 3,250-3,200 will provide a fresh buying opportunity. Buying should be avoided at current levels.

Wheat production during the current rabi harvest season is expected to be 94-95 mt - near the levels of 2011-12. India achieved a bumper wheat crop in the 2011-12 crop-year (July-June) as yields rose due to conducive weather during February and March. The government has already given permission to export 4.5 mt of wheat in 2012. This could give prices a boost. Else, prices are likely to remain under pressure.

Soybean prices have been drifting lower since September on expectations of higher production in South America. However, fresh demand for soy meal from India has triggered a bullish streak in the domestic market. Demand for soy meal from China and South East Asian countries has remained strong. Exports to Iran tripled to 189,975 tonnes in February, compared to 61,089 tonnes in January. On the back of meal demand, soybean prices have surged to Rs 3,500 per quintal from Rs 3,300 a quintal in a span of five days. Despite a surge in supplies from Brazil and Argentina, if demand for meal continues to grow, we expect limited downside for soybean. But, due to increased supply from South America we expect prices to test Rs 3,400 per quintal.

On the other hand, weather predictions for the US remain a cause of concern, as it approaches its new planting season. According to the forecast by National Oceanic and Atmospheric Administration (NOAA), climate models indicate negative precipitation anomalies for South-Eastern US through April. With an expected change from recent wetness to drier conditions, drought is likely to persist or develop along the central and eastern Gulf Coast. Drought now when the US soybean stocks are at a nine-year low will push up prices of oilseeds in the second half of the year. Therefore, weather developments in the US warrant a close watch.

The demand-supply scenario for the domestic market projects higher supply of most rabi crops. Weather developments in Argentina and US will determine meal exports from India. This will be an important factor to watch out for.

The author is head - commodity research, Nirmal Bang Commodities Pvt Ltd