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G. Chandrashekhar

Mumbai , June 23

EVEN as crude oil and base metals, especially copper, hog headlines in the commodities market, another segment of the market — agricultural commodities — may soon catch up, going by recent developments.

Since the second half of last year, agricultural commodity prices have, in general, remained depressed because of weak fundamentals such as record production, consumption demand trailing supplies and large inventory. Exceptions such as cocoa (political turmoil in Ivory Coast) have been few and far between.

Speculators too have had their say in the market. This year, however, the sentiment can undergo a change. Supplies in some key crops are expected to be lower and availabilities tight, on current reckoning. In a situation of closely aligned demand and supply, the market is vulnerable to supply-side shocks or uncertainties.

In some important origins weather is likely to impact production, and therefore, prices. Disease too can potentially take its toll. Hot and dry conditions in the US Midwest have lifted soyabean prices to an 11-month high with CBoT July delivery future trading at above $7.35 a bushel.

Soyabean in the US — world's single largest producer — is also threatened with Asian rust disease which is forcing farmers to shift acreages away from the crop. Cotton production too is likely to be affected, not only in the US, but also in other origins, with the forecast of a 15 per cent decline in global cotton output for 2005-06. Overall, yields are expected to be below last year's record levels, while demand in major consuming markets, including China, is likely to spiral.

Drought conditions in Australia are seen lifting the world wheat market which is already in a state of tight balance.

Australian wheat output is unlikely to come up to the earlier projection of 22 million tonnes and may end up at last year's 20 million tonnes (mt), resulting in a further decline in global production from in 2005-06 from the record 623 mt of the previous year.

Indian wheat crop, the harvest of which was completed a few weeks ago, too suffered some damage. While the Government claims harvest of 73 mt (versus target of 78 mt), private estimates place the output number lower at 71 mt or 72 mt.

In the domestic market, wheat prices have firmed up considerably rather early this year. Even procurement of the cereal by government parastatal — Food Corporation of India — has fallen to less than 15 mt.

Weather aberrations — delayed onset of southwest monsoon — and somewhat weak progress so far are likely to impact Indian sugarcane and oilseeds production too, although it may be premature to make any realistic assessment of the extent of damage.

Internationally, sugar is currently trading at 8.98 cents per pound, its highest since March 2005 when prices went up to 9.23 c/lb. Sugar prices are sure to rally if precipitation in India falls below normal.

Finally, with ocean freight rates turning friendly, agricultural commodity prices will find support as trade viability for major importing countries will improve.

With supply uncertainties looming large, lot more caution than usual may be necessary in trading.

Demand, on the other hand, appears to be quite robust with Asia as the centre of considerable growth.

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