Three developments last week were a cause for worry for India’s agro trade. These were — apprehensions about the Indian Government’s restrictive actions on export policies in the wake of deficient monsoons; Russia’s August 8 meeting on whether wheat exports should be continued or restricted in view of the dwindling 2012-13 crop; and the USDA’s (US Department of Agriculture) report of August 10 on World’s Agriculture Supply and Demand Estimates (WASDE), with special reference to projections on US’s drought-hit corn crop.

Top Indian Government functionaries have ruled out meddling in the current trading environment, though stakeholders remain apprehensive. The Government needs to keep itself aloof from day-to-day market movements, unless there is a calamity.

There are two main crops in India — summer and winter— each with 50 per cent weightage. Both are exposed to the uncertainties of weather. There is always the possibility of one crop season offsetting the failure of the other. Besides, wheat and rice output in Punjab and Haryana is now supplemented by many other States. But lack of data reliability regarding supply, demand, stock, diversion and climate reduces chances of adopting the right course of government action. Besides, price discovery in Indian futures exchanges remains suspect. Free markets are the best bet in such situations.

Russia’s exports

Russia decided that despite the shortfall of 13 million tonnes of wheat in 2012-13 (56 million tonnes last year to 43 tonnes this year), exports for ensuring better prices to farmers will be maintained.

USDA’s August 10 report has estimated Russian shipments in the marketing year —July 2012-June 2013 — at around 8 million tonnes against 21 million tonnes last year, of which 3 million tonnes will be gone by August. Egypt bought 1,20,000 tonnes of Russian wheat on August 12 after five months at $317 f.o.b for September delivery. Offers of Russian wheat for October shipments are not available. Likewise, Ukraine and Kazakstan are also a showing drop in output and exports. Collectively, major producers of the “former Soviet Union” are down 33 per cent in output, with exports falling by 55 per cent.

India’s prospects

Indian wheat values are at approximately $300 f.o.b and, therefore, competition from the Black Sea regions is now marginal. The Australian crop due in December is threatened by El-Nino. USDA expects an average upside in US wheat prices by another $50/tonne in 2012-13.

India’s overflowing grain inventories are therefore a reasonable replacement. South Korea contracted six cargoes totalling 325,000 tonnes of Indian wheat for October-November deliveries between $322 and $326/tonne (c&f) from Singapore traders, which included sales made by Indian private exporters and 190,000 tonnes by PEC/STC last week at f.o.b $296.68 and $302.50/tonne (against $228 fob of May bids, that were rejected). More Asian countries will turn to India for feed wheat, as the spread between Indian cereal and US corn is more than $60/tonne. Prospects of Iran accepting Indian wheat also appear brighter.

The world’s corn crop is down by 88 million tonnes (from 950 million tonnes in June to 862 million tonnes in July). US production, estimated at 376 million tonnes in June 2012, is now indicated at 274 million tonnes (102 millon tonnes less) with prospects of more decline (in yield), while 55 million tonnes have dwindled in July.

Chicago Board of Trade (CBOT) prices have risen from $203/tonne to $320/tonne in the last two months and US (Gulf) f.o.b is $342/tonne. World demand is reduced by 39 million tonnes; that includes 30 million tonnes in the US, as lower consumption in ethanol and feed is expected.

Surprisingly, CBOT stayed neutral after the USDA’s report of August 10. Either the trade has factored in USDA’s projections or the market is taking a position of pause before reacting in the near future.

At the same time, $2 per bushel or $80/tonne price surge in the US is anticipated — implying that the drought could get worse.

Rain is now progressing well in Karnataka, and Bihar is blessed with a rabi corn crop. Andhra Pradesh is well-positioned for kharif corn, and therefore any anxiety on the supply side is premature. Any increased demand-pull for export can be substituted by feed wheat.

Let the farmers and traders earn the best they can with better prices in the world market from October-November onwards.

Since June 2012, US soya output is down by 12 million tonnes from 87 to 75 million tonnes. Tightness on the supply side may continue. Historically, soyabean prices are 2.25-2.50 times US corn futures in CBOT. Soya is thus doubly bullish.

Soya on a high

The current price of soyabean meal (SBM) is $770 f.o.b Kandla, while in December 2011 it was at $330 f.o.b. Soya producers in India will be truly blessed by goddess Lakshmi this Diwali, while crushers will have to position themselves with “go long mantra” in a rising export market in October-November 2012.

Against an MSP of Rs 2,240/quintal, beans are being traded at Rs 4,400/quintal now with a maximum down side of Rs 3600-4000/quintal in November (pressure of seasonal harvest). The “bull run”, subject to corn values being maintained, will continue — aided by higher imports from Iran under rupee payments.

Any interference by the Government to curb soya meal exports will make crushers vulnerable to insolvency due to the negative “crush margin”.

This may snowball into a crisis of scarcity of edible oil, compelling imports at rocketing prices, and disturbing the marketable earnings of farmers.

(The author is a freelance commodity analyst.)

(This article was published on August 13, 2012)
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