MONSOON DICTATES COMMODITY PRICES

Agricultural production in India is heavily dependent on monsoon rains as over 60 per cent of cultivable area is rainfed. Thus, the forecast of monsoon rains and its progress is vital for the estimation of agricultural production and thus the movement of agri-commodity prices. Monsoon rains are critical not only for kharif crops, but also provide much needed moisture for the rabi crops sown later during October-November. Thus, a healthy monsoon leads to optimum production of agri-commodities and may lead to sufficient supply in markets which drag the spot prices down during the harvesting season. On the contrary, a weak monsoon normally surges up the prices due to fear of lower supplies.

Despite the forecast of a deficient monsoon by the India Meteorological Department (IMD), the monsoon rains across the country has been above normal so far this season. The showers hit the Kerala coast on June 5, four days behind the normal onset date of June 1. 

Normal Monsoon in June

The progress of the monsoon in the country has been above normal so far, allowing timely sowing of kharif crops - paddy, cotton, castor, soybean, maize, pulses, and other oilseeds. The country as a whole has received 80.71 mm rainfall, 11 per cent more than the normal (72.8 mm) till June 17, 2015, thus improving the possibility of better sowing for the kharif crops. According to IMD, rainfall activity was near normal over northwest India, southern peninsula, and east and northeast India except central India where it has been in excess.

The recent rainfall during June 11-17 was 20 per cent above normal over the country as a whole and forecast of more rains in the northwest and central India during June may continue to pressurize the prices. It is also believed that the prices are unlikely to recover any time soon till the monsoon progress is normal.

Meanwhile, the prices of most agricultural commodities moved down in the futures market during June. Guar seed prices lost more than 16 per cent to trade at Rs 4,146 per quintal. Sugar and castor slipped about 7 per cent and 4.7 per cent to quote at Rs 2,127 per quintal and Rs 3,855 per quintal respectively. The main kharif crops, cotton and soybean, also fell 3.2 per cent and 8.9 per cent to sell at Rs 15,840 per bale and Rs 3,640 per quintal.
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IMD Forecasts Stronger El Nino

Earlier, for the kharif season, the IMD had forecasted another year of deficient rainfall for India mainly due to the El Nino phenomenon. In its long range forecasts released on April 22 and June 2, it has forecast the southwest monsoon to remain below the long period average (LPA) at 93 per cent and at 88 per cent respectively this year.

The forecast on below normal rainfall brought firmness in agri-commodity prices during mid–April and this continued into May. During this period, prices in the futures market surged up to 31 per cent for guar seed and chana while jeera and soybean increased more than 19 per cent and 15 per cent respectively. The bull market sentiments towards agri-commodities was imminent as agricultural production during 2014-15 was adversely affected due to the late onset of monsoon coupled with deficient rains and then unseasonal rains and hailstorms in the northern parts of India during March 2015, which affected the production of cereals, pulses and oilseeds in the country.

In its fresh forecast by IMD, El Nino will get stronger during July, August and September which may result in less rainfall. The probability of a strong El Nino may increase from 12 per cent to 62 per cent during July, August and September. According to the forecast, there is an 88 per cent chance of a moderate El Nino along with a 12 per cent chance of a stronger impact, thereby affecting the growth and maturity of the kharif crop and less moisture for the rabi crops. A stronger El Nino may be pointing towards worsening of the situation by limiting the production of pulses and oilseeds for which buffer stocks have not created by the government, thus posing an upside risk to food inflation.

Impact on Commodities

During this kharif season, farmers have so far planted crops in over 91.61 lakh hectares, lower than 98.88 lakh hectares planted a year ago till June 19, according to data provided by the Ministry of Agriculture. The kharif output of soybean, castor seed and cotton is likely to improve significantly if the monsoon progress will continue as it has till now. Soybean is mostly grown in Madhya Pradesh and Maharashtra. It has continued with its negative trend on account of a supply glut due to less crushing last season. The active NCDEX August 2015 contract plunged 16 per cent from its high in June to trade at Rs 3,450 per quintal. We expect the active NCDEX August 2015 soybean contract to drop below Rs 3,300 per quintal.

As seen in the soybean technical chart, soybean was trading down for the last seven weeks after touching a high of Rs 4,412 during the first week of May. It has now breached the major support line at the level of 2,871 and is expected to trade downwards during the sowing season. Castor seed is mostly sown in Gujarat, Rajasthan and Andhra Pradesh during the kharif season. The castor seed prices mostly depend on the exports of castor oil and meal. Last year (April 2014-March 2015), the export of castor oil and meal dropped 3 per cent and 14 per cent respectively as per the Solvent Extractors’ Association of India. Currently, the NCDEX July 2015 castor contract is hovering around the level of 4,000 and expected to trade near Rs 3,700 per quintal in the coming months. As per the chart pattern, it has formed a lower top and lower bottom, which is a sign of downtrend.

Cotton crop is planted widely all over the country and well-distributed rainfall will boost the production. According to the agriculture ministry, cotton had been sown over 19.66 lakh hectares till June 19 this year as against 20 lakh hectares during the same period last year. During June, cotton trading has been down due to subdued demand from the ginners and millers. Meanwhile, the international markets also remained under downside pressure on concerns over release of cotton from its state reserves in China to reduce its bulging stockpile. The MCX June 2015 cotton contract is down by more than 4 per cent in June and expected to weaken further if normal rainfall persists.

As per the cotton technical chart, the prices are forming a lower top and lower bottom which is basically the sign of a downtrend. Recently it has also breached the major support line and is trading below it – a sign of further weakness.