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Agricultural commodities off bullish path. Where are they headed?

Agricultural commodities off bullish path. Where are they headed?

16 Jun 2021

There has been a reversal from the bullish trajectory in most agricultural commodities in May. NCDEX June Agridex futures have declined to trade near Rs 1,438 from near Rs 1,510 levels seen in the first week of May.

Rising prices and the threat of the pandemic had weighed on the markets. As most states imposed tighter lockdown restrictions, destruction of demand was seen in the primary markets. Despite the pandemic-influenced supply disruption problem, the markets reversed April’s gains.

Progress on the monsoon front has been satisfactory, which will continue to imbue a bearish tone to the agricultural commodities planted in the summer season.

Will the downward trend continue in June? Let us first understand the factors that will influence the prices of different commodities.

Chana: The prices are near the MSP level of Rs 5,100/quintal. Therefore, perceptions are strong that the market may fall much. Talks of a smaller crop size and the possibility of improvement in consumption, subject to the re-launch of the Pradhan Mantri Garib Kalyan Ann scheme, will be positive drivers moving forward.

It may be noted that due to the second wave of Covid-19, a few state governments have asked the Centre to restart the distribution of free food grains to 810 million people under the PMGKAY scheme.

Soy oil/soybean: Underlying sentiments are down on the back of increasing new supplies in Brazil and Argentina. The US, on the other hand, has a tighter supply balance sheet. The broader price view for vegetable oils remains bullish for soya oil and the positive data once again from the latest US Department of Agriculture (USDA) report backs the view. India’s lower crop size and limited inventory will be seen as a bullish price driver in the longer run. The poultry market is recovering gradually and once the unlocking begins, the demand for soy products will improve.

Crude palm oil (CPO): Tight inventories in Malaysia and Indonesia, and the prospects of improvement in export demand (as prices have corrected last month) will be the key price drivers. One has to observe the extent of production increment in the coming weeks. As of now, the extension of lockdown in Malaysia will be discouraging for carrying on plantation activity, which may lead to production falling short of previous estimates.

RM seed: The prices will be influenced by factors such as lower inventory, stable usage of mustard oil and the government’s earlier announcement to prevent the blending of other edible oils in the manufacturing of mustard oil. This will restrict the downside potential largely.

Cotton: USDA’s cotton projections for 2021/22 (August-July) include higher estimates for both world cotton production and mill use in comparison to 2020/21. As a result, 2021/22 ending stocks are expected to decrease for two consecutive seasons. On the domestic front, nearly 90 per cent of the crop has already arrived in the country while the new crop season is far away. All in all, there is a bullish price scenario for this year.

Guar seed/guar gum: Satisfactory progress on the monsoon front and sluggish export markets will be a limitation against the upward trend for now. But in near future, we may see a strong upside rally in case export orders for guar gum pick up. As crude oil price direction appears positive from a broader perspective, export prospects for guar gum can improve in the coming months. The inventory is, however, high enough to prevent chances for any significant price appreciation.

Spices: For the next few weeks, hand-to-mouth business is expected in jeera, turmeric and coriander. Once the pandemic cases start falling significantly, importers will focus on fresh negotiations for the spices. Lull export business will therefore check the upside moves in the short run. Inventories of these spices are running lower. The prices will be moving in a range and with limited upside.

Kharif planting scenario: Last year, infections were extremely less in the rural areas. Therefore, the progress of sowing was satisfactory. India harvested a bumper crop. This year, rural areas have also been affected, which has delayed sowing. The situation in rural areas is not completely known and there is a lack of data to assess the extent of the disease. Therefore, a lot will depend on the progress of the disease and kharif sowing operations will be impacted if the pandemic is not brought under control.

As the lockdown restrictions ease this month, most of the primary markets will resume functioning, which can result in a gradual improvement in the demand situation gradually. For June, chana, edible oils and oilseeds, and the cotton complex are most likely to trade with an upward bias but will face difficulty in sustain higher levels. On the other hand, the guar complex and spices may move sideways.

(Abhijeet Banerjee is Senior Research Analyst-Agri Research at Religare Broking. Views are his own)