With the weather office projecting normal monsoon rains this year, the agriculture sector is hoping for a healthy year, but any disruption in weather patterns may disturb the mood for commodity markets.
That was the message from market watchers after the India Meteorological Department projected a bountiful monsoon season even as coronavirus restrictions loomed large on the minds of farmers and traders.
IMD has forecast a normal monsoon season this year, with a 61 per cent probability of the rainfall matching or exceeding the country’s long-period average (LPA) of 88 cm. The Met sees seasonal rainfall at 98 per cent of the LPA with a model error of plus/minus 5 per cent.
So, what does it mean for commodity traders?
Monsoon rainfall is essential for Asia’s third largest economy, and a key factor to predicting domestic farm output and overall economic growth. Two-thirds of Indians depend on agriculture for livelihood. Monsoon updates are also watched keenly by market participants and consumers for key changes in retail food prices.
Normal monsoon isn’t everything
Madan Sabnavis, chief economist at CARE Ratings, said while any positive monsoon forecast is a comfort factor for the farm sector, what is critical is the time of arrival, spread across regions so that sowing takes place on time and finally its withdrawal…
“A normal monsoon is a necessary, though not sufficient, condition for a good crop and stable prices,” he told ETMarkets.com.
Weather disruptions tend to send prices of certain commodities soaring, which in turn cause the inflation gauge to tick up.
Citing the example of a wild surge in onion prices last year, Sabnavis said: “While we focus a lot on the concept of normal monsoon, often the numbers are distorted by single crop failures, which can also be due to excessive rainfall.”
In October, excessive monsoon rainfall in parts of the country damaged onion crops, sending the bulb’s prices to as high as Rs 100 a kg in some cities, prompting the government to impose stock limits.
Typically, commodity prices share an inverse relationship with the quality of monsoon: healthy rainfall boosts production, and vice versa.
Currently, the country is busy harvesting rabi season produce – such as wheat, barley, mustard, potato, coriander, cumin and peas. Analysts say logistical disruptions owing to Covid-19-related measures may have a limited impact on food prices.
On the other hand, an increase in commodity investments by hedge funds may continue to support prices. Rabi crops are sown in November.
Here’s how some agro-commodities have fared in the last one year:
Keep it simple, traders!
“Since the holistic picture is positive, it is likely that prices shall attempt a recovery in the longer run. So, buyers in the derivatives or physical markets should look out for the right price levels to enter,” said Abhijeet Banerjee, Senior Research Analyst-Agri Research, Religare Broking.
Agri commodity prices have rebounded sharply from March lows. Some analysts say tighter restrictions might trigger supply disruptions, which can underpin prices.
Asked about the best way to play the normal monsoon theme, Banerjee said: “It is better to keep it simple!”
‘Normal’ monsoon updates may put pressure on the prices of certain commodities for a while, he added.
His favourite commodities at this juncture are:
- RM seeds and soybean among oilseeds, with Rs 6,200-6,400 and Rs 6,300-6,500 good levels to enter, respectively
- Chana in pulses (Rs 5,000-5,200)
- Turmeric (Rs 7,800-8,000) and coriander among spices
He also likes soy oil and palm oil from the edible oils pack.
Ajay Kedia, Founder and Director of Mumbai-based Kedia Advisory, has three favourite commodities to play the normal monsoon theme in the near term: guar seed, cotton and castor.
“Going with a normal monsoon and the current price, farmers will definitely shift from garhwa to cotton, mung and moth crops in Rajasthan, which will support guar seed,” said Kedia, who suggests going long on the commodity at Rs 4,000 for a target of Rs 4,600 with a stop loss at Rs 3,750.
He also said cotton prices have rallied sharply and expectations of increased sowing will have a negative impact on the prices. Castor production has been low this year and a normal monsoon will definitely provide some support to prices, he said.
Kedia’s strategies for pre-monsoon play:
- Sell cotton at Rs 22,000; target: Rs 18,000; stop loss: Rs 24,500
- Buy castor at Rs 5,000; target: Rs 5,800; stop loss: Rs 4,600