Thursday, August 13, 2009

The Debts of the Lenders: India Begins To Experience Food Inflation Hunger Pangs

Not surprising really when you consider that the sub-continent has not experienced any significant rise in sea temperatures this year.
Jim Rogers must be rubbing his hands with glee. Any attempts at official intervention are likely to exacerbate bullish speculators.

Satellite image from NOAA.

India Food Prices Rise On Drought, High Import Prices

With 167 of India’s 626 administrative districts declaring a drought this year, prices of staple foods have risen by an average 30% and as much as 40% in some cases. The government wants imports to help bridge the domestic supply gap and rein in prices, but that may be easier
said than done. Efforts to encourage imports so far have had limited success because of higher international prices while what is seen by many as a last resort - subsidizing imports - could
drive up prices even further, making imports more difficult.

It’s a double blow to the government this year. Poor monsoon, coupled with rising global prices have put policy makers in a dilemma,” said Harish Galipelli, head of research at JRG Wealth Management. The government may give more import incentives but that may not work, as any new incentive will only push world prices even higher, said Sanjay Tapriya, director of finance at Simbhaoli Sugar Mills Ltd., a leading sugar producer in the country.

India faced a similar situation in 2006-07 and 2007-08, when a decision to import as much as 7 million tons of wheat amid falling domestic stocks pushed up international prices so much
that the country was left paying an import price of INR16,000 per ton by the time the program ended, compared with a price of around INR8,000/ton at the start of the program.

Sure enough, prices rose also because of other factors such as tight global supply, but India’s decision to enter the market after a gap of nearly six years was seen as a major catalyst for the sudden surge in prices. Prime Minister Manmohan Singh has said the government is ready to undertake open market intervention again to prevent the rise in domestic prices caused by insufficient rains.

“We need to be aware of the possibility that reduced production of kharif (summer-sown) crops in the current year may have an inflationary impact on prices of food items in the coming
months,” Singh said at a special meeting of federal and provincial officials earlier this week. “We should not hesitate to take strong measures and intervene in the market if the need were to

India’s Meteorological Department has estimated that rainfall during the June-September monsoon season this year will be substantially below longterm average, severely reducing plantings and damaging standing crop in many parts of the country. Rainfall was 29% below average as of Aug. 11. Analysts have said the country may face the worst drought in 50 years if rainfall remains weak during the rest of the season. Monsoon rains in June were the lowest in 83 years.

“A continuation of status quo in the remaining weeks of this monsoon season will lead to a severe drought in 2009,” rating agency Crisil said this week.

“In our assessment, a fifth of the country is reeling under drought conditions,”
brokerage Kotak Securities said in a report, forecasting an 18% fall in summer-sown food grain production and a 13% drop in total food grain output in 2009-10.

Morgan Stanley has halved its earlier forecast of India’s agricultural growth to 1.5% in fiscal 2009-10 although the government is yet to officially revise its target of a 4% growth in agriculture production this year. According to federal farm ministry, the area under paddy cultivation has fallen 20% this year to 22.82 million hectares. The wheat crop, which is
mainly winter-sown, may also be affected due to insufficient soil moisture, according to analysts.

Sugar cane acreage is down at 4.3 million hectares as of Aug. 6, compared with 4.4 million hectares at the same time last year. Sugar production in the current crop year ending September 30 is estimated to be 14 million to 15 million tons, down sharply from 26.3 million
tons in the previous year. Production of pulses could fall by 11% to 13 million tons in 2009-10
while demand is estimated to be 17-18 million tons.

Domestic sugar prices have risen almost 40% to INR2,800/100 kilo grams in the last six months while prices of pulses have risen by 20% to 40%.

Even wheat and rice haven’t been spared despite the country having ample stocks of both the grains following two bumper crops. Wheat prices in the spot market, for example, have risen to INR1,175/100 kg from INR1,110/100 kg in just a month. “There is hardly any wheat left with the private trade in the open market,” said Ajay Goyal, president of the
Maharashtra Flour Millers Association.

The price of rice has risen by 10% to 15% in the last three months. The federal government, which has already announced a slew of measures such as allowing duty-free import of sugar and pulses until March 2010 and re-imposition of export restrictions on most agriculture products, may be forced to take further measures to ease the pressure on prices.

Source CME News For Tomorrow
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