By Nirmal Bang

The Australian Meteorological Bureau and NASA had cautioned about the setting in of an El Nino event during April-May this year. The mild occurrence of this phenomenon delayed monsoon in India and there has been a deficit of 15% to 20% in rainfall in this country. Prices of pulses, vegetables, spices and oilseeds, have therefore, started moving up.

Weather changes the dynamics of agro commodities very quickly. During monsoon, volatility in agro commodities is the highest. By understanding the impact of weather conditions on particular commodities, traders can take early advantage.

Myths And Opportunities

Interestingly, in 2009, monsoon was delayed in India. It was also below average, triggering a sharp upside in prices of most agricultural commodities. Prices of milk, vegetables, sugar, rice as well as commodities listed on the exchanges started moving up sharply.

There’s a misconception that due to futures trading, prices are rising at a rapid pace and speculation is driving commodity prices higher. Although the futures market is subject to speculation, the speculators provide depth for actual hedgers. Interestingly, fundamentals are discounted well in advance in the futures market, which is taken up as speculation most of the times.

For example if jeera prices are moving up and there are no major triggers coming from the spot market, traders attribute this rise to speculative trade. But they might not be aware of the export status. They may not know whether exports have picked up in a country or whether other nations like Turkey and Syria have increased their prices or whether the weather has been unfavorable at the time of sowing or harvesting in other regions.

Despite slack exports, guar gum prices were moving up and one can say that they were not in line with fundamentals. But they may not be aware of the fact that due to below normal monsoon, the production was likely to go down by 60% -65%.

The beauty of the futures market is that it moves quite ahead of fundamentals. Just because someone is taking benefit of this kind of news or development, prices move up and after the rise in prices, there is a reason to do so.

There is more than one evidence to suggest that even after suspending commodities from trading on futures platform, prices have continued to move up. Sugar is one of the best examples. Suspending sugar trades did not help much. Prices continued its upward march. If there is acute demand and supply mismatch, prices are bound to move up. If monsoon is below normal, prices of agricultural commodities are again set to move up.

Opportunities In Agro Commodities

Just when you were wondering what returns should investors or traders expect from agro commodities, here’s a low down.

Turmeric, the golden spice, has given investors many reasons to smile. The bull run in turmeric began in November ’07 after prices remained low for a very long time. The situation was the same even in 2008 when production was down and there was no slowdown in exports over the past 4 - 5 years. Due to robust exports, turmeric carry forward stocks declined sharply.

Exports were pegged at 10 lakh bags - 12 lakh bags whereas production was down by 10% - 15% pegged at 40 lakh bags - 42 lakh bags whereas demand was 50 lakh bags - 53 lakh bags. The bull run intensified after unseasonal rains in the month of October ’09 damaged 1 lakh bags - 1.5 lakh bags of turmeric in Andhra Pradesh.

The ending stock fell to 3 lakh bags - 3.5 lakh bags from 10 lakh bags - 12 lakh bags a year earlier. Prices rose by more than 275% in the last 11 months. Going forward, we expect production of turmeric to rise to 50 lakh bags - 52 lakh bags which can trigger a sharp correction in the yellow spice from the present levels. The tide seems to be turning in turmeric and the outlook remains bearish. The December contract may test the levels of Rs 8,000/quintal.

Jeera prices rose sharply from 15th Sept ’09 as Free On Board (FOB) prices in Turkey and Syria increased to $3,100/quintal - $3,000/quintal from $2,650/quintal - $2600/quintal. Jeera prices rose by more than 60% in the last six months. Indian exports also jumped high by 6,000 tonnes and 5,500 tonnes in September and October respectively, pushing prices higher on the domestic bourses. Warm weather in jeera-producing regions of India has raised concerns of a drop in the output by 10% to 12% next year that has also fuelled a rally. But going forward, we feel that the huge difference between the spot and futures prices of nearly Rs 1,400/quintal may cap the upside. It is likely that the prices may not sustain above the level of Rs 17,000/quintal and may touch the levels of Rs 14,400/quintal to 14,000/quintal on the downside.

Pepper, the king of spices, has remained relatively subdued since the start of the year. Fundamentally, pepper looks the strongest among the entire spices complex. The global pepper carry forward stock is seen declining from 85,000 tonnes to 64,000 tonnes and more so that of Vietnam’s, which was around 20,000 tonnes to 22,000 tonnes last November and is expected to remain around 10,000 tonnes and 11,000 tonnes due to good exports by Vietnam. Though Indian exports declined due to shortage of MG1 grade of pepper, the low stocks in the domestic markets kept the prices high. So far pepper prices have risen by more than 30%. The prices of all the spices like cardamom, nutmeg and dry ginger, including pepper that are cultivated in Kerala, have risen sharply. This proved beneficial for farmers. If they hold their produce for a slightly longer period than they normally do, it would benefit them even more. We feel any delay in harvesting the Indian pepper, the prices of this crop may touch the levels of Rs 17,000/quin al to Rs 17,500/quintal.

The recent surge in the soyoil complex has been mainly due to weather issues across the globe - from dry weather conditions in Argentina to heavy to very heavy rains in Madhya Pradesh and Maharashtra during September-October causing damage to the crops. The overall soybean production was estimated at 8 million tonnes - 8.5 million tonnes as compared to previous estimates of 9 million tonnes - 9.5 million tonnes. The drop in the US ending stocks of soybean and soyoil was also seen supporting prices despite a bumper crop in the US. Prices rose sharply in the international market due to robust imports by China and a weakness in the dollar. Soybean prices climbed by 25% in just one month.

Guar seed and guar gum are among the top performers in agro commodities. The bull run in these commodities started after it became clear that the monsoon would be delayed in northern Rajasthan, the major guar seed producing region and a drought-like situation would develop in other states, due to the development of the El Nino in the eastern Pacific Ocean. Despite slack in exports, prices of guar gum started moving up since traders were expecting production to move down. Hence prices started soaring. Production of guar seed in the year 2008 was around 72 lakh quintals - 78 lakh quintals. Due to attractive prices of cotton and other pulses, farmers took to sowing these crops affecting guar seed crop. With a sluggish monsoon around August ’09, it was clear that prices of guar seed were likely to take off sharply from its present levels. This year, the guar seed production is expected to decline to 25 lakh quintal - 28 lakh quintal and prices are gradually moving up in line with fundamentals. In the past seven months, we have seen an upside of more than 65% in guar seed and guar gum futures and counting. Once the pressure of arrivals in spot markets moderates, then we may see a further advance in this complex. Guar seed prices may witness some correction in the coming months as exports of guar gum remain slack .