The focused efforts to ‘flattening the curve’ of the coronavirus contagion, around the world, have inadvertently led to the flattening of price curves, particularly in agri-commodities.
More technically, the demand curves for commodities, such as perishable vegetables and fruits and even some grains and pulses have shifted left, as bulk demand from hotels and restaurants nosedived, logistics became a challenge and export prospects turned uncertain.
However, while there are many factors that have been exerting downward pressure on Agri Commodity prices, in the time of the coronavirus crisis, there are evidently some that are supporting them. Let’s take a look these to get a clearer picture of where prices could be headed in the near future…
In response to this coronavirus crisis, governments and central banks worldwide have enacted sweeping and sizable fiscal and monetary stimulus measures to counteract the disruption caused by the contagion.
The US Federal Reserve has cut in its key interest rates to near zero, a dramatic move which has not been witnessed since the 2008 financial crisis. This move was made in coordination with efforts to buttress the global economy by the Bank of England and the Bank of Japan.
Nearer home, the RBI too has been reducing interest rates and taking measures to infuse greater liquidity into the system, in order to boost the economy. Until now, the monetary authority has reduced its policy rate to 4% from 5.15%.
Lower rates and better liquidity, in good measure, are a recipe for higher prices. The table below illustrates how major agri-commodities, such as Cotton, Corn, Soyabean and Soya Oil prices, outperformed globally for two consecutive years after major crises – the Dotcom Bubble in 2001 and the great recession in 2009. In both cases, the price rises were triggered by lower interest rates and global central bank monetary stimuli. Going forward, we expect a similar trend in the coming years.
In India, agri-commodity prices on the NCDEX outperformed during 2008 to 2010 (Note: Since the exchange launched trading in 2004, we don’t have data that can reflect the impact of the dotcom crisis in 2001). Interestingly, at present, most agri-commodity prices on the NCDEX are already in the green when compared to their status at the beginning of the lockdown.
In the event of a normal monsoon, agri-commodity prices tend to go down. However, even in the event of a ‘Normal’ monsoon this year, agri-commodity prices are not likely to fall further as they have already bottomed out.
So, in a nutshell, going forward, lower interest rates and global stimulus package will drive agri-commodity prices north wards.
The Government has increased its MSP for Kharif crops for the marketing season 2020-21 to ensure remunerative prices to producers. This decision, taken by the Cabinet, headed by Prime Minister Narendra Modi, will give respite to farmers and also help them take a call on which kharif (summer) crops to grow as sowing picks up with the arrival of the southwest monsoon.
Although it was a rather fleeting incident, the locust crisis, with its epicenter in East Africa, has so far affected 23 countries. According to recent World Bank estimates, locust-related losses could reach $8.5 billion by the end of 2020, if control measures are not undertaken. Countries expected to suffer most are Ethiopia, Kenya, and Sudan. So, despite global markets being well-supplied and prices being broadly stable, since the locust crisis has impacted global agri-production, it will contribute to pushing agri-commodity prices upwards.
There’s no doubt about the fact that the Indian Government has been stressing the importance of a strong agriculture base if the economy is to reach a size of USD 3 Trn. However, the pandemic has acted as a catalyst, hastening policy announcements that would otherwise have been unveiled more gradually. Three fourth of the Rs 20 lakh crore package for revival of the economic health, was targetted at the agricultural sector and various other policy amendments have been announced, with respect to repayment of loans, inter-state sales of farm goods, empowerment of groups to enhance investment, model agreements for contract farming and minimum price to farmers and input costs, amongst others.
In early June, the Union Cabinet also approved an amendment to the six-a-and-half decade old Essential Commodities Act to deregulate food items, including cereals, pulses and onion, a move that will transform the farm sector and help raise farmers’ incomes. Farmers will now be independent to choose the markets in which they want to sell their produce and can earn competitive prices.
All this policy framework restructuring will reshape Indian agriculture and rural India, which will contribute immensely to bringing the Indian economy back on track.
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We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.