The commodity policymakers should worry about!

Jun 18, 2011

In this issue:
» IMF's warning to US and Europe
» Reliance yearns for old glory days
» Tough times for firms looking to raise debt
» Nuclear energy finding very few takers
» ...and more!

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Mizoram, a north-eastern state in India witnessed a strange phenomenon in 2006. Out of nowhere, the local population of rats exploded and soon, their numbers increased so much that they were seen rampaging through rice paddies. The situation became so alarming that the occurrence of a famine looked like a real possibility. The word has it that the rare flowering of a certain type of bamboo plants caused the population of rats to explode. The flowering which happens just once in 50 years or so, enables the rats to feast on the flowers and in the process, grow their populations exponentially. And then, when the blooming stops, the population of rats again comes down.

Well, it will be a little far-fetched to think that the above phenomenon could be applied to us humans as well. After all, we are not dependent on any blooming of the flowers. And our population has only increased over the past couple of centuries rather than ebb and flow as those of the above mentioned rats. However, think a little harder and you will realise how perilously close our situation could be to those of the rats in the above example. We may not be living off on blooming flowers but the food we eat definitely comes from a finite resource, land. The only reason we have not had major problems acquiring food is because scientific breakthroughs and technological advances helped grow its production at a faster rate than the growth in population. But perhaps not anymore. Imbalances between demand and supply of food have only increased in recent years and if United Nations' Food and Agricultural Organisation is to be believed, the imbalance will only get worse in the coming years.

Thus, it has warned policymakers across the globe to brace themselves for higher food prices in the coming decade. Of course, if there are still more technological advances along the way, the day of the reckoning could easily get postponed by a few more years or decades. But absent that, agriculture is one commodity that is sure to give sleepless nights to our policymakers.

Do you think the world is running out of food or there will be enough to feed the evergrowing population? Share your comments or you can also post views on our Facebook page.

 Chart of the day
From food, let us move on to another equally precious resource and the one that the world also seems to be running out of, energy. Today's chart of the day takes a leaf out of energy giant BP's most recent statistical review of world's energy and highlights the growth in consumption of various energy resources in 2010. As seen from the chart, energy consumption from renewable sources grew the most in 2010, albeit on a lower base. Growth in coal as well as natural gas was also impressive and far exceeded the one witnessed in oil. Nuclear energy, the source widely hailed as world's saviour from darkness witnessed a poor growth of only 2% and with the events in Japan still fresh, may suffer similar fate in the near term as well.

Source: The Economist

If you thought the RBI was messing up your personal finances by indiscriminately raising interest rates, you need to look at the broader picture. Sure, most of us have seen our EMIs almost double over the past 18 months. Some are still basking in the glory of fixed teaser rates. But most individuals see higher borrowing costs impact their livelihood in some way or the other in the medium term. For corporate, the high borrowing costs have come as a huge deterrent in terms of availability of credit.

Banks have raised their base lending rates by several basis points. Even corporate bonds that had banks and insurance companies as ready takers are finding no market. In fact, during time of more benign interest rates, private placements of the bond were a popular source of capital. The stream of capital has now completely dried up. Recent spate of IPOs and FPOs have also shown that investors have no appetite for overpriced issues. If such a scenario is to linger for long, India Inc will have no option but to increasingly look for funding option overseas. And that may not be a very healthy sign if firms over leverage themselves with foreign currency denominated loans.

It is common sense that one cannot keep borrowing and using the debt to fund their spending. While this approach can be used for some time, it cannot possibly continue forever. At some point of time, the iceberg would tip. And this is exactly what the IMF (International Monetary Fund) has warned Washington and the Eurozone countries of. As per the IMF, the debt ridden US and Eurozone are playing with fire. The fire of debt. The IMF says that unless these countries cut down their budget deficits, they are looking at severely dark times ahead. As a result, the IMF has cut back its forecasts for US economic growth to 2.5% from its earlier estimate of 2.8%. It consequently has cut back its estimates for global growth to 4.3% as against the previous estimate of 4.4%. While one may argue that these forecasts are nothing but numbers, but it is more important to look at the underlying reasons for the cut back. And the underlying reasons are definitely serious and need to be rectified.

Expectations can be a heavy burden to carry, with the chances of disappointment rising well in proportion. That perhaps explains why RIL, with 11% weightage in the index, has plunged to two year lows on bourses. The company was once known for bold moves, identifying trends and creating new markets. However, at present, it is struggling hard to propel growth beyond cycles. The moves like buying a stake in East India Hotels and a Bharti-Axa joint venture have failed to convince the markets. Some blame it on the lack of focus in areas other than core energy. The company has reported a decline in the gas output from KG D6 basin. What has made the matters worse is the slew of controversies in recent times. The company has been alleged of inflating bills on investments made in the D6 block and multi-year insider-trading.

So what is the future going ahead? A recovery in chemical and refining cycles may help. But it can be hardly counted on for value addition. It's time that it is given a facelift - a change in the business model for which acquisition seems to be the key. It further needs to clarify its exploration and production prospects and find avenues to invest its cash in areas that let the company grow and relive the glory it has enjoyed in the past. But even with that getting rid of unethical practices would be paramount.

It was a mixed week for the world stock markets. Most developed markets except UK and Japan closed the week on a positive note. However, emerging markets closed the week in the red. Germany (up 1.3%) led the gains amongst developed markets followed by France (up 0.5%).

After registering six straight losses, the US markets finally ended its losing streak and closed the week on a positive note. Optimism crept into the US markets as financial rescue arrangement for Greece moved closer to a compromise amongst the European Union. Markets were also enthused by better than expected lead-economic indicator forecast's signaling that growth may pick up by the end of 2011. Amongst other developed markets, UK was down 0.9% and Japan was down 1.7% for the week.Indian stock markets closed the week in red (down 2.2%). This was on the back of higher-than-expected May inflation data which resulted in another round of rate hike by RBI. It may be noted that RBI raised its lending rate to banks (repo rate) by 0.25% to 7.5% in the recent monetary policy review. The sell-off was also attributable to FII outflows as concerns arose with respect to inflation and subsequent monetary tightening hurting growth and corporate profits. Amongst, other markets Singapore and Hong Kong closed the week down by 2.4% and 3.2%. Even Brazil ended the week with a loss of 2.6%.

Source: Yahoo, kitco, cnnfn

 Weekend investing mantra
"Price is perhaps the single most important criterion in sound investment decision making. Every security or asset is a "buy" at one price, a "hold" at a higher price, and a "sell" at some still higher price." - Seth Klarman

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10 Responses to "The commodity policymakers should worry about!"

Sarat Palat

Jun 20, 2011

What the article mention is correct. Due to increase in the human population the whole world is going to face the shortage of food. The phenomenen is not limited to certain countries, but the whole world. The policy makers should address this issue now otherwise tomorrow it will be too late. The head of states should have a population policy otherwise there will be riots, atrocities, social unrest, economic and political instability will be the result. In addition to the population growth, conversion of agricultural lands into commercial purposes, changes in the weather and climate, non availabilty of agricultural workers will also lead to shortage of food.



Jun 20, 2011

Land productivity is falling due to excessive use of chemicals, land available for cultivation falling due to diversion to other productive activities like real estate, building factories etc, farm labour is getting scarce as they move to more fetching jobs in urban areas and more land is diverted from cultivation of food crops to the more profitable commercial crops and more items like oil seeds and corn are diverted to produce ethanol etc as an effort to find alternative fuels. Population of course is growing and their needs are also growing relentlessly. Food prices and availability will pose bigger problems in the decades to follow.



Jun 20, 2011

The Arabs drew wealth from the ground, India too shall prosper by growing food from the ground. Quoted below are some figures from the WIKIPEDIA.WE MUST FOCUS AGAIN ON AGRICULTURE TO ATTAIN THE LEADERSHIP POSITION IN THE WORLD. IF WE ENGINEER ANOTHER GREEN REVOLUTION THE WORLD WILL NOT STARVE, NEITHER WILL WE.
"India is the largst producer in the world of fresh fruit, anise, fennel, badian, coriander, tropical fresh fruit, jute, pigeon peas, pulses, spices, millets, castor oil seed, sesame seeds, safflower seeds, lemons, limes, cow's milk, dry chillies and peppers, chick peas, cashew nuts, okra, ginger, turmeric guavas, mangoes, goat milk and buffalo milk and meat.[2][3] Coffee.[4] It also has the world's largest cattle population (281 million).[5] It is the second largest producer of cashews, cabbages, cotton seed and lint, fresh vegetables, garlic, egg plant, goat meat, silk, nutmeg. mace, cardamom, onions, wheat, rice, sugarcane, lentil, dry beans, groundnut, tea, green peas, cauliflowers, potatoes, pumpkins, squashes, gourds and inland fish.[2][6] It is the third largest producer of tobacco, sorghum, rapeseed, coconuts, hen's eggs and tomatoes.[2][6] India accounts for 10% of the world fruit production with first rank in the production of mangoes, papaya, banana and sapota.[6]

India's population is growing faster than its ability to produce rice and wheat.[7]"



Jun 19, 2011

Food supply will remain big worry so long our policy makers want it to be.
In India we have vast lands that could be brought under Agriculture use.
What is needed is access to vast inhabited areas. This could be easily solved by linking such pre-determined areas by rail link. Plots of say 1000 acres be alloted to companies like Tata & Birla exclusively for Agricultural Purposed. The plot should be given on a nominal rent of Re. 1/per annum. Thus the land will ever remain the property of Govt of India and will only be used for Agricultural purposes.
The Agricultural ministry can decide the number of such plots required to feed the population of India. Equal number of plots adjacent to such plots be kept vacant for crop rotation and future use.
50% of plot should be reserved for Cereals and pulsed.
30% for local vegetables and fruits. These produces to be sold at max of 20% profit through Retails created by the company.
15% plot should be for exclusive use of company to produce exotic fruits / flowers for local consumption and / or export at prevailing market rate.
5% of the plot should be reserved for research purpose.
It we start working today, within next five years we would have insured the future requirement of Food Supply.



Jun 18, 2011

There is enough resources in this world than we imagine but issue here is not the resources but the distribution. Recently our government wasted wheat to the nature. Some years back America dumped wheat into the ocean in order to arrest the declining prices of wheat. So when such type of incidents are there I think food prices are to rise only. Greed were has left us. Money in the short run.


Ganesh K

Jun 18, 2011

Food Shortage or food wastage. 7 crore quintals of grain meant for distribution in Adivasi area is lying in open outside government godown in gadchiroli district of Maharashtra.Reason- transporters were getting Rs.29 per quintal for a distance of 40 km. Now they want Rs.200. Nexus between government babus, transporters and political party.If goverment does not succumb then the grain gets wet in impeding rains. if it succumbs transporters,babus and politicians make money.In India no food shortage but wastage and poor distribution.



Jun 18, 2011

New generations will always see bigger challenges than ever before. There is nothing new in it. Histroy says we have always met these challenges, whenever we didn't loose its sight. The answer to food problem, on the production side, is in improving our productivity and reducing losses due to insects. Genetically modified varieties should provide the answer and I am sure everey 20, 25 years we will keep finding new varieties, to avoid insects evolving to a level that they effectively fight the new varieties.


shome suvra

Jun 18, 2011

The world's food prices are increasing due to lack of supply owing to weather change.Productivity must be tried to increase to meet the demand.


Vivekananda Koti

Jun 18, 2011

Regarding increase in the Repo rate & Reverse Repo rate, I fully agree with RBI and unless or otherwise RBI will initiate the action like this, inflation cannot be controlled. Most of the investments are going to real estate resulting in inflating the value of the property.
I would like to suggest that RBI should initiate to increase the CRR instead of increase in the interest rates. This will help the Banks to curtail soft lending to various sectors. As a retired executive of a Bank, I am fully aware that most of the Companies borrow the funds from the Banks more than what they require. Almost 75% of the Corporate lending is beyond the permissible levels.
Apart from this, RBI should insist that the finance to HOME LOANS by the Banks need a thorough verification as some of the advances are flowing to commercial properties than home loans.
As such, I fully agree with the views of RBI and I request / suggest that RBI should look into the home loans sanctioned by all the Banks as well as the financial institutions



Jun 18, 2011

Eq.Master Team,

In all my humility fortified with abundant ignorance I am prompted to observe as under :
WE HAVE KNOWN ARTIHMETICAL PROGRESSION 1,2,3,4,5, ETC.etc. Also geometrical progression 1,2,4,8,16,32,64 etc.etc.

I am prompted to cite the very famous instance of a Emperor who was asked by an intelligent one as to what he wanted from the Emperor??
The wise person asked Your Highness, I want you to fill the 64 squares with rice grains as enumerated below:
To start with you place one grain of rice in the first sqaure. Then 2 grains in the second, 4 grains in the 3rd, 16 in the 4 th, 196 in the 5th and so on.

The Emperor thought that it is so simple. But he did not have enough grain in his entire Kingdom before he reached the last square and had to admit his utter inability to fulfill the request !!

The ENTIRE humanity also may be in a similar situation as the Emperor in the ABOVE-CITED INSTANCE ??
I hasten to conclude !!

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