Look who's causing the surge in food prices

Jan 17, 2011

In this issue:
» Indian markets facing a double whammy
» Companies yet to face the rising interest rate impact
» CMIE joins the GDP growth prediction game
» India is shining in Gujarat
» ...and more!!

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First it was the drought in Russia. And now it is the flood in Australia. Natural disasters are hitting the Earth with increased frequency. Apart from loss of life and property, one direct casualty of these disasters is food prices. While everyone is blaming these disasters for surging food prices, we believe the chief culprit is someone else.

We are talking about the western central banks, whose loose money policies have played a key role behind pushing food prices to historical highs. With their QE1, QE2, QE-all around, these central banks have flooded the world with cheap money. A lot of this money is going into the commodity futures market that has led to heightened speculation in prices of agri-commodities. The result - food price inflation and hording, which is leading to shortage of food grains for consumption.

Of course the natural disasters have played their part as well. But a large part of the blame also lies with these central bank policies. They call this their solution to the global economic collapse. We can only hope that it is not their final solution!

Anyways, are you feeling the pinch of rising food prices? Share with us or post your comments on our Facebook page.

Indian markets have been weak ever since the start of 2011. The total decline for the BSE-Sensex for this year now stands at 8%. In all, the Sensex has lost 1,650 points during the first ten days of this year. This is around 54% of the gains it had recorded in the whole of 2010!

The factors leading to pressure on Indian stocks are not hard to fathom. But there are two that stand out. First is the fear of higher interest rates given that inflation is not showing any signs of cooling off. And now, even the economic growth seems to be stalling. This was made clear by the industrial growth numbers that were released last week. These suggested that India's industrial growth stood at just 2.7% in November 2010, as compared to 10.8% in October.

This is like a catch-22 situation for India's central bank, the RBI. Rising inflation means that the RBI needs to raise interest rates further to control rising prices of everything. But an industrial slowdown means that any rate rise will put brakes on the economic growth.

 Chart of the day
Carrying on with the fears of rising interest rates, Indian companies need not ring the alarm bells as of now. As today's chart shows, India Inc.'s interest outgo as percentage of sales is still below the peak it had touched exactly a year ago - in the quarter ended December 2009. Interest costs stood at 1.8% of sales in the September 2010 quarter. But the fact is that, these costs are bound to inch up as the impact of higher interest rates is still to be seen on the companies' financials. Combined with rising input costs, this is likely to impact the net profit margins in the coming quarters.

Note: Data is for BSE-200 companies, excluding banking and financial companies;
Data Source: CMIE Prowess

The current financial year FY11 is heading to a conclusion. And estimates of GDP growth for the next fiscal are flying thick and fast. But several entities are differing on their opinion about the number this time. Be it the government or global economic bodies or research agencies. This is due to the diverse ways of factoring in the inflation risk into growth. The runway rise in food prices has caught the government unawares. The policymakers are therefore willing to revisit the optimistic 9% growth figure. Ironically this figure was recently revised upwards by 0.5%. The CMIE however keeps the number very close to double digits. At 9.2%, the agency's estimates rely on very high growth in the second half of next fiscal. Agriculture, tourism and communications are expected to be the key drivers for the growth.

We at Equitymaster do factor in GDP growth into our estimates. However, uncertainty about the number is not something that bothers us. We are more comfortable factoring in only the long term sustainable GDP growth. This number factors in most risks ranging from inflation to economic downturn to new governments. And the best part is that it saves us the trouble of having to agree or disagree with every new economic data that is released. We believe that investors need to concentrate only on what works best for stock picking. That is investing only in those businesses that can retain profitability across all economic cycles.

How often does one see investment commitments to the tune of one third of India's GDP getting signed up in two days flat? Not very often we believe. In fact, there isn't a single example that comes to our mind save the current one. In other words, the Vibrant Gujarat summit 2011 succeeded in achieving what no other Indian state has achieved so far. As per reports, as many as 7,936 corporate agreements were inked, envisaging a mind boggling investment of US$ 462 bn into the state. Whoever says we should look up to China for attracting massive investments, we have an advice for them. A shining example of what political will can achieve with the right system in place is right here in our midst. And it answers to the name of Gujarat.

The state's Chief Minister put it best when he said the following words at the summit. "To me, good governance means minimum government and maximum governance." Indeed. Much of the state's success can be attributed to this one statement. We believe that in order to achieve rapid economic progress, governments should act as enablers and hence, provide the necessary investment climate and infrastructure. The responsibility of job creation and hence, equitable wealth creation should be left to the private sector. There is no better mantra for success we believe. It is time other Indian states took cues from Gujarat.

As if last week's hammering wasn't enough, Indian markets had to face volatility again today. The markets opened in the negative, then went into the positive, then down again, and then up again. The BSE-Sensex was trading with marginal gains of around 50 points (0.3%) at the time of writing this. Today's gains were led by stocks from the IT and FMCG sectors. Most other key Asian markets closed weak today. While China was down 2.8%, Hong Kong was weaker by 0.3%.

Crude oil is back on the boil with prices hitting the psychological barrier of US$ 100 a barrel. Since there is a seasonal boost to prices from severe winters and supply disruption factors, it is yet to be seen if crude prices will stay at that level for long. The OPEC has not yet called any emergency meeting regarding oil supplies. Even if it decides to ease the quota, we doubt it will help to curb the prices as demand for energy is expected to remain high. However, a better picture will emerge once IEA publishes demand estimates for crude next week.

Back home, the rising crude prices have doused any hopes of freeing diesel prices. We should also be prepared to see more rise in the petrol prices as PSUs are still losing Re 1 per litre after the recent round of price hike.

 Todays' investing mantra
"Figure out what something is worth and pay a lot less." - Joel Greenblatt

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18 Responses to "Look who's causing the surge in food prices"

Jack Wilson

Oct 18, 2011

Trying to curb food inflation by raising interest rates is akin to giving a lobotomy to a heart patient. Does the RBI seriously think that it can bring down onion prices by raising interest rates? Looks like Dr. Subbarao already had a lobotomy. Dumb and dumber...


Yeturi Prabhakar

Feb 16, 2011

I feel that the reason for high price rise On the Commodities
Side is because of certain unworthy policies of the Central and
State Governments. Certain State Governments are alluring
people of their states to lead easy living in the form of
supplying of rice @ 2/- per kg whereas it is available in the
open market @20-30/- in the open market, which is certainly a
political gimmic and does not benefit any sector of the
population. Further, it can also be noticed that the Central
Government which can lower the taxes on diesel and as well as on
other petroleum products which will help the farmers in
transporting their agricultural produce to the markets at a
cheaper rate and the produce can be ultimately sold in the
market at a lower price. Similarly, if the government stops
giving all alluring benefits basing on caste, creed and religion
and shower all the benefits to the Agriculturists viz.,
supplying them fertilisers, seeds and pesticides at very low and
reasonable rates, the rates can be brought down.


Mohan Singh

Jan 30, 2011

Inspite of shortage of food material in India, the country is allowing export of food items that too by giving a heavy subsidy to exporters @10-30%. Exporters pay heavy bribe to polititions and IAS at delhi to keep these export incentives going. Only UPA2 can do these henious anti people act for some monetary gains. Exports of food items should be banned immediately. Atleast subsidies should be withdrawn if the government has some concern for its people


Rustom Dalal

Jan 20, 2011

I have written before that commodities are not to be played with. Futures or otherwise. They are Gods gifts and are not for investing or hoarding. Whether this is gold or onions you should stop popularising these things including derivatives. You are just fanning greed in the name of insurance!It is bad enough to have FII pull out at will, why encourage gambling in shareholders.



Jan 18, 2011

Surge in food prices are governed by a) Natural calamities,b)Middlemen/high retailer margin,Excess consumption,High cost of transportation,Hoarding,Checkpost high fee/tax etc. Question arises how to control ? Govt/NGOs can utilise unemployed rural youths by providing transport from rural areas to town market place. To improve distribution,the mini truck can be allowed to enter residential free area to sell the farm produce directly to consumers at a price eqivalent to cost plus transport plus wages. This will generate employment to rural youth and better price to farmers eliminating the middlemen .


R.Ravi Kumar

Jan 18, 2011

I was surprised that this discovery has been rather late on your part. In fact, speculative trading in agricultural commodities is the bane of an economy where rich farmers benefit, traders make hefty gains, all at whose cost? You, me and the masses who constitute the commoner. When we are struggling to feed and adequately nourish more than 40% of the population living below the poverty line, it is mandatory to ban speculative trade in agricultural commodities. It is most unfortunate that today we have a senile economist as the PM, a Food/agriculture Minister too pre-occupied with everything except the portfolio entrusted to him,and an FM who seems to be using his position to refresh his learning of the basics involved rather than take measures to stem the deep rot in the economy- INFLATION !



Jan 18, 2011

In my opinion, the ease with which tom, dick & have trading access to commodities through Stock Exchange, is one of major reason for increase in Commodity prices.



Jan 17, 2011

We do feel the pinch of increasing food prices. Everyday some item or other goes up or is not available. Restaurants who cannot afford to increase their prices begin to compromise on quality. Getting a good meal except at 5-Star level is becoming increasingly difficult.



Jan 17, 2011

The surge in food prices is being caused by the Central & state Governments who have absolutely no clue about what needs to be done to tackle it.I also blame the middleman who makes a quick buck by hoarding as often as possible.
Obviously, all previous govts at the centre have to share the blame equally for doing nothing at all to put in place good logistics and cold stores all over the country.


Gulab Patil

Jan 17, 2011

Dear Sir,
The basic price at which Government purchases from farmers have gone up due to escalation in cost of cultivation. To become the agriculture as just like any other profitable bussiness, the basic price increase in to be established. The inflation to be accounted from the revised price & notjust the price which is based on old factor.
Another factore to be taken into account that quite a sizable foodgrains are being sold by village farmers at the village level to traders & they take the profit as they decide as the opportunities are arrising. These traders are coming under the perview of Local State Governments.Such inflation to be controlled at state level. Otherwise there should be one rule all over the India that only Government should buy Government all foodgrains.
Third factor to be taken into considertion that while calculating the inflation Govt. pay incrases (as per pay commission) based on certain inflation from that onwards inflation to be calculated. This only applicable to Govt. employees. At the same time all the medium & organised sectors pay scale is based on latest price index which based on market driven price index. That takes into account toadyas market price. It may not be 100% inflation but it covers majority of day to day price exclanations in the market. This number of employment is also sizable. However matter remains the same & every one speaks the same that there is high inflation.

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