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"


Jan 17, 2011

To err is human. To repeatedly err is a government.
So it will be too much to expect governments to bother about the problems they create...

You might hear the leader of a mighty country - state soon that the poor people in emerging economies want to have 2 square meals now - hence the problems...



Jan 17, 2011

pl elaborate comfort level of percentage of interest outgo cost to sales ratio for the gdp to sustain the required level. in effect a formula is needed to consider all the required eco parameters.
ur views r well explained, i read these daily and store. in indian context i presume after observing all the stalwarts of eco (except real ones like u),nobody understands present dynamics of indian eco scene, leave abt world.
wish u teach us in depth to get a daily feel of more events.
i term these qe1 as QnE1--2 to differentiate bet quantitative and qualitative easing-cheap money (QlE1--2)and other economists as parrot speaking fake economist (PSFE).


R Tayal

Jan 17, 2011

So long as futures markets exist, some money or the other will find its way into these markets. If it is not cheap money being printed by western banks, it will be some other money chasing speculative returns. Don't get me wrong, I am for futures markets but with the claer objective of farmers getting a fair price for their produce. The problem arises when unrelated parties are allowed to play in these markets. I strongly believe participation should be restricted to actual players (read farmers, certified distributors & intermediaries, government buying agencies and any other such bodies whose calling it is to deal in or process commodities) of course governed by a regulator. The problem arises when speculative elements who have no relation with commodities business start dealing in & manipulating the markets.



Jan 17, 2011

You all are fool,who are analysing the various factor which are playing their role in increasing price of essential commodities,while actually only person named Sharad Pawar,the Agriculture minister is behind this,who is the most corrupt and wealthiest person of India,which main job is amassing thousand of crores and transferring the same into foreighn banks.He has bilions of rupees in his foreghn bank accounts,but the present government has no guts to take action against him,becauses most of the leaders of Congeress have been also involved in the same actvities along with him.only solution of control of price is removalof Sharad pawar from political arena or his death.



Jan 17, 2011

Last sixty years inaction is main cause of food Inflation in India. Agriculture has never been treated as a commercial activity. Yields are lowest becuase who will invest in a non commercial activity?

I have a cointrarian view, Food Inflation will prove a blessing and a miracle medicine for Indian Economy. It will have wide ranging positive impact such as more investment in agriculture, warehousing, food processing and retail, more investments in R and D for improvement in yield and water management, reducing food wastages. Less migration of rural people to urban centres reducing pressure on crippling unban infrastructure and the biggest of all is reducing income inequalities in the society.

Those who are crying for Food Inflation are wrong. Urban middleclass is not spending even 105 of their total income on Food. So far as urban poor are concerned, who they are? Most of them are landless farmers migrated for better opportunities and leaving in pathatic conditions. they will go back to village due to better wages and this will increase wages of remaining urban workers due to shortage. Yes, there will be time lag and that will be painful.



Jan 17, 2011

What a question and a half! The surge in food prices, I feel , is tickling the funny bone!! Thanks and Regards.



Jan 17, 2011

thanks for your valued mail. market is in the beargrip..hoping for a better nifty tomorrow



Jan 17, 2011

Natural disasteres as well a speculation and drastical development in industrialization by converting cultivation land for industries as well are pushing the food prices to sky high

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