Drought not the only threat to food prices - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Drought not the only threat to food prices 

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In this issue:
» Cement companies hold back disclosures
» Being no. 2 to China is not worrying the US
» Pakistan looking to foray into Indian banking
» Most populated economy finding it difficult to fill job vacancies!
» ...and more!


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00:00
 
Rain Gods have been instrumental in stimulating India's GDP growth since ages. The economy is now no longer agrarian. However, India's inflation still gets squarely impacted by the rise in food prices. That in turn has a spillover effect on the economic buoyancy. But it seems the mercy of Rain Gods or the lack of it can no longer be indicative of rise in food prices. Forget India, not even in the US.

Like in several states of India, including Maharashtra, it seems a crippling drought has impacted farm produce in the US as well. It is said to be the worst since 1956. Crops like corn, wheat and soybean, that are widely consumed are the worst affected. Economists believe that some farms may have no produce at all. But with a sturdy irrigation system, the US may be able to tide over the drought problem in a much better manner than India. Having said that, drought alone is not the reason for spiraling food prices. And we completely agree with Jim Rogers when he says that there are plenty of factors that will make food crops dearer. Not just in India, but world over! But what could be a bigger reason than drought?

Less farmlands and lesser farmers! Farmlands are increasingly being acquired for industrial and residential purposes. With farming no longer remaining an occupation of choice, the existing farmlands also remain uncultivated. Moreover, farmers prefer to cultivate cash crops that are more remunerative. In the bargain the supply of food grains is dwindling by the year. Meanwhile higher demand and improved purchasing power does not help either. The rising demand supply gap in food crops is expected to stoke food prices higher, even if there is adequate rainfall. But we are not sure of Rogers' suggestion that investors should hoard agri commodity derivatives in their investment portfolio. For we believe that speculative trends could only worsen the problem of rising food prices.

Do you think investors should be allowed to speculate on prices of food crops? Share with us or post your comments on our Facebook page / Google+ page.

01:30  Chart of the day
 
While commodities have been a favourite investment bet over the past year, not many have yielded sizeable returns for investors. In fact as against popular perception, precious metals like gold and silver were not the top gainers. Nor were key industrial metals like copper and aluminum. On the contrary, food grains like wheat and corn saw the maximum year on year rise in prices. We will not be surprised if rising glob al demand for food products coupled with speculative interests, cause food commodities to move into unchartered territories.

Data source: Business Insider
Data as on 30th June 2012


02:10
 
The Competition Commission of India (CCI) slapped a penalty of nearly Rs 63.1 bn on 11 cement companies recently that have been found guilty of cartelisation and price manipulation. These companies have been ordered to pay a penalty to the tune of 50% of their average profit during the financial year 2009-10 (FY10) and 2010-11 (FY11). As a result, cement companies have chosen to respond to this by not disclosing their monthly sales and dispatches numbers. Until the order, companies in the cement sector published these numbers without fail with the Cement Manufacturers Association (CMA). This has obviously not gone down well with the investor community. Especially since these figures gave an idea of the demand supply situation of this sector. With no more disclosures on this front framing an outlook for the sector could be difficult.

One of the various factors that smacks of good corporate governance is transparency in operations and adequate disclosures to shareholders and investors. This helps in building some level of trust between the two parties. Sadly, there have been some companies which have not been able to deliver on this front. That is why we at Equitymaster are conducting a Corporate Trust Poll wherein we have asked our readers to vote for the corporate group that they trust the most. The poll is not over yet. So, we would urge you to go ahead and cast your vote.

02:45
 
Being number one brings in a sense of pride. But it also brings in a sense of insecurity. The insecurity comes from the fear of losing the dominant position. This is true especially if one has been numero uno for 135 odd years. Well, to say, the Americans are facing a similar situation now. US has been the world's largest economy for quite long. But if the International Monetary Fund (IMF) is to be believed in about four years time China will surpass US to be the world's largest economy.

Let's go straight to the facts. In 2011, the size of the US economy was pegged at US$15 tn. At the same time China's economy was valued at US$7 tn. However, on purchasing power parity (PPP) basis China's GDP stood at US$11 tn. And the IMF's projection is based on PPP. Now, whether China will be able to surpass US in 4 years time or not depends on number of factors. With growth in China slowing down it may take a while before this happens. Nonetheless, being number two to China is not a worrying factor for US per se. That's because China's growth benefits US as well as it provides a consumer base for US goods. However, it would be interesting to see how this number game pans out. And most importantly how Americans fathom this adjustment of being number two if it ever happens.

03:20
 
India may have lost some of its standing as a preferred FDI destination in the past few months. But for few others, it is as alluring today as it was in the past. Count investors in the neighbouring country of Pakistan as one of them. Close on the heels of India deciding to open up its economy for investments from across the border, a proposal has already come its way. It is in the form of Pakistan's wealthiest businessman looking to establish a banking presence in India. The Financial Times has reported that a gentleman by the name of Mian Mohammad Mansha is reportedly the first to apply to open bank branches in India.

"Our major rationale is that India is a very profitable market," Mansha, owner of one of Pakistan's biggest conglomerates, is believed to have opined. The idea is certainly encouraging. But Mr Mansha's dreams may well run into a wall called the Reserve Bank of India. And given how sensitive the nature of the sector is, hopes of a quick approval may well prove to be illusionary. Thus, it will be quite some time before we see a Pakistani bank branch on Indian streets.

03:50
 
Crude prices are setting a new record, not in terms of absolute prices but with regards to volatility. After touching lows at US$ 89 per dollar in May, the prices are once again defying gravity. The crude now rests above US$ 100 per dollar, thanks to sanctions on Iran and falling US inventories. As the prices rise, so do the under recoveries for state run oil refining companies in a regulated price regime. What makes this all the more complex is the volatility of exchange rate. With such mercurial trends, it is not just the fortune of state oil refiners at stake, but upstream companies' future as well since they are supposed to compensate the former.

What does this imply for the common man? While even higher prices of crude in the last few years did not lead to an increase in diesel price, this time it is different. The country itself is struggling with mounting fiscal deficit. It does not have enough funds to keep giving subsidies like in the past. Also, with Presidential elections getting over soon, we expect the diesel prices to be raised, something that has not been done since June 2011.

04:15
 
With China's GDP growth rate almost halving from peak levels of 14.8% in mid 2007 to 7.6% in mid 2012, one would think the unemployment rate of the world's most populous nation will spiral out of control. This, especially for a country which is very much dependent on exports to developed nations (which have their own set of troubles). However, going by an article published by the Wall Street Journal, Chinese companies are having trouble filling vacancies. As would be the case with any item, when demand outstrips supply, the value of that item tends to rise in the market. This seems to be the case for China's labour force. The wage rates in the nation continue to rise rapidly. As per China's National Bureau of Statistics, the average monthly income for migrant workers rose 14.9% YoY during the first half of the current year. This is higher when compared to the wage income for urban households (increase by 13%). Amongst the many factors attributed towards this development, a key one could be the one-child policy, which started in the 1980s. The same has kept the nation's labour population under control. On the flip side, with rising wage rates, it could have a long term effect on China's global competitiveness.

04:40
 
In the meanwhile, the Indian equity markets had a volatile day of trade today. At the time of writing, BSE Sensex was up by 72 points (0.4%). Amongst sectoral indices, auto, banking and power stocks were the ones on the losing side. Asian stock markets were trading in the positive.

04:50  Today's investing mantra
"The intelligent investor is likely to need considerable will power to keep from following the crowd." - Benjamin Graham
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9 Responses to "Drought not the only threat to food prices"

manoharkantak

Jul 21, 2012

Looking at the present situation, speculation in commodities must be gradually reduced by implementing various new rules.
There is increase in population, but we have not proportionately increased the food items. Inflation, scarcity, black marketing, hoarding must be kept under control. Otherwise there will be lots of problems.

Like 

Harsha

Jul 19, 2012

Being some one who has not tasted the investment wine yet, wonder all the time the reason behind speculation in agri commodities.

The article has also not spoken directly on speculation and inflation over here, but I believe this has got a strong influence on the commodity prices. Today in India where we talk about inflation day-in and day-out in our media, such sensitivities play a major role; and speculation only adds more fuel to the fire.

Like 

S.S.Ranganathan

Jul 19, 2012

I agree that drought is not the only threat to food prices.In fact availability of farm land and enough water to irrigate them are the biggest threats.We just can not count on the Central Govt. to take action to ensure adequate farm output to feed our population.They are much too busy with their personal/party agendas.I hope all political parties wake up and get together in the national interest to do something to avert a disaster like this.

Like 

V.JANAKIRAMAN

Jul 18, 2012

This obsession with Pakistan, a country whose official policy is "Bleed India by a 1000 cuts", who print and circulate fake Indian Currency, is clearly defying logic. As a Tamil proverb goes it is like "putting a rat into a Paddy bag". So much easier to circulate fake currency and ruin Indian economy. Do we want to make it easier to repeat 26/11?

Like 

Brkar M.R.

Jul 18, 2012

Sir, Very fast we are getting caught in our own making. The
population is going up. Land available for agriculture is slowly
coming down along with the water resources and forest coverage.
I will give one example. My friend whose family is basically
farmers. He worked in Mumbai but maintains interest in family's
basic vocation of farming. He advises his brothers to skip
sugar cane growing for two reasons, land becoming less
productive and cane growing requires/consumes more water, longer
period for crop. However they continue to go after this cash
crop because it requires less toiling. Give proper dosage of
water, fertilizer and u r not required to toil much. much less
than other crops like jowar, wheat, chana etc. Then lot of free
time for "other vocations". The commodity market/exchange is
certainly not helping to grow more crop but growing more
speculation. It must be banned. The middleman ie agriculture
produce committes, traders get easy credit from the banks but
the farmer does not. What a paradox!! Can we ever overcome this?
Maharashtra is on the threshold of famine and the minister is
spending on lavish opening of Maharashtra Bhavan in Delhi. Our
Ministers are giving fresh dates for the rains and prices to
come down. Where are we going?

Like 

SUBHASIS

Jul 18, 2012

Rogers has rightly pointed out the menace of devolopment land grabbing and ill condition and attitude shown towards the farmers, which in long run will create worst scenario for food crisis in years to come.Jamindar are rich persons and now the jamindar are poor persons with out getting right proce for their farm produce and again day will come jamindar will be rich persons , History repeats-Subhasis Das

Like 

Vinod

Jul 18, 2012

Food crops should never be allowed to speculate. We have seen that full speculation is not good for that commodity. Farmers don't get benefit, but it's the brokers / speculators with much excess money or middle men benefit. So, why interfere in natural process - and mind you speculation and price jigging is not natural force :)

Like 

Sucharita

Jul 18, 2012

Can not agree to you less than cent percent. The urbanisation has in fact increased the gap between the have & have nots much more. Mr Sharad Pawar may comfortably ask us to wait till mid August, the trends tell that we are preparing for a crisis faster than china or USA leave aside wish to become numero uno any time in fore seeable future. Would praise you for intelligent write ups. Await to read from your wrap ups to sharpen my views. Great work. Keep up!

Like 

Carlos de Souza

Jul 18, 2012

1) When you compare No.1 and No.2 in economic terms, is it not more realistic to look at per capita incomes ?? When you compare pure size of economy, is it not reasonable to expect that a country of 1500 million people will have a larger economy than a country with 315 million people ??

2) Why should India allow Pakistani banks to open branches in India ?? Will our banks be given reciprocal permission ?? Will our banks be able to operate safely in that terrorist infested country ??

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