Indian agri-commodity stocks yo-yo on Brazil drought

With more than half of Brazil — a key producer of coffee, sugar, corn and soyabean — reeling under drought, prices of the staples are on the rise as are shipping costs. As one the world’s largest crop exporters, any trouble in Brazil will impact food prices globally.

Share prices of major Indian players in the field such as Tata Consumer, ITC, Hindustan Unilever and Adani Wilmar have been under pressure. On the other hand, Patanjali Foods, Agro Tech Foods, Saptarishi Agro Industries and Amber Protein Industries have been on the rise in the last one month. 

Amit Aggarwal, Associate Director – Transaction Advisory & Consultancy Service at Wodehouse Capital Advisors, told businessline, “The Indian market will see a short-term spike in the already highly-priced cocoa market. Though Indian companies do not have direct exposure to cocoa from South America, the global shortage will put pressure on the prices and supply chain resulting in price spikes. However, this will be mitigated to some extent for the large companies who are well stocked for next six-nine months.”

Climatic conditions

The global climate has been increasingly unpredictable over the past few years, leading to extreme weather conditions across several regions. The worst drought in Brazil’s history follows a period when the country faced the worst flooding in over 80 years. 

The Brazilian government recently removed curbs on ethanol production, resulting in a sharp surge in sugar stocks. Given the ongoing drought and reduced output in the above-mentioned commodities, prices are likely to spike, fuelling inflationary pressures. “Indian sugar production is expected to be good and, therefore, Indian companies will do well. But since restrictions on sugar exports are still in place, Indian sugar companies will not benefit from the spurt in international prices,” said VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services. “The situation also diminishes the likelihood of interest rate cuts in the global market as central banks may need to respond to inflationary concerns,” said Abhishek Jain, Head of Research, Arihant Capital Markets.

Indian coffee companies stand to gain from this reduced supply and higher global prices. Indian coffee exports are doing well. Major exporters include companies such as Nestle, CCL products and ITC. Shares of Nestle India closed today on the BSE at ₹2,502.90  (-0.38 per cent). HDFC Securities has given ‘Add’ call on Nestle India with a target price of ₹2,700.

Corn prices are also on the rise, which will likely affect raw material costs for FMCG and poultry companies (such as Venky’s India). This could lead to price adjustments in various consumer goods. Meanwhile, companies in the agricultural and allied industries may see a positive impact due to the price shifts in these key commodities, added Jain. Patanjali Foods, formerly Ruchi Soya, for instance, could see gains. Overall, the drought in Brazil presents a significant opportunity for coffee and sugar exporters.

Heavy rains lashed Brazil on Saturday, as storms swept parts of the country following a severe drought that fuelled a record wave of wildfires. However, analysts say the broader implications such as inflationary pressures, onset of La Nina will need to be monitored closely. 

Meanwhile, Russia’s dry weather is also raising concern over wheat, corn and sunflower. Weather extremes, ranging from early spring frost to drought to heavy rains, have hit Russia’s main agricultural areas this year, dampening a boom in the sector that has, in recent years, become a success story despite Western sanctions.