Prices of major crops may rule soft; but weather holds key

After three consecutive years (2010, 2011 and 2012) of bad weather in some or other part of the world, and decline in the production of major field crops such as corn, wheat and oilseeds leading to elevated prices, what does 2013 hold for the global agricultural market participants? This is the multi-billion dollar question everyone is asking.

The external environment is still decidedly weak. Economic slowdown all over is palpable. Worried over unabated inflation, especially food inflation, Central banks in emerging economies are still unwilling to ease the credit squeeze of previous two years even as some of the major industrial economies continue to encourage easy money policy.

Crude oil market which has a certain positive relationship with agriculture market has been relatively benign in recent months. It is anybody’s guess whether geopolitical tensions which impact crude prices will ease or escalate in 2013.

Expect supply response: In 2013, it would be reasonable to expect a marked supply response to three years of elevated farm goods prices. Producers will invest in their crops with improved nutrient application and farm management. Area expansion for major crops can be expected. Farmers in western industrial economies have accumulated cash reserves, while input costs are manageable.

In the event, one can expect a major rebound in agricultural production across the two hemispheres in 2013. Be it corn, wheat, rice, oilseeds or cotton, production should expand in 2013, improve availability and lead to softer prices. If fundamentally the market is in surplus, one can expect speculative funds to stay off. This in turn will reduce price volatility and bring some stability to the market.

Portends are clear: Prices of major farm goods have already begun to soften in anticipation of a recovery in the South American crops followed by a likely rebound in the US crops in the months ahead. From their lofty levels, prices of soyabean, palm oil, corn, wheat, cotton and several others havetumbled in recent weeks.

No wonder, hedge fund activity is less-pronounced as risk appetite ebbs. This could also be the time for inventory building as abundant supplies and softer prices will encourage replenishment of stocks. With improving macroeconomic data, the US dollar, the currency of trade for most commodities, has the potential to gain strength vis-à-vis other currencies such as the euro. In the event, commodity prices in dollar terms can come under downward pressure. In other words, the market is developing in a way supportive of importing and consuming countries.

Risk factor: As usual, weather is going to the most crucial factor in 2013. After three years of bad weather somewhere or the other, can the world expect the weather gods to smile with more benign conditions? Most weather pundits believe it is most unlikely the world will face aberrant weather for the fourth year in a row; but none knows for sure.

However, some forecasters have predicted a repeat of the 2012 US Midwest drought this year too. If that were to happen, all bets are off as the world will face a serious supply crunch and prices will rise to unprecedented levels resulting in demand rationing.

Policymakers in India ought to take cognisance of the emerging situation which is fraught with possibilities.