agro commodity: India was slowly becoming a major agro commodity exporter. But 2022 may be a different story – The Economic Times

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SynopsisIndian growers and agro exporters were able to show a marked improvement in exports. But their celebrations might be short lived as the clouds of inflation are getting darker, threatening to overturn the country’s export victory.

Trade and supply in agro commodities are considered to be key determinants of the global economy’s health. The recent spurt in agriculture commodities’ prices — the World Bank estimated a 22% rise year-on-year in October — should then come as good news because it indicates robust trade. However, this development has undesirable consequences for Indian growers and agro exporters.

Agro commodities have exhibited significant volatility over the past two years, leading to inflation fears at the domestic and global levels. The worrying trend also brings to the fore the question: what does 2022 look like for India’s agro commodities? This question assumes importance because agriculture is considered to be the backbone of the nation’s economy. About 60% of India’s population depends directly or indirectly on this sector. It not only meets the food security needs of about 1.3 billion people, but is also a major source of export earnings and rural development. The labour-intensive segment has lately been a bright spot in the midst of the pandemic. Agriculture’s contribution to the GDP has been rising for the past few years. It was 17.6% in 2018-19, 18.4% in 2019-20 and 20.2% in 2020-21, according to the Ministry of Statistics. The year 2020-21 also saw a significant increase in exports of the usual and new agri commodities. Agricultural and processed food products’ exports rose over 13% in dollar terms in April-November 2021-22 compared with the year-ago period. The export of products under the ambit of the Agricultural and Processed Food Products Export Development Authority (APEDA) grew from $11.671 billion in April-November 2020-21 to $13.261 billion in April-November 2021-22, says the Ministry of Commerce and Industry.

According to an official statement, India has been able to take advantage of an increased demand for staples after the pandemic began. There was a huge growth in the export of cereals: non-basmati rice grew by 136.04%, wheat by 774%, and other cereals such as millets, maize and other coarse grains by 238%. Exports of essential agricultural products also rose 38% in April 2020-January 2021.

The upward trajectory shows the resilience of this domain. However, this rise has also been accompanied by a rise in prices. For stakeholders in the segment who were hoping for better days because of rising exports, the development hints at a hard landing.

Why fear the surge?
There are multiple reasons for the price rise in agro commodities. It started during the lockdowns, when agrarians found it difficult to continue farming, especially of core agricultural commodities, because of shortage of labourers and difficulties in getting fertilisers and other supplies. As global trade slowed down, cargo ships stopped loading or unloading. Only after China resumed economic activities around June did other countries follow suit. Soon, the US and EU countries announced fiscal stimulus packages, which led to demand overshooting supply at every stage of the supply chain.

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A recent report by Drip Capital noted that a host of factors have fuelled the spike in prices — including the emergence of new Covid epicentres, supply chain disruptions, political instabilities, natural calamities and energy crisis. Supplies have not been able to keep up with rising demand. Rising costs of expenses such as sea freight, energy and labour have fuelled price rallies seen in staple commodities like soybean, corn, cotton, sugar, coffee, wheat, and palm oil, the report added.

Irrespective of the reasons, the demand-supply mismatch is now crippling the agro commodities supply chain and leading to inflation fears.

Outlook 2022
If economic activities speed up, it is quite possible that the demand-supply mismatches would get ironed out sooner than later. But such a situation is unlikely to happen soon given that the new coronavirus variant — Omicron — is again putting a damper on economic sentiments. Many industry players claim Omicron’s impact on the commodity markets will worsen through the better part of 2022.

Pushkar Mukewar, Co-founder and CEO of Drip Capital, says his hopes of the situation stabilising have gone for a toss now. “If in 2022 no new variants emerge and the US Federal Reserve and the Bank of England maintain their hawkish stance on tapering — basically sucking liquidity out of the system — prices should reach their usual averages by the second half of 2022.”

In the agro commodity market, certain commodities would see price fluctuations because of harvest, stockpiles, and the year’s output.

Supply would catch up when stocks are replenished and socio-economic conditions stabilise, says NS Ramaswamy, Head of Commodities, Ventura Commodities Pvt Ltd. This will cool off speculative behaviour.

He says tightening of financial liquidity to control inflation has just started. “In 2022, we expect food-at-home prices and food-away-from-home prices to be high, but we wouldn’t see higher levels like those witnessed in 2021. We expect markets to stabilise by mid-2022 on the hopes of a positive monsoon.”

Ramaswamy says some positive signals are already visible for oilseeds cultivation in the kharif season (Jun-Oct) for groundnut, sesame and sunflower as the acreage is rising. “Higher sowing is also seen in rabi crops like mustard and chana. However, the uncalled heavy rainfall during November in key parts of south India have created a flood-like situation and damaged bumper harvest crops which would favour price hikes.”

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Has the pandemic significantly upended the way agro commodity trade flow used to happen? Are commodity markets and their drivers changed now?

Yes, say many firms. Radhika Garg, Chief Financial Officer of rice exporter Bindaas Foods Pvt Ltd, says it takes a while to adjust to the new, increased global prices as buyers still have pending orders at last year’s lower prices. Large buyers are delaying signing purchase contracts for new crops because of the higher prices. This increases costs as inventory has to be held for a longer period, Garg says.

For India, she says, the good news is that rice exports should pick up in January 2022. This year, buyers procured rice earlier than usual. However, due to supply chain-related delays, such as container shortages, the overall export lead time has increased.

Besides rice, India is also known globally for coffee. The country is the sixth-largest producer and fifth-largest exporter of coffee. The Indian coffee trade season has started on a dull note due to certain factors, says Madurai-based coffee exporter Ashwin Ram Ragupathi. “Damage to Brazilian coffee crops has led to an extraordinary increase in Indian coffee parchment prices. This and higher freight costs (almost 3X to 4X the pre-Covid prices) have raised the prices of Indian coffee in the international market. Also, planters have not yet started releasing their stocks in full swing as they expect prices to go up. Major exporters and curing houses are reluctant to book parchments at the current higher prices,” says Ragupathi, a partner at Nadar Spices.

If this situation prevails, price-sensitive buyers might move to cheaper varieties from regions such as Africa. Some buyers have already started doing that or are bargaining hard. But as the government has reduced the tax refund rates to 1% from 3%, exporters don’t have much breathing space for bargains, points out Ragupathi.


iStockDamage to Brazilian coffee crops due to severe frost pushed prices of Arabica coffee to a seven year high.Queries sent to the Ministry of Agriculture and Farmers’ Welfare, and the Agricultural and Processed Food Products Export Development Authority did not receive any response at the time of publishing this story.

Where is the silver lining?
Any hope of a quick recovery for commodity firms has been extinguished now. Arun Singh, Global Chief Economist, Dun & Bradstreet, affirms that commodity prices are expected to remain high and volatile. Omicron will aggravate supply bottlenecks, adding to price pressures, he says. As states start implementing various restrictions, the demand-supply gap will widen. “Besides, international prices are not likely to ease in the near term. A reduction in import duty, ban on futures trading of commodities to prevent speculation or a good output — only these can alleviate some of the price pressures. Till disruptions in the supply chain normalise, volatility and high prices are here to stay. It is highly likely that the disruptions caused by the new variant will continue till mid-2022,” adds Singh.

But Siraj Chaudhry, CEO and MD of National Commodities Management Services Limited (NCML), has a different view. He asserts that agricultural commodity prices are expected to witness a mixed trend in 2022. Several factors with roots beyond domestic frontiers seem to be at play here. Prices of edible oil and oilseeds are expected to soften due to an increase in supply. “Pulses are expected to remain firm during 2022 as production has been impacted due to heavy rains in the pulse growing regions of the country,” Chaudhry says.

He expects wheat and maize to witness bullish momentum in 2022. Chaudhry estimates the market to stabilise from Q4 of 2022 when the Indian kharif crop, North American crop and Black Sea region crop hit the markets. The edible oil complex will start stabilising from the second quarter of 2022 when fresh supplies of palm oil start from Malaysia and Indonesia, he adds.

Chaudhry, however, has a word of caution. India is an agri-rich nation but its agri players and domestic growers are on a sound footing to combat uncertainties and unevenness of prices. It will be tricky for domestic players to navigate safely in the midst of market upheavals. Therefore, he says, commodity risk price management is going to be critical for businesses. As volatility is expected to remain high, players with good risk management should be able to safeguard themselves. Remember, he adds, commodity prices can see volatility in 2022 also.

It might not yet be a happy new year for Indian agri commodity players.

(Edited by Ram Mohan. Illustrations by Mohammad Arshad)
(Originally published on Jan 11, 2022, 09:18 AM IST)

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