Milk, Cereal Prices Push Inflation Up further - June 7, 2008

New Delhi: Inflation continued its northward trend to inch up further above 8 per cent, spurred on by increasing prices of primary articles including cereals, spices, milk and fruits, besides manufactured items such as iron and steel and edible oils.

The latest Wholesale Price Index-based inflation estimate of 8.24 per cent for the week ending May 24, as against the previous week’s annual rise of 8.10 per cent, does not, however, incorporate the hikes in fuel prices announced by the Government on Wednesday.

The impact of the diesel, LPG and petrol price hike is slated to figure two weeks from now, when the data for the week ending June 7 would be released.

Reacting to the latest inflation numbers, the Finance Minister, P Chidambaram, said the Centre would take m

Policies To Control Inflation May Be Actually Stoking The Fire

NEW DELHI: Bulls are running amok in Indian oilseed and corn futures in anticipation of a ban by the government soon. Since Indian contracts are rising at a time when the world market is cooling off, policies to control inflation may be actually stoking the fire in domestic oils and grain futures.

By continuously going long, a clutch of large players have pushed up soybean, rapeseed and corn futures to record highs in Mumbai and Indore bourses even though the international market has dropped significantly.

“At a time when the international market in soybean, rapeseed and corn has dropped, even those who had short positions are now exiting to go long. Obviously they know something that others don’t,’’ said a market watcher in Mumbai.

These local bulls are betting that when the government bans futures in these commodities, it will ask exchanges to settle their contracts on the basis of prices on the last trading session and not prices in the physical market. That would give punters ample gravy for a profit feast.

Ever since the ban on soyabean oil, there has been a bull run in oilseed because speculators are anticipating a similar ban there as well. In the last three weeks, soybean has shot up Rs 2,500/tonne, rapeseed Rs 4,500/tonne and corn Rs 800/tonne.

The market is under such a sway towards one direction that even a crash in the international market has not been sufficient to ensure a correction. On May 29, Chicago Board of Trade soybean contract dropped 5% by 65 cents, or Rs 100/quintal in rupee terms.

CBoT corn also dropped almost 5% in May. In India, however, soya dropped by just Rs 5/qtl on Friday, while corn actually rose Rs 13/qtl. Rapeseed also bucked the international trend by rising Rs 30/qtl on Friday.

“Things have come to such a pass that soyabean October contract for the new crop is now ruling at a record Rs 23,500/t. One reason is the likely increase in minimum support price for soybean. But that can’t explain this rally. The crop is not even sown yet,’’ said a trader in Mumbai.

While the longs are betting on futures getting banned, the shorts are nervous because they know it would leave them with no exit option. So they are staying away from the market. “No one wants to be caught on the short side of the market when the ban comes,’’ said a trader here.

Market watchers say the only way to halt this rally would be for the government to make it clear that if a ban comes, it would not use merely the last traded price for settling contracts.

“The same method was used in soybean oil, rubber and potato this year and urad and tur contracts last year. Only in wheat the government allowed the contracts being traded to run their course. That ensured an orderly exit of players in the market,’’ a source added.

The biggest problem of this bull run has been the growing disconnect between the physical and futures market. No one in the physical market is willing to do deals at prices in the derivatives market. That has disrupted trading significantly, which may further work to the bulls’ advantage.

“The upward spiral in corn has further fuelled demand by poultry and starch industries to ban futures and the strategy appears to be working well. Either way bulls are ensuring the ban comes soon. They are waiting for the government to fall into this trap,’’ a source said.

Beleaguered Net Food Importing Developing Countries

New Delhi: For the beleaguered net food importing developing countries, faced with the recent record level of prices for almost all agricultural commodities that led substantially to food inflation, the prospects for any respite in the medium to long term are none too optimistic.

This is the broad conclusion of the Agricultural Outlook, jointly prepared by the Organisation for Economic Cooperation and Development (OECD) and the Food and Agriculture Organisation (FAO) of the UN and released in Paris at the 30-member inter-governmental think tank’s headquarters on Thursday.

As world reference prices in nominal terms for all agricultural commodities today remain at or above previous record levels, OECD said this might come down due to the transitory nature of some of the factors behind the recent hikes. However, it adds: “There is a strong reason to believe that there are now also permanent factors underpinning prices that will work to keep them both at higher average levels than in the past and reduce the long-term decline in real terms”.

In the medium term

Providing a synoptic assessment of agricultural markets covering cereals, oilseeds, sugar, meat, milk and dairy products over the span of 2008 to 2017, the report said the underlying dynamics in supply and demand suggest that commodity prices — in nominal terms — over the medium term would average substantially above the levels prevalent in the last ten years.

When the average for 2008 to 2017 is compared with that over 1998 to 2007, it said, beef and pork prices might be some 20 per cent higher, some 30 per cent for raw and white sugar, 40 to 60 per cent for wheat, maize and skim milk powder, more than 60 per cent higher for butter and oilseeds and over 80 per cent higher for vegetable oils.

Despite record wheat and coarse grain crops in 2007-08 and a sustained moderate rise in production thereafter, grain markets are likely to remain tight in the period to 2017, OECD said. The prolific demand for maize arising from the rapidly expanding ethanol segment in the US has profoundly hit the coarse-grain market since roughly 40 per cent of the US’s maize crop could be destined for energy production by 2017, it noted.

Feed demand

Developing countries such as those in South and East Asia, as well as Nigeria and Egypt, would continue to fuel global wheat demand. Saudi Arabia is also projected to become a major importer. The growth in global demand for coarse grains would be driven by heightened feed demand from thriving livestock industries in developing countries. Imports by these countries as a group are likely to grow to 94 million tonnes, representing nearly 75 per cent of the world total, which compares to less than 70 per cent over the base period.

Global rice production could expand by 10 per cent by 2017, fuelled by larger crops in South and South-East Asian countries. As a share of world production, rice trade is likely to fall slightly, indicating a lessening reliance on the global market that is consistent with a return to more stringent self-sufficiency policies in several countries. Much of the expansion in world imports is fuelled by demand in Africa and Asia, with Thailand forecast to account for around one-third of all rice exports.

Bio-diesel production

OECD said emerging bio diesel production would escalate the consumption of domestically produced palm oil in Indonesia and Malaysia and soyabean oil in Brazil at the expense of exports of vegetable oil or oilseeds originating from those countries. On the ethanol front, a number of sugar-producing countries such as the EU, Japan, Malaysia, Indonesia, India, South Africa, Colombia and the Philippines are embarking on renewable energy programmes for use in the transport fuel sector.

As most of them are expected to use molasses or starch sources rather than raw sugarcane juice as feedstock, OECD said molasses-based bio-ethanol production should not impair sugar production in these countries and might even whet further growth in cane and sugar output.

World ethanol production is likely to increase rapidly to reach some 125 billion litres in 2017, twice the quantity produced in 2007. World ethanol prices are likely to exceed $55 per hectolitre in 2009, as crude oil prices rise, but should fall back to levels around $52-53 per hectolitre over the remainder of the projection span as production capacity expands the world over

Inflation In Agri-Commodities

New Delhi: The jury is still out on whether futures trading has had any role in fuelling inflation in agri-commodities.

But in the case of wheat, the available evidence points at something quite interesting.

De-listing

Since the de-listing of fresh futures contracts in the commodity in the 2007-08 Union Budget, wheat prices have ruled remarkably stable in the domestic market, even while being on the boil globally.

On February 28, 2007 (Budget day), wheat was quoting at around Rs 1,035 a quintal in the Delhi wholesale market. With the new crop’s arrival, prices fell below Rs 1,000 in the early part of April, touching a low of Rs 910 a quintal towards end-May.

By early-July, they had crossed the Rs 1,000 mark again, but traded within a narrow range to close the year at about Rs 1,060 a quintal.

Current year trend

In the current calendar year, too, domestic prices have been generally range-bound — crossing Rs 1,100 a quintal on January 10 and peaking at Rs 1,160 on January 18 and then declining with the seasonal trend to sub-1,100 levels from mid-April, and remaining there till the first week of this month. On Saturday, wheat was selling at Rs 1,100 a quintal.

All this is also reflected in the average wholesale price index (WPI) of wheat, which has increased marginally from 232.1 to 233.1 between February 2007 and April 2008, subject to the normal seasonal variations.

Disconnected prices

During the same period, world wheat prices (of the benchmark US No. 1 Hard Red Winter variety) have spiralled from $200 to over $362 a tonne (free on board, Gulf of Mexico), having averaged $439.72 a tonne in March!

The above disconnect between domestic and global price movements was not so pronounced in the pre-futures ban period.

Between March 2005 and March 2006, the WPI of wheat went up by 11.9 per cent, in tandem with the 15.5 per cent rise in world prices.

Subsequently, between April 2006 and February 2007, the WPI climbed by 16.7 per cent, even as global wheat prices strengthened by 10.9 per cent.

The period since then has witnessed a total de-linking — while wheat prices have triggered unrest spilling over into food riots elsewhere, the Indian market has exhibited relative tranquility. And coincidentally, this has happened after the ban imposed on wheat futures.

“Although no clear causality can be established, it seems that the transmission of international price pressures on domestic wheat prices has been much lower following the ban.

“This was not so earlier, when the screen-based trading in commodity exchanges could capture international price movements more quickly and these got reflected in domestic prices through the ‘reference price’ role played by futures prices,” said Prof Abhijit Sen, Chairman of the Expert Committee to Study the Impact of Futures Trading on Agricultural Commodity Prices.

He, nevertheless, clarified to Business Line that “what I am saying is only a conjecture that requires more rigorous testing”.

Also, it did not represent the Committee’s view, which had held that there was “(no) clear evidence of either reduced or increased volatility of spot prices due to futures trading”.

Costlier Manufactured Items Fuel Inflation Rate

New Delhi: Surging prices of some manufactured items and industrial fuels lifted the annual Wholesale Price Index-based inflation to 3.93 per cent for the week ended January 19.

This was higher than the previous week’s annual rise of 3.83 per cent, the Government data showed on Friday. The annual rate of inflation stood at 6.31 per cent during the corresponding week a year ago.

The Wholesale Price Index of all Commodities increased to 217.1 points against 216.7 points the previous week.

Primary Articles

On a disaggregated basis, the Primary Articles’ group index rose 0.3 per cent, with prices of maize up two per cent and wheat and arhar prices up one per cent each. The index for the Non-Food Articles group rose by 1.1 per cent due to higher prices of nigerseed and soyabean ( six per cent each), sunflower ( five per cent), groundnut seed ( two per cent) and rape and mustard seed, cotton seed, castor seed and copra ( one per cent each).

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The Fuel, Power, Light and Lubricants group index rose 0.1 per cent due to higher prices of furnace oil ( two per cent) and light diesel oil ( one per cent).

The Manufactured Products group index rose 0.1 per cent as the index for ‘Food Products’ group rose by 0.4 per cent due to higher prices of soyabean oil, imported edible oil, gingelly oil and cottonseed oil (three per cent each), khandsari (two per cent) and groundnut oil, ghee and sugar (one per cent each). However, the prices of gur (one per cent) declined.

Textiles

The index for Textiles group rose by 0.4 per cent due to higher prices of viscose filament yarn (four per cent), cotton yarn-cones (two per cent) and cotton yarn-hanks, viscose staple fibre and other cotton yarn (one per cent each). However, the prices of polyester staple fibre (four per cent) and hessian cloth and hessian and sacking bags (one per cent each) declined.

The index for Chemicals and Chemical Products group declined by 0.1 per cent for the previous week due to lower price of epoxy resins (15 per cent). The index for ‘Base Metals, Alloys and Metal Products’ group rose by 0.2 per cent due to higher prices of other iron steel (nine per cent), MS bars and rounds (seven per cent) and lead ingots, foundary pig iron, steel sheets, plates and strips and basic pig iron (1 per cent each). However, the prices of zinc ingots (three per cent) declined.

The final WPI for the week ended November 24 stood revised to 215.6 points, as compared to 215.4 points and annual rate of inflation based on final index, calculated on point to point basis, stood at 3.11 per cent as compared to 3.01 per cent points reported provisionally.