Monsoon to dispel clouds over sugar, grain

Monsoon to dispel clouds over sugar, grain

New Delhi/Singapore: A good monsoon forecast strengthens prospects for India to cut sugar imports, free up grain exports and buy more gold as rains boost supplies in the world’s leading consumer of most farm commodities.

Annual monsoon rains from June to September are key to firing up growth and farm output and limiting inflation in India, which ranks among the world’s top producers and consumers of sugar, wheat, rice and edible oils and is the biggest buyer of gold.

Any fall in Indian sugar imports is likely to squeeze New York raw sugar futures, which tumbled to a 10-month low on Friday, helped by the forecast of normal monsoon rains; while possible wheat exports could weaken benchmark Chicago wheat futures , which flirted with seven-week highs on Monday.

“The monsoon is definitely going to help us in easing supply concerns and food inflation," said Harish Galipelli, research head at JRG Wealth Management in the southern city of Kochi.

“Our imports of sugar and edible oil may go down due to better output of soybean and sugar cane."

Still, monsoon forecasts can go awry, as happened last year, when India suffered its worst drought since 1972, despite a forecast for a similarly normal monsoon.

That drought cracked the earth in rice and cane fields, forcing the world’s top sugar consumer to import a record 5 million tonnes and helping drive sugar futures to their highest in nearly three decades.

More cane planted

Higher sugar prices spurred farmers to plant more cane.

“Given the high prices of sugar, farmers in India have increased cane acreage and on top of that, if they get good monsoon rains, the country’s sugar production will increase back to the pre-2008 level, which is in excess of 22 million tonnes," said Doug Whitehead, commodity analyst at Rabobank in London.

That should embolden India to scrap emergency steps taken last year to bridge the sugar scarcity, such as duty-free imports, limits on stocks of sugar held by traders and firms and a sharp rise in state-set cane prices.

“A good monsoon will improve cane planting and improve yields, resulting in higher sugar output. Sugar import demand will fall," said Amol Tilak, a senior analyst at Kotak Commodities in Mumbai.

The US Department of Agriculture attache expects India’s sugar output to rise 27% to 24.7 million tonnes in the year to September 2011.

Grain exports

Even before the drought, the government had clamped down on exports of wheat and rice and banned futures trade in several farm commodities, hoping to ensure steady supplies at reasonable prices in the run-up to general elections last year.

Its ban on export of non-basmati rice helped as last year’s drought had devastated rice fields in many regions, prompting the government to consider rice imports. State firms even issued import tenders, only to back out when the bids proved too high.

Trade officials and analysts say good monsoon rains can boost raise rice output, which may lead to export of small quantities of regular grades, and at the very least, obviate imports.

The government expects rice output in the year to June 2010 to fall 14% to 72.87 million tonnes, but stocks on 1 April stood at a comfortable 26.7 million, or more than double a target of 12.2 million.

“As I understand, there is no urgent need to import rice and this forecast of normal monsoons probably will remove the need for importing rice," said Emmanuel Jayet, head of agricultural commodities research at Societe Generale in Paris.

D.P. Singh, president of the All India Grain Exporters Association, was more optimistic, saying, “A normal monsoon will induce the government to get rid of huge grain stocks, even exploring the option of allowing exports of rice."

Wheat exports seem more likely as the crop being harvested this month is likely to soar to a record 82 million tonnes, exceeding domestic demand for the fourth year straight.

India had stocks of 16.1 million tonnes of wheat on 1 April, four times the target of 4 million tonnes.

“There is an increasingly a robust case for exporting wheat because India already has large wheat stocks," Jayet said.

“The country can certainly afford to export wheat."

The government has already allowed state firms to ship small quantities of wheat and regular grades of rice to neighbours Nepal and Sri Lanka, and may more shipments may be encouraged.

Analysts say India’s bulging stocks may spur the government to export wheat to other markets but this may require a subsidy since the grain is made costly by high prices official agencies pay to farmers for their produce, with the rates hiked annually.

“Indian wheat prices are much higher than the global market," said Rabobank’s Whitehead.

“Indian wheat could get some export demand from neighbouring countries, where it has a freight advantage. For a significant volume of exports to take place the government will have to subsidise exports."

Gold imports

Monsoon rains are a key driver for rural incomes as two-thirds of India’s 1.2 billion people live in villages and work on farms. Rainfall would boost India’s demand for gold.

“The monsoon is crucial for gold demand. Ours is a farm-based economy, and a good harvest helps gold buying in rural areas," said Suresh Hundia, president of the Bombay Bullion Association.

India’s gold imports last year are estimated at 339.8 tonnes the Bombay Bullion Association (BBA) says, while first-quarter 2010 imports are up 30% on the year at 90.5 tonnes.

The gold market suffered its worst year in more than a decade in 2009, when annual imports fell 20% as India’s monsoon failed, felling farm output and shrinking consumer spending.