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Apr 04, 2012, 04.58 PM IST | Source: Reuters

Output falls, heat to keep India's food inflation simmering

Food inflation is likely to pinch Indians at least until July as fruit and vegetable output shrinks, hurt by rising temperatures and a lack of water, while edible oil and pulses prices are rallying on lower production and a more expensive world market.

Output falls, heat to keep India's food inflation simmering

Food inflation is likely to pinch Indians at least until July as fruit and vegetable output shrinks, hurt by rising temperatures and a lack of water, while edible oil and pulses prices are rallying on lower production and a more expensive world market.

Rising food prices will add to problems for the fractious coalition government, which has been weakened by a slew of scandals, and will make it difficult for the central bank to cut high interest rates, which are hindering growth.

"Based on market prices we see a sharp rise in vegetable inflation. Overall food inflation we see in double digits in March. This will have a very significant impact on overall inflation," said Sujan Hajra, chief economist at Anand Rathi Securities.

Food inflation is problematic for the central bank, which can do little about it. Surging food prices were a key driver of headline inflation that only began to ease significantly towards the end of 2011 as food prices fell, in part due to the base effect from surging prices a year earlier.

However, headline inflation edged up to 6.95% in February, and the central bank has been forced to push back the expected start to a cycle of interest rate cuts.

"Going by the sub component analysis of the wholesale price index (WPI), pulses and edible oils would remain inflationary and would pressurize the headline WPI going ahead," said Shakti Satapathy, fixed income strategist at A.K. Capital Services.

The price of potatoes, the most widely consumed vegetable in the country, jumped 45% in the past month, while prices of cabbage and cauliflower jumped more than 30%.

"A disease attack during the maturity stage has affected potato production," said R.P. Gupta, director at the National Horticultural Research and Development Foundation.

Potato futures are hovering near their highest level in nearly three years.

India's vegetable prices often rise in summer as output falls on water shortages and higher temperatures, but this year a cold wave and even less water threaten sharper price gains.

"Vegetable supply has been falling continuously," said Vilas Bhujbal, a vegetable trader based in Pune, in the western state of Maharashtra. "This year a severe cold wave initially hampered growth of vegetables and now higher temperatures and water scarcity is reducing yields."

MONSOON IMPACT

The arrival of monsoon rains will also impact food prices. Most Indian farmers start sowing crops after the arrival  usually in June. Any delay in rains, or lower rainfall at the start, could keep food prices firmer for a longer period.

Prices of pulses also known as lentils which consumers use as an alternative to vegetables, are also powering ahead on thin availability. Futures prices of chana, or chickpea, the most widely consumed pulse, rose to a record high in March on an estimated 7% output drop.

"This year production of all key pulses fell. Carry forward stocks from last year were lower," said a senior analyst at Angel Commodities. "Imports have also become costlier due to a weak rupee. All these factors will keep prices firm."

Fruits and vegetables have 3.84% weight in the wholesale price index, while edible oils weigh 3.04% and pulses 0.72%.

India's food balance in fresh fruit and vegetables is always precarious as they are difficult to store in the hot and humid summer for long periods, refrigerated transport is poor and demand is rising from an increasingly wealthy middle class.

BOILING EDIBLE OILS

Soyoil futures, an indicator of edible oil prices in the country, hit a record high on Monday and are likely to rise further on tight supplies in the world market.

Wholesale soyoil prices have risen to Rs 75 per kg, pushing the retail price above Rs 90 per litre, about twice the price of a litre of milk.

"In the world market edible oil supplies are becoming tighter. The soybean crop was lower in Argentina, Brazil and now traders are betting on thin supplies from the U.S.," said Badruddin Khan, associate vice-president of research at Angel Commodities.

India fills over half its edible oil needs through imports, mainly of palm oil from Malaysia and Indonesia.

"Vegetable prices will stay at current levels or may rise further. They are unlikely to correct before we see a significant improvement in supplies," Bhujbal said.

Normal supplies of vegetables are unlikely to resume before July, traders said, when crop from the new season will start arriving in the market. Supplies of lentils will improve from August while edible oil should start rising again from the end of October.

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