Crude palm oil was a victim of a supply glut in 2018 in the two largest supplying nations, Malaysia and Indonesia.
Ravindra V Rao
Anand Rathi Commodities
Undoubtedly, 2018 was a volatile one for most farm-commodities, with prices of oil crops, spices, guar and that of the cotton complex testing multi-year highs, while a few such as pulses breached their multi-year lows. Agri-commodities are vulnerable to the vagaries of the weather, and 2018 was no exception.
In fact, the whipsaws in the 2018 monsoon have pushed prices higher in the year gone by. The southwest monsoon had a good start but the second half was not up to the mark. Many agricultural belts of Maharashtra, Rajasthan, Gujarat and Karnataka, among others, are drought ridden. The government's efforts to protect farmers' interests are at centre stage and a substantial hike has been made in the Minimum Support Prices of many farm commodities.
The year gone by saw global agro markets tumbling amid trade tensions between the two major economies, which not only affected global agricultural trade but left their footprints on domestic markets as well. The broad fundamentals and macro-economic factors played their roles in determining prices of farm commodities in 2018. They stuck to seasonal price patterns during the relevant times of the year.
Of the farm commodities that have been hit by scanty rains in 2018 is castor seed. The non-edible oilseed, castor, also led the gainers' list in 2018, posting an 18 percent rise. Castor seed yields have been affected by deficient rains in the largest-producing state, Gujarat, and output is thus expected to fall below 11 lakh tonnes.
Stocks of castor seed are already lower, and the expected fall in 2018-19 output has raised worries about supplies, pushing prices to a many-year high of Rs 6,270. The commodity looks attractive in 2019 as supplies will be tight once harvesting pressures recede, post-April.
Cotton is yet another commodity hit by the drought in Gujarat and the Marathwada belt of Maharashtra, reducing the 2018-19 crop almost 6.8 percent. The commodity hit a many-month high in mid-2018 in both the home and International markets on concerns about supplies amid erratic weather in the top-producing nations, the US and China. However, the heightening trade tensions between the two nations impacted global cotton prices, ultimately hampering overseas demand for high-priced Indian cotton, and prices have once again tested a seven-month low (20,770) in late December. Nevertheless, supply shortage persists in domestic markets, while, in the US, the peak supply season is nearing its close. Considering broad fundamentals, the outlook for the first half of 2019 is bullish.
Of the few rabi crops that are bearing the brunt of drought is chana. In fact, this pulse crop was the worst hit commodity in the first half of 2018 due to huge stockpiles. With the government's measures such as a hike in import duties, a price-support scheme and the imposition of quantitative restrictions, prices recovered in Q3 2018.
Finally, they held above Rs 4,400 as sowing area was curtailed substantially, particularly in the drought-ridden belts of Maharashtra and Karnataka. After two consecutive years of higher production, chana output will be dragged down in 2018-19 because of the fall in acreage and unfavourable yield conditions. At the present juncture, chana prices for 2019 look attractive; any price gain would be determined by government policies and other seasonal factors.
When it comes to oil crops, particularly, soybean, prices have declined from the peak of 3,900 in April to as low as 3,150 in October. The fall that started in Q2 2018 with escalating worries about the US-China trade war continued in subsequent quarters due to an optimistic 2018-19 crop picture in the home and global markets.
Soybean output, which dropped more than 21 percent in 2017-18, is expected to increase around 37 percent to 114.83 lakh tonnes in 2018-19. Nevertheless, soybean price movements in Q1 2019 would be mostly positive as the oilseed prices closely follow seasonality. The potential would be capped, post-April, once South American supplies peak.
Crude palm oil was a victim of a supply glut in 2018 in the two largest supplying nations, Malaysia and Indonesia. Palm oil inventories in Malaysia surged to an 18-month peak, pushing the benchmark Malaysian palm oil futures to a many-year low in the last quarter of 2018. India being one of the largest importers of palm oil from Malaysia domestic prices also plunged during Q4 2018.
Though bearishness in CPO is expected to continue in Q1 2019 amid high inventories, the overall outlook for 2019 may turn positive considering the implementation of a larger biodiesel mandate in 2019. The risk of an El Nino phenomenon would disrupt the production pattern and this could be one of the important factors for a price rise.
(The author is the Head - Commodity Research & Advisory at Anand Rathi Commodities.)Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.