A late July flood can hit farmers and investors alike

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Shishir AsthanaMoneycontrol Research

There seems to be no end to farmer woes. Last year a good monsoon led to a glut which resulted in prices of farm commodities touching the ground. This year rainfall has been more concentrated resulting in floods in many parts of the country.

A late July flood can be disastrous for the farmer. By late July crops are in the early stage of growth. A farmer would have already spent money on seeds, fertilisers and weedicides. This is the time when the young crop, like a young child needs special protection. Heavy rains and flooding of water will destroy the entire crop thereby adding financial strain on the farmer.

Monsoon has been especially heavy in North East India and western states of Gujarat and Rajasthan. Though water has started receding from north eastern states like Assam, heavy and incessant rainfall continues to hit Gujarat and Rajasthan.

Arial photos show the damages done to cities and villages. It is too early to assess the damage done in most part of the regions as they are still water-logged and people have been evacuated from many areas.

Take the case of Gujarat where the state has received 61 percent of the season's rainfall. According to the state’s water supply department, out of the 203 reservoirs in the state, 30 have been put under high alert with 100 percent filling, while 11 dams record over 90 percent filling. The administration has issued an alert for 12 dams.

The biggest damage of flooding will be on the farms. According to reports, kharif sowing was done in around 60.62 lakh hectares. Gujarat is among the top states in production of many agriculture commodities like cotton, groundnut, and castor, among others.

Sowing this year had progressed faster as compared to earlier years on account of a good shower at the start of the season.

While exact data is still awaited, reports say that the affected districts had cotton acreages of over 20 lakh hectares, followed by groundnut area of about 14 lakh hectares. A bad crop in one of the highest growing regions will push prices of the commodity higher.

In case of cotton, market was expecting a bumper crop from India as acreage has increased to around 10.26 million hectares. However, with nearly 20 percent of the India’s total acreage, which is in Gujarat, is being affected by floods, the exact impact will be known in a week. Cotton crop prices can shoot up temporarily. But a decade high bumper crop in the US can put a cap on the prices.

As for groundnut, where Gujarat again is the largest producer with nearly a third of country’s production, apart from Junagadh most of the other groundnut growing areas are severely affected. Groundnut crop is mainly used for oil extraction, any impact on its production not only affects the price of the crop but also other crops like Soya which is considered as a substitute by oil extractors. The entire solvent extraction industry is watching the groundnut crop impact closely.

Castor is another important crop from Gujarat where the state produces nearly 80 percent of the country’s output. Details of castor acreage is not yet public, but the crop might not be as badly hit as cotton or groundnut. Normally sowing of castor takes place between July and August in Gujarat. Being a six-eight month crop the farmer might get another chance to sow castor. In fact, post the damage assessment, experts feel that the farmer might go in for either shorter-term pulses crop or castor. Many listed companies in India use castor as a raw material to produce oleochemicals, which, in turn, is exported. A good castor crop will result in lower raw material prices for these companies.

However, the textile industry, which is already affected by GST, now has to deal with a higher raw material cost. Similarly, the edible oil industry will be impacted by higher input costs.

Apart from the consuming industry the insurance and banking industry will be impacted by the damages in the states. For investors, it is perhaps a year to stay away from companies associated with these agro-commodities.