Posted by: commoditywise | December 15, 2007

Weekend Musing: Agflation

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n a weekend day, I thought I would be able to catch up with some of the developments that I may have missed from both the domestic and international arena, and then possibly also take some rest, too. But like many of you, I too was pushed out by my better half to get some groceries.

We all have to, you see, sometime or the other…. 

Not accustomed with the prices of groceries, I called my wife to check if the prices of jowar, grams and few other items were charged correctly by the nearby grocer. 

“What?” My wife shouted from the other end. “How come the prices have risen so much! Barely few months ago, these used to cost almost 30-40 per cent less…” 

High food grain prices do not leave any option. We have to buy them. Like the Reserve Bank of India (RBI) Governor, we all too hate inflation, but have learned to live with it, grumbling or other wise. 

In UK, food prices are accelerating at their highest rate for 14 years – and running at more than three times the rate of inflation, official figures show, reported Telegraph of UK a couple of days ago. 

And the Central Bankers all over the world – including our own Reserve Bank of India (RBI) – thought that they along with their politicians – have succeeded in containing the inflation dragon from inflicting more economic wounds across the globe. That our pockets are being pinched by the inflation dragon is none of the concern of RBI or any of the Central Bankers or their politicians. 

RBI Governor Y V Reddy recently said that RBI hates inflation… and that RBI has been successful in maintaining inflation in India at around three per cent levels. Though down from over five per cent few months ago, inflation dragon in India has begun to raise its head and currently is said to be be high at around 3.75 per cent. 

In USA too, the Federal Reserve is concerned about its ability in priming the US economy and also how to contain the rising inflation reflected in rising cost of gasoline, clothing & food among other products. After the recent round of cut in interest rates by Fed Reserve, the stock markets worries about inflation has increased that is reflected in Dow Jones shedding off 178 points on Friday (December 14, 07).  

Having barely managed to learn to live with the inflation dragon, we are collectively expected to live with yet another of its kin – AGFLATION – agriculture + inflation – or the era of rising food prices led inflation. 

Retail levels food prices all around the world – and so also in India – have been rising, and will continue to rise even further in future. So what if RBI, its governor, or its masters in the South Bloc (that houses finance ministry in India) hate inflation? Food prices have their own reasons and logic to rise or fall, irrespective of the likes and dislikes of the Central Bankers. 

Apart from the collective greed of the retailers, packers and traders whose prices of food items have nothing to do with the farm gate prices and the farmers are not better off with the kind of rise in food prices we are forced to shell out these days, I can think of two other reasons for the rise in food prices: 

One, the overall rise in demand for food with rise in population across the world, and more so in the developing countries where the consumers are witnessing increasing amount of disposable incomes that constantly nudge them to buy more and more, also of food, dairy and liquors from the mushrooming shopping malls in their vicinity. 

Two, and this is a global phenomenon – increased use of food products – sugar, maize/corn, soybean seeds, palm furit, etc – for bio fuels in the hope that these bio-fuels would compete with the costlier fossil fuels. No one has yet however, calculated the cost to the society of bio-fuels v/s the fossil fuels, and not just at the petrol pump but across the society. 

And while the Indian government is busy making space for the sprawling shopping malls and trying hard to find ways to convince the rising opposition to its policy to allow more foreign direct investment (FDI) in retail space, and the US government is happy giving subsidies to the farmers to grow more food grains that can be diverted for bio-fuels, my wife, like those of many of you out there, are shouting in vain as to why food prices are rising so fast.  

Surprising, but true, the US house prices are plunging, but the food prices in 2007 have risen the maximum in 34 years!! And what is more, USA, the world’s largest food exporter has been the biggest gainer by earning over $18 billion in food exports.  

In India, the government is un-flinched with the rising instances of farmers committing suicides, or for that matter the rising food bill for the consumers. It is busy finding ways to fill its granaries by buying food grains from the USA!!! And shelves at mushrooming shopping malls in India are finding more and more food items from foreign countries… 

Yes, there is more to Agflation …

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Posted by: commoditywise | December 14, 2007

Sebi may also regulate India’s commodity markets, but…

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ill there be one regulator for India’s financial and commodity markets?   

In UK, the Financial Services Authority (FSA) regulates all three wings of the financial markets of UK – banks, capital and commodity markets. The Financial Services Authority (FSA – www.fsa.gov.uk) is an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000. FSA is a company limited by guarantee and financed by the financial services industry.  The Treasury appoints the FSA Board, which currently consists of a Chairman, a Chief Executive Officer, three Managing Directors, and 9 non-executive directors (including a lead non-executive member, the Deputy Chairman). This Board sets the overall policy of FSA, but day-to-day decisions and management of the staff are the responsibility of the Executive. 

In India three regulators regulate the three segments – Reserve Bank of India regulates the banks, Securities and Exchange Board of India (Sebi) the capital and Forward Market Commission the commodity markets.  

Yes, there has been a move to have one regulator for India’s financial and commodity markets and it can, too, provided if the forthcoming elections results in a change of guard at the Ministry of Agriculture (MoA). Only then would the Ministry of Finance (MoF) be able to push forth the long-pending proposal to merge FMC with the Sebi. 

“The day there is a different Minister of Agriculture, the MoF would be able to push forth the FMC-Sebi merger proposal”, said a top executive from one of the leading commodity exchanges requesting anonymity. 

It is no secret that Food and Agriculture Minister Sharad Pawar has been supportive of commodity exchanges’ views on FMC-Sebi merger and has been aggressively opposing the much-awaited merger. So, only if there is change of guard at the Krishi Bhavan housing the MoA can let the FMC-Sebi merger a reality. 

This tug-of-war like situation between MoF and MoA for the proposed merger of FMC with Sebi is holding back the much-delayed structured development and regulation of the commodity markets in India. As a result of this India is losing out sizeable commodity risk management business to its rivals in the Asian region and also in other foreign countries.  

Fearing the negative impact of loosely regulated commodity markets with feeble staffed and low funded FMC, some of the top state-owned commodity related companies like ONGC and others have been encouraged by the MoF to hedge their business and commodity risks on the international commodity exchanges and not on the domestic commodity exchanges. Because of this stand of MoF, the domestic companies prefer to go overseas for their risk management activities. Also, the commodity exchanges continue to remain a shallow pool for the speculators and small time day operators to play in.   

Since the opening up of the commodity markets in mid-2003, there has been a proposal to merge FMC with Sebi. This merger could strengthen the overall regulation of both the capital and the commodity markets and lower the regulatory bill for the regulation of the financial markets, which if FMC is separate, the government will have to earmark a sizeable amount of funds needed for a strict vigilance and structured development of the nascent commodity markets in India. 

The benefits of merging FMC with Sebi are many. The first being the comforting perception that there is a strong market regulator, which, obviously the influential group of members of the commodity markets do not want.Two, the government can then strengthen the commodity market regulatory aspects from the cash-flush Sebi;Three, the government can push forth the policy moves to allow institutional players into the commodity markets. Currently, institutional players, banks and mutual funds are not allowed to operate in commodity markets, barring of course few mutual funds that have been allowed to float their own Exchange Traded Funds for gold.Four, the most important the sheer change in perception of a stronger regulator would prompt the companies to take advantage of the available hedging and risk management facilities offered by the commodity exchanges.Five, collectively, this will start the process of deepening the commodity markets while also its integration with the other segments of the financial markets. 

The moot question is – Does India have what it takes to be a Super Financial Cop? 

India is primarily a multi-lingual, multi-cultural and an agrarian economy, with 70 per cent of its population living in villages – and most of them uneducated. It is simply too-o much to expect full fledged knowledge of both finance and commodity markets among larger section of population from where the Financial Super Cop may possibly come from. And it is rarer still to have persons of integrity, with knowledge of finance and commodity markets who can take on the challenges of heading an organization that is expected to regulate both the capital and the commodity markets. The opportunities and attractions of making good money on the sly from such an enviable position are simply too many to be ignored. 

So, all the hopes of merging FMC with Sebi for a better regulated capital and commodity market is all very well. India does not have such people who can take on this challenging task. It is because of this that the government’s wish to have independent directors in companies guarding investors interest has remained just that – a wish. This is because there is lack of individuals with sufficient knowledge of finance who can even be as an independent directors on the board of companies. 

And as regards knowledge of commodity markets is concerned, there is even less pool of people who know the intricacies of commodity markets that are more complex that capital markets. So, the total absence of pool of persons with integrity and knowledge of finance and capital markets in India will prove to be one of the biggest stumbling block for the government to see a Super Financial Cop for its capital and commodity markets.

Posted by: commoditywise | December 13, 2007

Glimmer of hope on copper

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ooking eastward to developing countries, cutting down on mining operations and lowering copper production are some of the ways that the miners and copper makers seem to be trying to lift themselves out of the ongoing supply glut. 

An indication of likely lower mine and copper production during the months ahead was recently made by International Copper Study Group (ICSG – www.iscg.org) in its latest report. Among other things the ICSG report said the following: 

  1. Monthly mine production during the four months to August 2007 has slowly been lower. In August 2007, it was placed at 1.241 mn tn, down from 1.314 mn tn in May 2007;
  2. The peak annual mine production was in 2006 at 15.015 mn tn
  3. Monthly mine capacity utilization has been lower at 82% in August 2007, down from 87.9% in May and June 2007
  4. Monthly world refinery capacity utilization too was lower in August 2007 at 81.1%, down from 82.7% in May 2007. The peak annual world refinery capacity utilization was 88.6% in 2001.
  5. Monthly world refined copper usage has declined by around 100,000 tn during the 4-months to August 2007 to 1.455 mn tn. The annual peak refined copper usage was 17.122 mn tn in 2006.
  6. Increase in copper consumption in Asia (excluding China) and Africa of 4% and 7% respectively was offset by lower consumption in Americas (2.4%), Europe (2.3%) and Oceania (9%)

 The copper stock at the warehouses of London Metal Exchange (LME) has doubled to 200,000 mt tn in November 2007, up from year’s low of 100,000 mt in July 2007.   On LME, the 3-month copper prices on Thursday morning dipped to $6,693 a tonne from previous day’s close of $6,820 a tonne. The slide in copper prices was mainly due to the supply fears that loomed larger with the latest 25 bsp interest rate cut to 4.25 per cent by Federal Reserve on Wednesday. Indicating that Fed may resort to further rate cut indicated that the clouds of sub-prime led crisis continued to loom thicker on the US economy.Soon after the Fed’s interest rate cut, a report of Telegraph, UK on December 12, 2007 informed: `Morgan Stanley yesterday become the first investment bank to issue a full recession alert for the US, warning of a sharp slowdown in business investment and a “perfect storm” for consumers as the housing slump spreads’. 

In current gloomier times, the ICSG findings give a glimmer of hope for lower copper output during the months ahead. However, given the excess of copper in the markets would take time to get consumed and possibly result in higher prices.

Posted by: commoditywise | December 11, 2007

Hidraf protest may impact palm oil exports to India

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griculture remains the most politicized commodity the world over. Palm oil could hardly be different.  

Malaysia, the palm oil producing and exporting major has since November 11 been experiencing the disturbances caused allegedly by the protesting members of Hidraf group which the Malaysian government is trying the hard way to control the agitation “based on its own laws”. We sincerely pray that the disturbance in Malaysia is settled peacefully and amicably between the Malaysian government and the Hidraf group, said to represent over one million Hindus largely from Southern India’s Tamil Nadu and Kerala states.  

Each year, India imports around 3-4 mn tones of palm oil both from Malaysia and Indonesia, though Indonesia is bigger supplier than Malaysia. With a meager domestic palm oil production, India is forced to import entire quantity of palm oil it requires for its domestic consumption. 

We hope not, but the socio-political unrest in Malaysia could disturb palm oil exports to India and therefore, could raise the prices not just of palm oil but of the other edible oils also. Or will there be some kind of resistance from Southern India?  

Of the total three million plus palm oil imports from Malaysia and Indonesia, almost 50 per cent is said to be imported through the southern ports. And the rising palm oil imports in India has disturbed the economies of oilseeds in the country, notably that of coconut and its oil especially in South India. In order to protect the interest of farmers in Southern India, the government has banned palm oil imports from Kochi port, but recently declined the Kerala’s plea to extend the ban up to Beypore port. But there is no plan to ban palm oil import, the Agriculture Minister Sharad Pawar has said.  

Palm oil production in Malaysia this year is said to be good and with exports remaining at around 1.3 mn tones in December, stocks are likely to be high. These high stocks could rein in the chances of high palm oil prices going further up which could also result in lower imports by importing countries. However, traders here feel that palm oil exports to India could partially be disturbed because of the ongoing protest between the members of the Hidraf group and the government. 

For various reasons, in India there is no trading in futures of palm oil – crude or refined. On the Bursa Malaysia Derivatives Exchange, the palm oil prices have risen by over 500 Malaysian ringgits since June 2007. On Friday, December 7, the February 2008 CPO contract  ended at Malaysian ringgit MYR2870 (US$ 844) a metric ton, up MYR20 (US$ 6) from Thursday, but down from Tuesday, December 4 when it was quoted at around MYR2889 (US$ 850) a metric ton.  In October 2007, the January 2008 contract the palm oil futures had touched a record at 2,791 ringgit ($825) per tonne.  

Surprising as it may seem but the correlation between edible oils and crude oil has risen to over 95 per cent since the past few months from a miniscule 0.36 per cent in the early ‘90s. So, the bullishness in the crude oil and soy oil among others. This is because edible oils are increasingly being used as bio-fuels which compete well with diesel which is costlier than bio-fuels. 

After having touched a record MYR2900 in October 2007, Malaysian palm oil prices are sure to rise further – what with rising crude oil prices. Given the overall bullishness, chances are palm oil would soon cross MYR3,000 per tn.

Posted by: commoditywise | December 10, 2007

Rising monopoly in India’s commodity futures trading

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hree years is a good time to look into how India’s commodity futures market is doing. No, this is not a balance sheet kind of in-depth study, but an observation of the trading pattern that has emerged since past more than a year. India’s fast upcoming economy is also witnessing the emergence of monopoly in its nascent commodity futures market that was reopened in 2003 after a gap of over four decades of official ban. That options are not yet allowed on commodity futures is a different story here. 

Monopoly anywhere is unhealthy, more so in current increasingly democratic times and in a world driven more by market forces that shuns monopoly. Monopoly distorts the market and harms the economic and financial interests of members of the concerned market. It is therefore, important that the concerned authorities wake up to this surprising development in a market that has good potential to help India blend with the global derivatives market that is growing by leaps and bounds. 

The main players here are three nationwide multi commodity exchanges (NMCEs) that were given licenses in mid-2003 to offer online commodity trading platform to the members of the commodity market eco-system.

These three NMCEs are (1) Ahmedabad (Gujarat)-based National Multi Commodity Exchange of India (NMCEIL); (2) National Commodity & Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX) of India.  

Latest figures show that the commodity futures trade on all the 24 Indian commodity exchanges was Rs 22,68,826.98 crore (approx Rs 22.7 bn, or $560 billion) during April 2, 2007 to November 15, 2007. The average daily turnover is around Rs 10,000 crore, but the actual daily trading value fluctuates around Rs 20-25,000 crore between the three NMCEs, and MCX takes the cake by cornering almost 90 per cent of the traded volumes and therefore, is a monopoly in Indian commodity futures market. 

Are the government and the regulator worried about this monopoly? Not at all, for, there has been no voice of concern raised anywhere even when there are number of debates, conferences on commodity related activities. Even the high profiled panel headed by Dr Abhijit Sen expected to submit its report `soon’ on the impact on spot prices of price fluctuations on futures market, do not seem to have considered this aspect of monopoly and its impact on the future of India’s commodity derivatives industry. 

One would say, the business models adopted by the NMCEs have given them the kind of trading volumes they have – including the monopolistic situation at MCX.  

MCX has concentrated more on the international commodities – crude oil, bullion and couple of non-ferrous metals. Trading in agro futures too have been rising of late. MCX has also offered the facility of evening trades that helps members trade on the sly on the international commodity markets till just before midnight. This is despite the fact that trading on international commodity exchanges and arbitrage between domestic and international commodity exchanges are not allowed. But it is always difficult to prove this and nab and punish the members, more when the exchange has the silent blessings.  Daily turnover on MCX is said to be around Rs 12,000 crore – 14,000 crore, and almost 60-75 per cent of this comes from evening trading, where there is no price discovery, no delivery of trades but pure speculation. And the size of collective volumes is relatively unchanged!!! 

On its part, NCDEX had decided to focus more on agro sector, given the importance of agriculture in Indian economy. But agriculture in India is more political than commercial, and therefore, the government’s constant intervention and suspension of trading in key agro commodities. The Forward Market Commission (FMC), awaiting more clarity and powers from government, has been raising margins on agro futures trading possibly to support government’s views to discourage trading in agro futures because this is seen as pushing up prices in the open market. All this has robbed off NCDEX of its share of trading volumes and disturbed its growth plans and fortunes. Daily turnover at NCDEX has shrunk to barely around Rs 1,500 crore, and for various reasons. It has relative strength in edible oils complex, but that edge too is fast reducing. Also, its recent effort to boost volumes on its bullion segment has not yielded much result. 

We do not know why do the members of the commodity futures trading community have extreme, unchallenged, and unquestioned preference for MCX platform, provided of course they have either been promised some kind of undisclosed benefits or have been subtly asked to put all their trades only on MCX and stay away from trading on other platforms, and if they do so, they could attract wrath from the exchange. 

NMCEIL is trying hard to focus beyond rubber and pepper futures. Recently, it has made changes in its metals futures trading products along with changes in other commodities. 

Is there a case for some kind of management study into the monopolistic success of MCX? This is more important for two reasons – one, when the government has assigned management institutes and the high profiled panel to look into the impact of futures trading on spot prices; two, the government is in the process of deciding whether or not to merge FMC with the securities market regulator the Securities and Exchange Board of India (Sebi) which the commodity exchanges are opposing tooth-and-nail. 

We will try to look more into this aspect.

Posted by: commoditywise | December 8, 2007

Who’ll gain from Stanchart-STCI commodities tangled deal?

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 technical issue regarding `conflict of interest’ in Press Note No 1 (2005 Series) seems to have halted Standard Chartered Bank’s (SCB) further foray into Indian commodity markets. With this, STCI will have to scout for another partner for its commodities activities from among couple of other applicants who had lost to SCB. 

Securities Trading Corporation of India Ltd (STCI) had picked up 100 per cent stake in UTI Securities in January 2006 for an amount of around Rs 250 crore. Of this, it had succeeded in negotiating with SCB to pick up 49 per cent equity stake (at around Rs 148 crore) which was almost approved by the government on August 21, 2007. Other hopefuls who were in the foray to pick up stake in STCI included Citigroup, Macquire Bank, Societie Generale and Kuwait’s Global Investment House.  

The approval for SCB’s application was with a rider that said: ‘Acquisition of 49% stake in UTI Securities Ltd – Proposal attracts Press Note No1 (2005 Series). Clause 2(iii) of Press Note No1 (2005 Series)says: In so far as joint ventures to be entered into after the date of this press note are concerned the JV agreement may embody `conflict of interest’ clause to safeguard the interest of JV partners in the event of one of the partners desiring to set up another JV or a wholly-owned subsidiary in the `same’ field of economic activity’. 

So, even when the mandarins in the North Bloc (Finance Ministry, Department of Economic Affairs, FIPB Unit) cleared SCB application, the Reserve Bank of India (RBI) the apex bank, found out that the proposed plan of SCB picking up 49% equity stake in STCI’s UTI Securities was `conflict of interest’. This is because SCB UAE, in Dubai, already has a full fledged commodities division established in May 2006. If offers facilities to trade in precious metals, base metals, energy, and soft commodities. In Dubai, SCB is also the clearing bank for Dubai Gold and Commodity Exchange. 

It was also in May 2006, SCB announced the establishing of commodities desk in Singapore and London. And as regards SCB’s commodities activities in India, its press note (http://www.standardchartered.com/global/news/2006/pdf_grp_20060530.html) issued on May 26, 2006 said: ’SCB has a rich history in commodities trading in Asia and India dating back to the 1850s…. A commodity derivatives capability allows us to help manage risk for our corporate clients exposed to these volatile markets’, and has been offering a whole range of commodities related activities from its Mumbai branch.  

SCB did not have a brokerage arm in India, and therefore, the proposed investment in STCI, which is most unlikely to be cleared by RBI, if reports are to be believed. Following this, SCB may hive off its commodities business.    

Another reason for RBI not clearing SCB’s application to pick up stake in STCI is that banks in India are not yet allowed to participate in the commodity futures market, even as they have been allowed to pick up stake in commodity exchanges mainly as part of investment and not trading or offering hedging products to their clients. 

It will be interesting to see how and when does STCI seek alliance with other hopefuls mentioned above. Without the help of a strong partner, it would be difficult for STCI to make a foray into commodities derivatives and broking as there are already over 900 broking entities entrenched in the relatively nascent commodity futures arena.  

That the government does not want to see any sour deals in UTI Securities is a different story.  

Posted by: commoditywise | December 7, 2007

Commodities bull may want to take some rest in 2008

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p, Up and Away was a Disney Channel Original Movie released for television in 2000. According to Wikipedia, the TV flick was about a common teenager from a family of super-heros, who is expected to `save the day and rescue the kids without superpowers’. 

In current times, up and up away can be referred more to our fond desire for the continued bullishness in the finite world of the financial world with infinite possibilities. One of these possibilities now seen ahead is a slowdown in global economy and possibly a slowdown / slide in bullish commodity prices.  

Time for us to shirk our five-year sweet and dizzying slumber from a commodity bull market that experts say would last for next 15-20 years. It seems, commodities riding the bull market for over five since 2002, may now want to take some rest in 2008. 

Why the warning bell now? 

For one, the global economy surprisingly still wants to be led by the weakening US economy that itself is overburdened with its own once mighty now weak US dollar; two, is a calculated slowdown in the money supply (credit squeeze?) by almost all major banks in the world to possibly prevent the negative impact of the failure of the sub-prime loans that resulted out of almost a decade of unmindful money supply;three, along with the USA, the growth in the industrialized economies too is slowing down as was indicated by the recent report released by OECD; in Brazil and Russia while the overall inflation is seen to be down, the GDP growth in these countries is seen to be lower than in the previous year.four, the politicians and bankers in all the major countries are trying to put their collective heads together to find ways to boost the economic growth in their respective countries; five, as a result of this looming fear of slowing down of the global economic engine, the US Federal Reserve has been forced to repeatedly cut interest rates to boost up growth in the US economy; six, even the UK is now worried about the slow economic growth and the Bank of England on Thursday (December 6, 2007) finally announced a quarter percentage point cut in its interest rate hoping that this will shore up its economy.  

As regards the scene in the Asian markets India – third best performer in Asia – is now clearly seen to be slowing down what with the high interest rates, the dual negative impact of strengthening rupee and the rising cost of imports and production and the collective result of rising inflation in the economy. Globally there is no better way to earn good return from a weakening currency (the US dollar), then to invest it in freshly booming economy with a billion-plus population and booming stock markets.  

With unprecedented rise in the flow of the weakening US dollar in the Indian economy, the valuations of Indian stocks have been stretched such that “the risk reward ratio is not favorable”, according to Sanjiv Duggal who manages the Luxembourg-based $8.5 billion India Equity Fund, the world’s largest holding of Indian equities.   

India’s business confidence too is at 5-year low, according to the latest survey conducted by the Federation of Indian Chamber of Commerce & Industry (FICCI) published today by leading financial dailies. http://economictimes.indiatimes.com/India_Incs_confidence_touches_5-year_low_FICCI_survey/articleshow/2598597.cms

According to FICCI survey, the overall business confidence index has in November 2007 slipped to 61.2 from 68.4 in the previous survey conduced six months ago. And official data indicate India’s GDP growth rate dipped to 8.9 per cent during the second quarter of current financial year from 10.2 per cent in the comparable period last year. Strong rupee (INR) has hit both exports and imports – imports are costlier impacting rise in cost of production and cut in profits. Exports sector are doubly hit – one by the slide in exports and the resultant fall in employment as a result of loss in business with a stronger rupee. 

“Failure on any one of these counts would send the industry into a downward spiral and make recovery particularly difficult,” the FICCI survey warned. 

WHY COMMODITIES BULL MAY WANT TO TAKE SOME REST – It cannot be up and up away, for long. The likely slowing down of the global economy would require less of physical goods and commodities.  

CRUDE OIL, GOLD PRICE SLIDE – As a first indication of slowdown, there is this unexpected fall in the price of crude oil to around $88-89 a barrel on Wednesday (December 5, 1007) from an all-time high of $98 a barrel week ago – a comforting sign from the threatening $100 a barrel fears. In India, high gold prices and a strong INR has resulted in slide in demand and therefore, price of gold. This trend could dent the expected rise in gold prices in the international markets, as India is the world’s biggest buyer of gold. 

METALS INVENTORIES RISING – In metals, inventories at leading stock exchanges are rising. And analysts fear spike in copper prices in 2008 and say there will have to be rise in demand to maintain the current prices, what with substantial rise seen in copper production.  For one, the construction of China’s dream Olympics 2008 is almost over, and therefore, its requirement of almost all metals would be substantially low in 2008 than in the earlier years that had led the commodities boom.  

Also, the construction industry worldwide is seen to be slowing down as a fall out of slowing of overall economic growth. And this is not just in the USA. If the worldwide housing slows, there is sure to be lower demand for metals. And India’s 5-year low business confidence survey (mentioned above) shows, the low confidence has come also from both the heavy and light industries. This indicates that there will be lower demand for metals even in India, despite the continued growth in housing and infrastructure. Yes, in India, the construction demand is rising – both in housing and infrastructure – such that there is perceived shortage of cement which the government now toys with the idea of importing cement to break the vice-like grip on supply and prices of what the government calls the cement cartel. 

Like everyone else, your faithfully too loves optimism and bullishness. But as reports from FICCI and OPEC for example, indicate tough times are seen ahead. These reports could not be wrong and therefore, this is not the time to gamble for investors – and like in the movie ‘ Up, Up and Away’ we are not super-heros. The pointers on the commodity futures markets would possibly not reflect these emerging situations correctly.

Posted by: commoditywise | December 6, 2007

Agriculture – India too can reap bounties (2)

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pportunities for India’s agriculture are immense, both on the home and the international front. Else, how would farmers, traders and governments of USA, Canada, Brazil, Indonesia, Malaysia, Myanmar among others be able to continue to export their agro products year after year after year to feed India’s rising demand resulting out of rising income levels and also population? 

In the global agriculture market, there are gaps between demand and supply of wheat, sugar, cotton, pulses, fruits and vegetables, herbal products, and of course, edible oils and non-edible oils (for industrial use)among others. Also, the changing food habits in a fast growing and vast economy like has largely remained unmet.  

The existing and widening vacuum in this segment is slowly being filled in by the foreign and India-based multi national companies. Some few Indian companies too have begun to make inroads, but their number and collective strength are both insignificant compared to the existing and new MNCs. Therefore, there remains a lot to be done in this regard – collectively by the state and central governments, the industrial sector and of course the commodity exchanges.   

Like it or not, India continues to be largely an agriculture country with vast tracts of arable land with wide range of land quality and climatic conditions available nowhere in the world. It is this and other related strengths of India that we need to understand at the earliest if India wants to reap bounties from the existing and emerging opportunities in global agriculture market. 

For various reasons, we have collectively chosen to forget completely and even try to erase from our collective memory and economics what at least two biggest thought leaders had said and continue to say about India. For one, Mahatma Gandhi, the father of our nation, had said more than five decades ago that India lives in its villages, indicating that the fast westernizing India should not forget their own brethren in the villages and hinterlands. Two, management guru C K Prahalad through his wonderful book titled `Profit at the Bottom of The Pyramid’ reminds us of the same, but differently. 

There have been concerted policy and financial support for the development of India’s industrial, Information Technology, Energy and Services sector. These sectors and the members in the value chain of these sector have reaped the fruits of the fast-changing and rewarding word. This kind of focused and collective approach has been missing for agriculture for the past four decades. It is only recently, that the ruling United Progressive Alliance (UPA) government has decided to give the missing policy and financial thrust to the Indian agriculture. But its efforts (as indicated in my yesterday’s blog) pales before that of the USA that continues to aggressively push its agriculture policies down the economies of various countries but also down the throats farmers and consumers in other countries. 

Let us appreciate, India’s agriculture is the biggest of all other private sector industry that employs over 65 per cent of India’s one billion plus population. However, it is entangled in political quagmire of states and the central policy maze.  

EFFECTIVE COMMUNICATION NEEDED – If India is to reap the bounties in domestic and Indian agriculture, there is a serious and urgent need to eliminate this division between state and central governments. Also, it is important for the farmers themselves to set up at the earliest a serious platform – a strong lobby sort of – that would inform them about their independent and collective role in the era of WTO that can also represent their needs, views and aspirations to the government. Serious and effective communication with the government and between the Indian farmers themselves therefore, is the most important aspect that India’s agriculture seems to be lacking. This prevents them to take on the challenges of the WTO and the competition wielded by both the wealthy and the not-so-wealthy members of WTO. How this can be done effectively in a multi-lingual country like India – with poor literacy rate – is yet another bigger challenge that both the government and the farmers face. 

These aspects have kept the Indian farmers and majority of India’s population poor and disconnected from the mainstream known as India and in many states the politicians do not seem to understand their own electorate. It is surprising that majority of us in the metros along with the government in New Delhi hope these farmers to re-equip themselves to compete in the domestic and international agro markets and also emerge stronger by providing us and the world low=priced products like their industrial counterparts are able to do. 

Little wonder that the in WTO era, agriculture continues to be the most contentious of all other issues and India has to keep on guarding its farm land not just from the onslaught of foreign goods but also from its own power-hungry politicians and corrupt bureaucrats. The issue becomes more complex with India being a multi-lingual state with hundreds of dialects different from one another. 

Yes, there are few sporadic efforts from the some of the leading multinational companies like ITC, Hindustan Lever, PepsiCo and few others – see, no leading Indian companies? – to reach out to the Indian villages. However, this supposedly reaching out is only with the ulterior motive to reap the bounties and profits from the bottom of the pyramid by selling their high priced goods that are supported by high-decibel marketing on both the local media and TV programs which is the most effective of all mediums. Some of the big Indian companies like Reliance and Tatas have been booted out by the villagers in some of the states (though for different reasons) where the governments want progress through `industrialization’ but did not communicate effectively with the core population owning the lands there. 

In absence of effectively collective platform for agriculture and near-total absence of effective communication between farmers and government, India despite having one of its most favorable of weapons is fast losing out on the global food and agriculture arena. It is because of these lacunae that large numbers of Indian farmers do not get effective returns on their toiling activities. In turn, many of them along with their kin and their children feel disappointed and lured by the bling and glitz of the westernized India … are rushing out of the farm lands.

India too can reap bounties in global agriculture arena, depending upon the time it takes to sort these and other related issues. Faster the better.

Posted by: commoditywise | December 5, 2007

Agriculture – India too can save farmers to reap bounties

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griculture may be the most contentious issues under WTO, but citizens of both USA and India are enjoying the fruits of the increased desire of to expand Agricultural Collaboration between the two countries. Indian mangoes for the US citizens and `Washington Apples’ for the Indians, among other US fruits and agriculture products  

We don’t bat our eyelids, while buying fruits and other food items from foreign countries. Neither do we when India’s agriculture and millions of its farmers cry for serious attention from all possible quarters, more so from the divided and thick-skinned politicians who are impervious to the vast opportunities in agriculture slipping out of their own hands and right under their nose..  

At least 150,000 farmers have committed suicides over the past few years in various states; in others, their brothers and their families are fighting survival battle against their own governments wanting to thrust industrialization down their lives by snatching away their lands. And if observation of one of government’s key representative is to be believed, at least 25 per cent of farmers in some of the states are not interested to continue with their parental activities which is why these state governments are aggressively pushing ahead with their policy of Special Economic Zones (SEZs).  

Against this background, media reports quoting United States Department of Agriculture (USDA) informed us yesterday: US agricultural exports to India rise 37.74 per cent to $467.62 million in 2006-07 as compared to a year ago. (http://economictimes.indiatimes.com/News/Economy/US_agricultural_exports_to_India_rise_3774_pc/articleshow/2592015.cms). And topping the list of these exports to India are pulses whose imports from USA has jumped a whopping 232 per cent!! Other items in the list include eggs, fresh fruits, processed fruits and vegetables, snack foods, wine and beer and fish and forestry products. And the report has not mentioned the latest controversial item – wheat imports from USA. 

Sensex and cricket crazy Indians may not find this news item worth taking note of. But it is a slow bomb in the making, which could prove to be more troublesome if not lethal than the controversial 123 nuclear treaty between India and USA for which noises are being made from both quarters for obvious reasons. The recent unrest in and around West Bengal and few other states aiming to reap the fruits of unplanned Special Economic Zones (SEZ) by not taking farmers into confidence point to the ominous days ahead. 

It is an open secret that India is the biggest importer of edible oils from various nations, and imports over 45 per cent of its rising requirements each year. Edible oils constitute the second biggest import item after crude oil, and within this it is the palmoil imports from Indonesia and Malaysia that has almost uprooted the economies of groundnut and coconut among few other edible oils complex.

Thus, India continues to fill the pockets of farmers and traders in USA (for wheat and soybeans and soyoil among others), in Canada and Myanmar (for pulses), in Indonesia and Malaysia for palmoil. You will find my earlier post India helps wheat farmers, traders of US, Australia interesting.

On its part, the Indian government and its ministers would say agriculture tops the list of their common minimum program (CMP). And since the past three years, the total institutional funds for agriculture have almost doubled. In July 2007, the government has also announced a huge Rs 25,000 crore plan to boost agricultural productivity. There are few other government sponsored programs also aimed in this direction – but lack focus and commitment what with our corrupt politicians and their `loyal’ bureaucrats who too love to pocket public funds.

Thus, the sporadic, non-focused agriculture boosting programs of India pale against the highly focused and aggressive agriculture promotion program of USA. President George Bush had said after signing the controversial $190 bn farm bill in 2002: “Farming is the first industry of America — the industry that feeds us, the industry that clothes us, and the industry that increasingly provides more of our energy…The success of America’s farmers and ranchers is essential to the success of the American economy.”   Since 2002, the USA government has been on one hand massively increasing state funds for agriculture, and on the other, the US government is aggressively pushing forth the Agriculture Collaboration between various nations, including India.  

The irony is, even when majority of the US citizens feel they have a stake in agriculture policies, in India majority of us feel the issue is best avoided and left for the government and farmers to decide among themselves.  

Also, I don’t recall any Indian Prime Minister or any other important minister saying such supportive words while earmarking national funds for agriculture which has been neglected for the past more than two decades. Recently, it has once again emerged as part of the CMP of the United Progressive Alliance (UPA) government, whose alliance members are constantly fighting… but not for the focused development of agriculture and ways to tap the fast emerging opportunities in the global agriculture and food products arena – both domestic and international. 

As a first step towards tapping opportunities in agriculture and food sector, the Indian government has to be first sensitive to the subject of farmers’ suicides and also to the farmers’ rising exodus to metros both of which will have to be stopped at the earliest. And the government can do much more than merely verbal commitment of more than doubling the growth of agriculture to four per cent from under 1.8 per cent currently.  

Yes, there’s more…

Posted by: commoditywise | December 4, 2007

ASEAN beckons Indian commodity exchanges

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rowth opportunity for commodity exchanges was never so bright as in the current uncertain times, more so for two of the three Indian nationwide multi commodity exchanges (NMCEs). 

Asia is now the growth center for the global economy where Chindia – China and India – are the leading economies with bursting population of one billion plus. So, in order to make the best of this available opportunity in Asia, the 10-member Association of South East Asian Nations (ASEAN) is currently in the process of finalizing the free trade agreements between Japan, China, India, South Korea, Australia and New Zealand.  

The total trade between the ASEAN nations is close to $1.5 trillion. The size of India’s trade in 2005 was estimated to be around $23 billion which in the next three years to 2010 is expected to more than double to $50 billion. This therefore, is one of the biggest opportunities for India to take on the commodity risk management challenge offered by the emerging ASEAN trading bloc.

In order to be able to tap this opportunity, it is the commodity industry along with the NMCEs that will have to jointly push the government to hasten the slow-paced moves to strengthen the overall commodity derivatives segment, including allowing the banned options on commodity futures.  

A TOUGH CHALLENGE FOR INDIA – It will be a tough challenge for India. This is because, four of Asia’s leading economies – China, Taiwan, Hong Kong and South Korea – are already entrenched in the list of top 25 derivatives exchanges in the world, according to the Futures Industry Association (FIA). Majority of these derivatives exchanges also have financial and currency futures and India’s only representative in the list is the National Stock Exchange (NSE).  

China has three leading commodity exchanges – Dalian Commodity Exchange (16th position), Zhengzhou Commodity Exchange (25th position) and the Shanghai Futures Exchange (not in the list of top 25). And FIA says, the China’se agriculture commodity derivatives have reported very rapid growth. So, it is China’s and not Japan’s commodity exchanges that pose severest of the challenges for Indian commodity exchanges. 

Commodity risk management is relatively new to India. Despite this, there has been considerable growth in commodity futures trading during the last three years of its re-emergence in 2004 after being suspended for over four decades. Latest figures show that the commodity futures trade on all the 24 Indian commodity exchanges was Rs 22,68,826.98 crore (approx $560 billion) during April 2, 2007 to November 15, 2007. Trading in agro futures however, suffered the most because of government’s suspension of trading in wheat, rice and two other agro commodities earlier this year. 

According FIA, India’s agricultural futures trading fell 30.2% to $27.2 million on the Multi Commodity Exchange (MCX) and fell 21.8% to $3.5 million at the National Commodity and Derivatives Exchange (NCDEX) during the first nine months of 2007. So, NCDEX has been able to weather better the negative impact of government’s suspension in trading futures of key agro commodities, whereas this has been felt more on MCX than on NCDEX. 

In absence of clear policy support from the Indian government, trading on Indian commodity exchanges has remained shallow as banks and institutional investors are not allowed to operate on Indian commodity exchanges. This therefore, has restricted the commodity futures activities only to short-term traders and investors. Majority of commodity related companies, exporters and importers inevitably have to go to international commodity exchanges to hedge their risks. The latest example of this is that of Indian Oil, a leading state-owned petroleum company, planning to hedge its risk on NYMEX and not on any of the two Indian NMCEs that too offer crude oil hedging products.  

Therefore, in absence of government’s support even the two NMCEs – NCDEX and MCX – are unable to convince the corporate clients to use their platforms to hedge the commodity related risks on their platforms. And with this India is fast losing out on the opportunities available from emerging ASEAN bloc. 

It will be interesting to see how fast both NCDEX and MCX take up this challenge.

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