Monsoon, Agriculture & Government

Source: CMIE

The India Meteorological Department (IMD) has indicated that the monsoon rains this year is likely to be 87% of the long-period average. That's the weakest in seven years. The last time the rains were this bad was in FY03. Given the very strong linkages between rainfall and the entire Indian economy, we decided to revisit FY03 to gauge the impact of poor monsoon rains. The two crops that are likely to suffer the most due to poor rains this year are Rice and Sugar. Let us see how they fared in FY03. As per RBI data, Rice production fell by 23%, from 93 m tonnes (MT) in FY02 to 72 MT in FY03. Sugarcane production fell by 3%, from 297 MT in FY02 to 287 MT in FY03. Overall, the impact on agriculture was severe as food grain production fell by 18%, from 213 MT in FY02 to 175 MT in FY03.

Industries which depend on agriculture directly suffered. Production of tractors fell by 15%, from 226,000 units in FY02 to 192,000 units in FY03. In fact, the effect lasted for another year as production of tractors fell by another 7% in FY04 to 179,000. However, commercial vehicles (CVs) production did not suffer at all. Production of CVs grew by 36%, from 146,000 in FY02 to 199,000 in FY03.

The last time monsoons were this bad, it did leave a big impact on the overall economy. In FY03, GDP growth rate declined to 3.8% from 5.2% in the previous year. The question is will India suffer as much this year as it did the last time the monsoon was this bad? We will discuss this topic further in the forthcoming issues.

Speaking of agriculture, the sugar prices in the international markets have skyrocketed, rising 60% since December 2008. The situation is aggravated by fears of shortfall in supply due to adverse weather in producing nations such as India. The global shortfall is projected to be 8 m tonnes (MT).

The chart captures the trend in sugar prices and production in India. India, the second-largest producer, is likely produce around 18 MT of sugar and is expected to import a total of 5 MTs in FY10. The feast- to- famine swings in sugar cycle is aggravated by the government's policy of regulating the sugar prices. For example, in 2006 the government banned exports in order to bring down the prices, resulting in a glut and a steep fall in price in the subsequent months. As a result, many farmers switched to different crops. In contrast to India, Brazil, the world's largest sugar producer has steadily increased production and exports, and is now benefiting from India's shortage.

Today's investing mantra

The really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions. - Warren Buffett