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Want a winning investment for 2007? Well...then forget the advise of seasoned fund managers and CTAs,
and follow the farmers of India.
According to them, wheat is the commodity to watch during the coming year. Putting
their money where their mouth is, they have upped their stake in wheat
acreage this season, cumulatively sowing a whopping amount of land with
wheat.
As a result, by the first
week of December wheat sowing has crossed the 20 million hectares mark and
touched a landmark 20.74 mha, a record 22.5 per
cent more than the corresponding last year's area of 16.92 mha. The sowing area has increased across the board,
gaining almost equally among all the major wheat-growing States.
Farmers are no commodity
analysts but they are the primary stakeholders, and they have been prompted
by the buoyant market prices. Wheat prices are up 67% in the past year,
reaching $5.6 on October 17, the highest since 1996. In India the
prices have been steadily strong, and have made the farmers in a state
recently threaten to stop selling their stock at government-fixed prices,
which are usually lower than those prevailing in the markets.
At the back of it all is a
shortage in production and increase in consumption. FAO’s
latest forecast of world wheat output in 2006 stands at roughly 592 million
tonnes, almost 33 million tonnes, or 5.3 percent, down from 2005. Price rises
have been supported by supply shortfalls due to setback in Australian wheat
output as well as due to low global stocks.
Though FAO expects a
turnaround, with increased winter plantings - as has been the case in India and
elsewhere - and good growing conditions raising expectations for a strong
rebound in 2007 harvests, at least the coming few months may witness wheat
prices continue to rule firm. Reason enough why a report by J P Morgan Chase
has been bullish on the grain. "Global wheat reserves will fall to 118.8
million tonnes on May 31, the lowest since 1982 because Australian production
will drop 57% to 10.5 million tonnes and US output has declined
14%."
Leave aside wheat, other
grain production is also a cause for worry. For example global production of
coarse grains is lower by 2.1 per cent over last year, at 981 million tonnes.
Maize output is lower by 2.2 per cent at 694 million tonnes. More than two
billion people are used to consume coarse grains, and are likely to select
either wheat or coarse grains depending upon various factors like
availability and comparative price.
Similarly rice growth is
predicted to be affected by the typhoons, drought, flooding, diseases and
insect attack. Rice again is staple for more than
two billion people, most of them in Asia,
and any stress in supply will only spur them to consume wheat.
Although Indian Ministers
have been shouting from the rooftops that there was no threat to country's
food security, and that the available food grain stocks are much higher than
the mandatory buffer norms, the fact is everybody in the trade knows about
the ensuing shortages. India
is estimated to import 6 million tonnes of wheat in 2006-07. The forex outgo for this, at an average price of $200/tonne,
is Rs 5,300 crore.
India has already
begun importing wheat, and according to informed sources there are problems
even though the stocks have landed in India. There have been reports
about contamination on account of the use of substandard packing, thus
feeding the speculations that India
was going to be a sustained customer in the global markets. And as the trend
has been; the prices harden smartly any time India is a buyer.
India is forced to
import substantial quantities of wheat since other grains' output is also
markedly down. For example the production of corn, which is the third most
important cereal crop in India after wheat and rice, has fallen from 12.4m
tonnes to 11.5m tonnes this year, a significant reduction in the face of
overall declining grain output.
While supply has fallen to
11m tonnes, demand is rising rapidly and pegged currently at 14m tonnes. Although
the demand for corn in India
comes mainly from the poultry, meat and dairy industries for use as animal
feed, it is also consumed as regular food by people. In fact in many regions
corn is the staple, not without reason; traditionally India is
among the top 10 global producers of corn.
Globally corn has been one
of the best performers on the commodity bourses this year. Corn prices have
reached levels not seen for a decade, according to FAO’s
latest Food Outlook report. Corn market fundamentals favour firm prices given
buoyant demand by China
for feed purposes and for bio-ethanol use in the US.
If industrial use, mainly
for ethanol, continues to grow at the current pace, it may take more than one
good crop season for prices to retreat significantly from their current
highs, the report said.
But what about the
increased acreage the farmers have managed to sow? The fact is there are many
doubts if the wheat output will really match the increased acreage. The
winter crop is often very fragile owing to the delicate weather and
irrigation requirements. Besides, the 22.5% increased acreage is going to
increase the demand for fertilisers, and right now all is not well in India's
fertiliser industry. And then the consumption is on the rise. According to an
expert, "Even if the country manages to produce 71-72 million tonnes of
wheat (optimistic on current reckoning), there may be no escape from
importing 4-5 million tonnes in 2007." And as I said before, the moment
the international markets smell India's approach, the prices
shoot up. It is as simple as that.
The long and the short: while petroleum may remain a more likely cause
of international conflict than wheat - as claimed by Simone Weil - wheat may
provide better bang for your buck in the immediate future.
Shailendra Kakani
Copyright © 2006 Shailendra Kakani. All rights reserved.
Shailendra Kakani
is the Research Head of Commodity Research Group and the Managing Editor of www.commodityresearch.in. Please send inquiries to com.res.group@gmail.com or call + 91 98678 33034.
Information contained herein is obtained from sources believed to be
reliable, but its accuracy cannot be guaranteed. It is not intended to constitute
individual investment advice and is not designed to meet your personal
financial situation. The opinions expressed herein are those of the author
and are subject to change without notice. The information herein may become
outdated and there is no obligation to update any such information. The
author, 24hGold, entities in which they have an interest, family and
associates may from time to time have positions in the securities or
commodities discussed. No part of this publication can be reproduced without
the written consent of the author.
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