Kharif crop prices will guide inflation fight in coming months amid polls

A few weeks back, the Central government released the first advance estimate of kharif crops, which showed a dip in production of almost all crops except for tur due to uneven monsoon and other natural calamities, including pest attacks, in the case of cotton.

The first advance estimates are usually very initial projections on the crop size and, more often than not, are revised as more inputs come from the fields. But, the findings have rung alarm bells in several quarters.

The Centre, along with many others, is confident that as more details come, the crop's estimates will be revised upwards, but if the numbers stay around their current projections (see chart), then it could spell trouble for inflation, particularly in crops such as rice, pulses and edible oils and also cotton to some extent.

This should be of concern to the government as it enters into the crucial year of the General Elections of 2024. The ongoing elections in the three states could also be influenced if inflation rears its head again.

A recent analysis by rating agency CRISIL showed that the price of an average vegetarian thali might inch up in November if higher prices of onion — which accounts for around 10 per cent of the total cost of a veg thali — persist.

This is the month when all three north Indian states go to the polls.

In October, too, CRISIL said prices could not moderate by much as the price of pulses, which accounts for nine per cent share in the total cost of a veg thali, increased 19 per cent on-year.

CRISIL's veg thali comprises roti, vegetables (onion, tomato, and potato), rice, dal, curd and salad. For non-veg thali, the constituents remain the same as veg thali, except dal being replaced by chicken broiler. The prices are on a raw material basis.

So, how are the prices of major food and non-food commodities expected to behave in the coming few weeks?

An analysis done by SilkRoute.ag, a global agritrade company based in Dubai, shows that among major kharif crops, cotton prices are expected to remain bearish due to weak demand and new crop arrivals, though production is expected to be down this year to around 27-28 million bales, while pulses prices are projected to remain strong.

Within pulses, moong rates are expected to bounce back after a slight correction, while pigeon peas (arhar dal) are also likely to remain firm. Chana and urad prices, according to the weekly analysis, are expected to push up in the days to come after a brief lull.

Another commodity whose prices are of interest to many is soybean, particularly in the context of elections in Madhya Pradesh, where it is one of the main kharif crops.

The SilkRoute analysis shows that prices will remain firm despite steady crop arrivals and could even reach Rs 6000 per quintal, which would be much higher than the MSP of Rs 4600 a quintal for 2023-24.

Wheat prices are expected to stay firm as there is minimal crop with the millers, though there has been slight moderation in the last few days due to excess liquidation by the government, but the underlying sentiment remains bullish in wheat.

In rice and maize, too, analysts said that prices will remain firm, mirroring wheat and other cereals.

In veggies, onion prices could drop from their current elevated levels and trade sideways in the days to come after the new late kharif harvest starts hitting the market, the SilkRoute analysis showed.

Sandeep Sabharwal, CEO of SLCM Group, in a note shared with Business Standard, said that an analysis of this year's Kharif crop production shows an increase in rice cultivation leading to a marginal improvement in rice output.

Conversely, the production of pulses is anticipated to decline, given the unlikely significant change in the sowing area.

For oilseeds and cash crops like sugarcane, the production estimate is only slightly higher than the previous year.  This trend has also influenced domestic prices, with most significant commodities experiencing an upward trend.

On paddy and maize, which accounts for more than 85 per cent of the total kharif cereal production, according to Sabharwal, production this kharif is expected to remain above average levels.

On cotton, he feels that demand from both domestic mills and international markets is expected to remain low, mainly due to the decrease in fiber and yarn prices from the peak levels observed last year.

"Additionally, the surplus available for export is expected to be higher, potentially limiting the need for mills to import significant quantities in the upcoming marketing year," Sabharwal said. EoM

On the whole, the coming few months might remain challenging for a lot of commodities and their prices.