Deficient monsoon and Commodity Prices By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran


This is an ongoing conversation between the student and the professor.

Student: I know you teach trading in commodities. Please tell me the impact of monsoon on the commodity prices.

Professor: Monsoon is a massive see breeze blowing in from the sea. In India, we call it South West Monsoon. The breeze is from the high pressure area to an area of low pressure and is formed over land due to intense heat. Recently, extended winter in North India interfered not only with the heating of land but also the gradient. What do we have now? According to the news, the month of June passes with a rainfall deficiency of about 40 percent. The EI nino is blamed for this deficiency. Monsoon impacts the plantings. Currently Kharif plantings have been severely impacted by this deficient rainfall across the country. The worst affected are cotton and oil seeds. As a commodity trader, you will notice that the prices of these are moving up. A trader would buy these contracts hoping that this misery persists.

Student: Professor, I want to learn how to speculate in commodities. Can you give me a rough idea of how to go about?

Professor: I understand that you have no time to attend my classes. Anyway let me try. Currently the Kharif crops involve the following commodities planting. Historically the amount of land under cultivation should be as follows (measured in hectares).

Sl. No Commodities Amount of land under cultivation (in lakh hectares)
1 Rice 35.44
2 Course grains

(a)   Sawar

(b)   Bajra

(c)    Maize

13.39

1.41

1.4

8.47

 

3 Pulses

(a)   Tur

(b)   Urad

(c)    Moong

6.33

2.03

1.19

1.84

4 Oil seeds

(a)   Ground Nut

(b)   Soya bean

(c)    Sesamum

(d)   Sunflower

7.04

4.26

1.06

0.8

0.53

5 Cotton 35.86
6 Sugarcane 44.52
7 Jute and Mesta 8.18

 

A speculator like you would want to watch the developments of the monsoon and read the reports of the various commodity houses to know which commodity you should bet on. The monsoon is supposed to have set in Kerala on June 1. This year it got delayed by 5 days. After a good start it slowed down and the amount of rain required is not available. Unless the monsoon revives in the near term, we can see the prices of specific commodities moving up because the farmers may decide not to sow them enough. This creates scarcity and so the prices move up.

Student: Are you saying that I can speculate on the price and if I am correct the price appreciation enjoy a handsome profit.

Professor: Why not? That’s how the commodity market works. The worst thing is when the future prices moves up, the retail prices will also move up which means, the inflation rate will move higher. It is a tough time for Modi and his team to keep a lid on prices. They will definitely try to intervene in the commodity markets to stabilize the prices. Will they succeed? Let us see.

Student: What else should I understand?

Professor: You must know that the global commodity market work in sync and so price appreciation in one market will push in the others also. Well, this is not the appropriate time for us to discuss this in loose terms. Take my course. You will learn all about how to take advantage of the price volatility.

Student: Thanks Professor. Let me think about it.

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