How important is the monsoon forecast? The stock market moves sharply every time there is a forecast given by IMD or Skymet, before reverting to normal. The progress of the monsoon too is tracked by the market, and the sounds of a drought can depress the indices. However, given the way in which things have played out in the last few years, one may say that it is probably just one indicator that can be considered when looking at kharif prospects.
But the relevance stops there as monsoon is at best a necessary condition for good farm tidings. This is both due to the changes in patterns of the monsoon as well as the final availability of the products at reasonable prices. Both these assertions call for a fuller explanation.
June 1 to September 30 was traditionally held as the monsoon period. However over the years there has been a change in this pattern with the monsoon arriving and leaving later. This is important because it drives the cropping pattern as farmers start sowing the seeds depending on the expectation of the rains. This dependency is high given the limited access to irrigation. While rice has a coverage of around 60%, it is lower at 23-24% for pulses, 20% for coarse cereals and 28-30% for oilseeds. Late arrival can lead to change in crop selection depending on the matching of soil requirement.
Further, the concept of normal rainfall is based on the long term average, and is indicative of the macro picture only. It may not be relevant at the micro level as the progress and distribution is more important as it affects cropping pattern in the interiors. This holds more for regions that fall in the rain shadow area and have limited access to irrigation, including the non-coastal states. Therefore, today, while IMD data indicates normal monsoon, the shortage in the eastern parts of Bihar, UP, Jharkhand can be a worry as crops like maize and rice can be impacted. It is hence not surprising that, towards the end of August, the area under cultivation for rice and pulses is lower than last year, a concern if the deficit persists.
The government has been fairly aggressive with its ‘free food for the poor’ programme since 2020, leading to depletion of its wheat stocks. Therefore, it was recently decided that the beneficiaries would receive rice rather than wheat. Now if there are going to be slippages in production, there can be distortions in the stock matrix.
In the case of pulses it will be even more challenging because production of tur, urad and moong have been good in the past, and by the law of averages, production was likely to be lower this year. Now, with the area under cultivation being lower, the shortages could get exacerbated thus putting pressure on prices. The initial tremors are being felt in the retail markets already.
Therefore, even with a good monsoon this year, with just 6 sub-divisions being classified as being deficient in rainfall so far as against 13 in 2021, shortages are still possible. While rice can still be managed given the stocks of around 40 million tonnes as of July-end, the same does not hold for pulses that are more vulnerable to minor distortions in production.
The other issue is on prices. A good monsoon and good crop does not necessarily mean lower prices, which rudimentary principles of economics espouse. A reason for the severance in the relation is that the government has tended to increase the MSPs every year. This year too prices have been increased by 5-8% across all the kharif crops. While procurement takes place mainly in rice and wheat as there is a direct link with the PDS, the MSPs tend to have an influence on the benchmark prices for other products. In fact, when there are shortages, which looks possible for pulses and rice, the market prices will tend to increase at a sharper rate thus adding to food inflation. Therefore the conventional link between monsoon and food prices has tended to get severed.
Agricultural prices is a zero sum game. The moment there is an inclination to manage farm product prices through MSP, consumers have to pay more, just like how any price curbs which were put in say the telecom or aviation industry tends to affect the supplier of services. The way out is for market based commercialisation of agriculture, which the farm laws sought to accomplish.
With inflation being stable presently in the 6.5-7% range the possible shortfalls in certain crops can upset the apple cart. Rice and kharif pulses have a weight of around 5.8% in the WPI with derived products having another 1-1.5%. Add to this the fact that in the last four years, we have had an annual feature of tomato and onion inflation caused by late withdrawal of the rains. Therefore a good monsoon is good news, but does not preclude the other disturbances
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