Impact Assessment: Deficit Monsoon likely to hit hard on Crop Production and Commodity Prices in India

The latest forecast of Monsoon rains in India by the Indian Meteorological department has worried the Indian farmers as well as the consumers. The goodwill of the government is also on stake as it will have an uphill task to contain inflation if the forecast come true this year.

This article analyses the previous trend in the monsoon rainfall, changes in production of commodities and wholesale price index to gauge the likely impact on the common man.

First of all let us highlight the main features of the Latest Monsoon Forecast for India for 2015 which was released by IMD on 2^nd June 2015.

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Ø Rainfall over the country as a whole for the 2015 southwest monsoon season (June to September) is likely to be deficient (<90 lpa="" of="" span="">

Ø Quantitatively, monsoon season rainfall for the country as a whole is likely to be 88% of the long period average with a model error of ±4%. [THAT MEANS AROUND 12% DEFICIENT RAINFALL]

Ø Region wise, the season rainfall is likely to be 85% of LPA over North-West India, 90% of LPA over Central India, 92% of LPA over South Peninsula and 90% of LPA over North-East India all with a model error of ± 8 %.

Ø The monthly rainfall over the country as whole is likely to be 92% of its LPA during July and 90% of LPA during August both with a model error of ± 9 %.

Ø  The rainfall over the country as a whole is likely to be 92% of its LPA during July and 90% of LPA during August both with a model error of ± 9 %.

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·            Thus, as of now, there is clear indication that this year’s monsoon is likely to remain deficient by around 12% on country level.

·            States like West UP, Punjab, Haryana, Rajasthan, Madhya Pradesh and Maharashtra are likely to be affected more than the other parts of the country. The deficiency may remain in the range of 15 to 10 percent in these states.

·            Last year too, country witnessed a 12% deficient rainfall. Thus this will be the second consecutive year which will witness less rains in the country.

·            This indeed is  a matter of worry despite the fact that the country has ample foodgrain buffer stocks with the government and Sugar supply is ample.  

Market react more on the future event rather than the current facts. Thus in spite of comfortable food grain availability, the possibility of commodities price rise has increased sharply.

Here we will see empirically what has happened during past years when such type of situation emerged. Based on that we will try to draw some conclusions about the likely production scenario and expected price rise for this year for some important commodities.

A :  IMPACT OF RAINFALL ON PRICES OF COMMODITIES

In India a vast part of the cultivable land is totally dependent upon monsoon rains. The monsoon rains are one of the most important factors that determine the production of crops. Thus supply and demand factors determine the prices.

Table1 and Fig. 1 present the trend in the rainfall departure and percentage change in the Wholesale Price Index in India for the last 9 years.

Observations:

1. From 2005 to 2008, not much deviation in rainfall from the normal range was seen. Thus prices in general (with some exception) have remained more or less stable or even declined in Cereals, Pulses, eggs, meats & fish, condiments and spices and sugar. However in Oilseeds the prices remained very high.
2. In Year 2009, where rainfall deficiency was very high (-21.8%), the immediate impact on prices of the commodities was seen. Prices of Cereals witness a moderate rise, while a significant jump in prices of Pulses, Vegetables, Eggs, Meat & Fish, Condiments & Spices was seen.
3. SUGAR PRICES ROSE EXCEPTIONALLY HIGH BY 48 %.
4. In year 2010 and 2011 monsoon rains recovered and were in surplus, the prices came down in cereals, pulses, and sugar.
5. In Year 2012, again prices rose substantially in Cereals, Pulses, oilseeds and sugar.

Inference:

• Thus prices of Cereals, Pulses, Oilseeds and Sugar have seen more and direct impact of deviation in the monsoon rainfall.

• The vegetables are perishable and nature and spices are mostly perennial, thus the impact of rainfall deficiency/surplus cannot be generalized. 

B: IMPACT OF RAINFALL ON PRODUCTION OF COMMODITIES

Table 2 presents the trend in the rainfall as well as the production of important commodities for the last 10 years. The %age change in the production with respect to the previous year is also given.

Observations:

1. The production years 2009-10, 2012-13 and 2014-15 have seen deficient monsoon rainfall in India. The extent of deficiency has remained in the range of  -21.8%,  -7.1% and -12% respectively in these years.
2. The production of Cereals, particularly Rice and Wheat, Pulses, Oilseeds and Sugar has seen significant decline in the deficient rainfall years. The extent of production decline has roughly remained in the range of 5-16% in these commodities.
3. In year 2014-15 which witnessed around 12% rainfall deficiency, the  significant production decline in Cereals, rice, wheat, Pulses and Oilseeds was seen.. Herver sugarcane area witnessed marginal increase.

Inference:

• Even a rainfall departure of around 10% from normal rains results in to production fall in the range of 5 to 15 Percent in many commodities.

• Given the fact that this year’s rainfall deficiency in the range of 12% (equal to last year’s range), we assume that production of cereals, rice, wheat, pulses and Oilseeds may reduce by -5. -4, -5, -10, -16 % respectively as compared to last year’s figure. [ i.e fall in production of these commodities may be at least in the same proportion as was seen during 2014-15].

• However, we expect that sugarcane production may decline by more that 5% as compared to last year’s figure because this crop requires more water and is largely grown in the North-west UP and Maharashtra where the expected monsoon deficiency is around 15%.

  

Conclusion:

• The agricultural commodities production is expected to decline straight in the second successive year due to weak monsoon rains. The extent of production fall may vary in the range of 5 to 15% among various commodities including cereals, rice, wheat, pulses, oilseeds and sugar. This figure may further rise if the  monsoon deficiency range further increases in the June – september period.

• The prices of agricultural commodities are likely to increase substantially during 2015-16 period due to less production and increased demand.

• Oilseeds and Pulses seems more vulnerable in terms of price rise. If sugarcane area substantially reduce this year then Sugar prices will start witnessing improvement and sugar will emerge a major commodity which will witness significant price rise in 2015-16.