ECONOMICS FOR MDM

FOOD INFLATION

NAME-Priyanka Agrawal BATCH-FS2 ROLL NO.-39

FOOD INFLATION SET TO EASE BY 20%

The price of pulses has dropped up to 20% in the wholesale market after rising rapidly for months, and is expected to remain bearish, calming concerns of food inflation that has been a key obstacle in reducing interest rates. India is the world's largest producer, consumer and importer of pulses, a key source of protein in vegetarian diet.

According to the Indian Institute of Pulses Research, Kanpur, 17 million tonne of pulses are grown on 24 million hectare, but demand far exceeds supply, leading to imports of 3 million tonne from Australia, China, Canada, Africa and other regions. Prices are expected to remain bearish with the onset of harvesting of tur (pigeon pea), urad (black gram) and chana in the country.

Wholesale traders say prices have dropped sharply since December but retailers were holding on to huge margins. "It is only in weekly sales announcements of big retailers that you see prices slashed for pulses. It happens as big retailers are buying in bulk and doing inhouse packing. So they are able to pass the benefit to consumer, which is not the case with the neighbourhoodkirana store," said an industry person who feels strict regulation by government agencies is necessary. Imported chana price, which was quoted at Rs4,250 a quintal in December, is now selling at Rs3,275 a quintal. Similarly, yellow peas (matar) prices remained stable at Rs2,500 a quintal. There was a slight 5% upward movement for tur which was currently quoted at Rs4,100 a quintal. Retail chana dal, masur dal and tur dal prices are still ruling at Rs80-90 a kg. Rajma, the king of pulses, remained firm at Rs120 a kg with new contracts from China for March delivery being signed at Rs60-90 a kg. Edible oil major Adani, which sells pulses under the Jubilee brand name, has reduced prices by 50 paise to Rs1.50 a kg across chana, moong, masur and tur dal. These constitute 80% of the total pulses consumed in the country.

"Pulses prices will further fall as harvesting progresses in the coming months," said Angshu Mallick, COO, Adani Wilmar. He added that retailers were not quick to pass on the benefit to the consumer as they were not revising the MRP when prices firmed. "Pulses prices have remained volatile owing to the changing pattern of import and local harvest," he said. The expected arrival of vessels carrying yellow peas from Canada has mellowed down the market.

Pulses importer PradeepJindal of Jindal Overseas Corporation at Delhi's Naya Bazaar mandi said buying by retailers was slow as a huge harvest was expected for chana and imported yellow peas. Reports of crop failure in Uttar Pradesh and Madhya Pradesh were not worrying the trader who annually imports around one lakhtonne of pulses. "Indians are very price-conscious and quickly shift to a pulse which is cheaper. There are so many options," said Jindal. With the advent of pulses procurement under the minimum support price programme by government agencies, prices should remain stable. Across nine locations in Maharashtra, Gujarat and Rajasthan, the National Spot Exchange Limited (NSEL) has started procuring tur, urad and chana on behalf of Small Farmers Agri-business Consortium. By next week, the agency will enter Andhra Pradesh, Madhya Pradesh.

For the first time, MSP operation will be carried out in Jharkhand. "There is no major distress sale and we see prices stable with a good crop," said Anjani Sinha, CEO, NSEL. The MSP for the 2013-14 marketing season for moong has been kept at Rs4,400 a quintal, for uradRs4,300 a quintal, tur/arhar atRs3,850 a quintal, masoor at Rs2,900 a quintal and bengal gram atRs3,000 per quintal.

National Agricultural Cooperative Marketing Federation of India (Nafed) is also set to undertake the MSP operation engaging state procurement agencies. "Current arrivals are slow and will pick up in a week. Certain pulses like urad are being quoted below MSP whereas tur dal is being quoted above MSP owing to good quality and low availability," said a Nafed official. The procurement agency will very shortly cover local gajjar variety from Uttar Pradesh, Bihar and Jharkand to ensure remunerative prices to farmers.

The price of pulses has dropped up to 20% in the wholesale market after rising rapidly for months, and is expected to remain bearish, calming concerns of food inflation that has been a key obstacle in reducing interest rates. India is the worlds largest producer, consumer and importer of pulses, a key source of protein in vegetarian diet. According to the Indian Institute of Pulses Research, Kanpur, 17 million tonne of pulses are grown on 24 million hectare, but demand far exceeds supply, leading to imports of 3 million tonne from Australia, China, Canada, Africa and other regions. Prices are expected to remain bearish with the onset of harvesting of tur (pigeon pea), urad (black gram) and chana in the country.

Wholesale traders say prices have dropped sharply since December but retailers were holding on to huge margins. It is only in weekly sales announcements of big retailers that you see prices slashed for pulses. It happens as big retailers are buying in bulk and doing in-house packing. So they are able to pass the benefit to consumer, which is not the case with the neighbourhood kirana store, said an industry person who feels strict regulation by government agencies is necessary. Imported chana price, which was quoted at .` 4,250 a quintal in December, is now selling at .` 3,275 a quintal. Similarly, yellow peas (matar) prices remained stable at .` 2,500 a quintal. There was a slight 5% upward movement for tur which was currently quoted at .` 4,100 a quintal. Retail chana dal, masur dal and tur dal prices are still ruling at .` 80-90 a kg. Rajma, the king of pulses, remained firm at .` 120 a kg with new contracts from China for March delivery being signed at .` 60-90 a kg. Edible oil major Adani, which sells pulses under the Jubilee brand name, has reduced prices by 50 paise to .` 1.50 a kg across chana, moong, masur and tur dal. These constitute 80% of the total pulses consumed in the country. Pulses prices will further fall as harvesting progresses in the coming months, said Angshu Mallick, COO, Adani Wilmar. He added that retailers were not quick to pass on the benefit to the consumer as they were not revising the MRP when prices firmed. Pulses prices have remained volatile owing to the changing pattern of import and local harvest, he said. The expected arrival of vessels carrying yellow peas from Canada has mellowed down the market. Pulses importer Pradeep Jindal of Jindal Overseas Corporation at Delhis Naya

Bazaar mandi said buying by retailers was slow as a huge harvest was expected for chana and imported yellow peas. Reports of crop failure in Uttar Pradesh and Madhya Pradesh were not worrying the trader who annually imports around one lakh tonne of pulses. Indians are very price-conscious and quickly shift to a pulse which is cheaper. There are so many options, said Jindal. With the advent of pulses procurement under the minimum support price programme by government agencies, prices should remain stable. Across nine locations in Maharashtra, Gujarat and Rajasthan, the National Spot Exchange Limited (NSEL) has started procuring tur, urad and chana on behalf of Small Farmers Agri-business Consortium. By next week, the agency will enter Andhra Pradesh, Madhya Pradesh. For the first time, MSP operation will be carried out in Jharkhand. There is no major distress sale and we see prices stable with a good crop, said Anjani Sinha, CEO, NSEL. The MSP for the 2013-14 marketing season for moong has been kept at .` 4,400 a quintal, for urad .` 4,300 a quintal, tur/ arhar at .` 3,850 a quintal, masoor at .` 2,900 a quintal and bengal gram at .` 3,000 per quintal.

India's fuel inflation eased in late June on lower petrol and other decontrolled (or market-determined) fuel prices, but the recent hike in state-set fuel prices is seen keeping headline inflation high and pressure the RBI to raise rates further later this month. Annual food inflation eased to a seven-week low, but the knock-on effects of last month's increase in diesel, kerosene and cooking gas prices are expected to nudge up food prices. The fuel price index climbed 12.67 per cent in the year to June 25 from 12.98 percent a week earlier, while the food price index rose 7.61 per cent compared with an annual rise of 7.78 per cent in the previous week. The primary articles index rose 11.56 per cent in the year to June 25 from 11.84 percent a week earlier.

India's benchmark five-year overnight indexed swap (OIS) rose 4 basis points (bps), while the 10-year bond yield rose 1 bp after the weekly inflation data, reflecting the market's concerns on high inflation. The five-year OIS was at 7.73 percent, up from 7.69 percent before the data. The one-year OIS rose 1 bp to 8.06 percent. "Besides, crude had softened since the domestic price revision though it has again gone up. That is why the fuel basket as a whole has softened." Data released by the government showed prices of kerosene, high speed diesel and liquefied petroleum gas (LPG) had risen during the week, while those of bitumen, furnace oil and Naphtha had declined.

Battling Inflation The Reserve Bank of India raised key interest rate last month for the 10th time in just over a year to combat sticky headline inflation, currently hovering above 9 per cent. This figure is expected to hit double digits again after the government last month raised prices of diesel, cooking gas and kerosene to cut revenue losses of state fuel retailers for selling these products at subsidised rates. The market expects the RBI to raise key rates by a quarter percentage point at its policy review on July 26. Diesel, cooking gas and kerosene comprise 6.4 percent of the total wholesale price index (WPI) basket and 70 percent of the fuel component of the WPI. "The net impact on the headline is likely to be more prolonged. In all, June WPI is likely to remain rooted in 9.0 percent handle, signalling no let-up on the need to tighten benchmark rate at the July meet," said Radhika Rao, an economist with

Forecast PTE, Singapore. Goldman Sachs expects the rise in diesel prices to add around 90 basis points to headline inflation, a recent report showed. New Delhi has budgeted a fuel subsidy bill of $5.2 billion for 2011/12, assuming oil prices below $100 per barrel, but with global crude prices showing little sign of moderation, analysts expect the government to hike fuel prices further in coming months. Brent crude climbed above $114 on Thursday, supported by a more-than-projected drop in U.S. crude stocks and expectations that China's monetary tightening cycle may be nearing its end. Even after the fuel price hike, state-run oil companies are still expected to lose about 1.2 ($26.9 billion) trillion rupees in the current fiscal year. India is likely to pay an additional around 300 billion rupees in fuel subsidies after August, a government source told Reuters on Wednesday.

SA food inflation appears to have peaked at an annual rate of 7,5% last November. The latest reading for March 2013 came in just below the SA Reserve Bank's 6% target ceiling, at 5,9%. The staples of breads, cereals and meat all recorded increases of 4,7% y/y - though vegetables and dairy products were a fair bit higher.

The outlook for soft commodity prices is a bit mixed. The US department of agriculture's (USDA) March stocks report was quite bearish for maize prices, with stocks and plantings higher than expected. If the plantings forecasts are realised, this will be the highest maize area planted since 1936.

However, the April 2013 USDA World Agriculture Supply & Demand Estimates report pointed to robust demand. In particular, ethanol demand has so far been

largely unaffected by the higher prices, with global ethanol demand up 5,8% y/y. Though the USDA expects a strong crop from Brazil, there are concerns that late plantings put pollination there at risk. So far, the increasing supply has driven the maize price. The SA yellow maize futures contract is down 22% from last June's peak in rand terms. Maize is critical to SA food prices as this is the main feedstock for all livestock, including poultry. Thus maize prices have an impact on meat, chicken, eggs and dairy prices, with a six- to nine-month lag. Macquarie's soft commodity team has also warned of weaker wheat prices in the next 12 months, due mainly to expectations that production from the former Soviet Union will exceed forecasts. Add in good crops out of South America and the US and it looks highly likely there will be a global wheat surplus in the 2013/2014 season. This should leave global maize and wheat prices both trending slightly lower as the year progresses. The main wild card for local food prices is the currency. Since last October, the rand has traded between R8,60 and R9,40 to the US dollar. If it remains in this range, then SA food prices should continue to slowly trend lower. Lastly, the rand oil price has come off sharply in recent weeks. Not only will this directly lower petrol prices, it will also ease pressure on food prices, as transport accounts for a notable portion of food prices - between 5% (for a tin of tomatoes) and 30% (for a loaf of bread). More contained food prices are not good news for SA food retailers. The combination of slowing SA consumer spending and contained food prices poses risks to consensus earnings forecasts over the next 12 months. Add in valuations that are no longer cheaper than their global emerging markets (GEM) peer group, and it's difficult to find a driver of any further rebating of the sector relative to either the JSE Alsi or the GEM universe. Normally, bad news for SA food retailers is good news for SA companies in wage talks. Unfortunately, this time political manoeuvring appears to be playing a far bigger role than inflation in driving wage increases. A human resources executive of a large company recently said unions appear set to reject all offers on principle, even if the company absurdly offered twice the inflation rate. Therefore falling food price inflation may be good news for discretionary income growth on a 12month basis but it is unlikely to ease the pressure on labour relations.