ECOWRAP

‘Be the Bank of Choice for a Transforming India’

OCTOBER 30, 2018

ISSUE NO: 58, FY19

FOOD PRICE CYCLE TURNING BUT UNLIKELY TO

PUSH HEADLINE CPI HIGHER, NEED TO HAVE A
AGRI EXPORT POLICY
In Oct’18, Wholesale Prices of Onion has increased by 9% over
the previous month, prompting market expectations of a reverse
in the trend of food inflation in coming months. Recently, some
reports highlighting that this year there could be droughts in
onion producing regions (Maharashtra and Gujarat) owing to low
rainfall and sharp increase in cost of production thereby
increasing the price of Rabi onion crops. Subsequently, the rise
in onion prices in October could continue further and might have
some spillover effect on other vegetable prices like Potato &
Tomato.
Examining the possible onion price impact on food inflation, we
however find that even in the worst case scenario, with onion
prices registering as much as 50% increase from current levels,
with a simultaneous increase in potato and tomato prices will still
keep inflation below 4%. This is however a statistical artefact as
onion prices had jumped by more than 100% a year back. We
believe, if inflation stays below 3.5% for October, November
inflation could slip below 3%. As off now, we are expecting
headline CPI inflation for October might stay a tad over 3.5%.
Food prices have stayed low continuously in the last couple of
years. Apart from a changing food habit of Indian consumers,
one of the other factors is the trend in global food prices. For
example, the trends in international food prices show that
international prices of wheat declined in September, pressured
by stronger export competition. Prices of Maize also declined,
reflecting expectations of a large crop in the United States of
America. Export prices of rice generally declined. Sugar remains
the only commodity where international prices have risen. India
has also bagged an export order in Sugar.
All this implies farmers are unlikely to fetch a better realisation,
unless domestic prices improve and once a proper agri. export
policy is finalised, that is still pending. In fact, a material
improvement in India’s trade deficit may not fructify until and
unless we are able to push our exports that has sadly been
unable to take advantage from global upturn.

SBI ECOWRAP
SBI ECOWRAP

THE ONION PUZZLE: ITS LIKELY IMPACT ON MoM % cha ge i Price I dex of Potato, To ato & O io
FOOD INFLATION
 In Oct’18, Wholesale Prices of Onion increased by 9%
over the previous month, prompting market
expectations of a reverse in the trend of food inflation in
coming months, which has been continuously lying low
for last several months/years.
 Historical trend suggests, prices of agricultural
commodities in general and vegetable prices in
particular follow a seasonal pattern in India. For
Source: MOSPI, SBI Research
example, food price increase over last 2 decades
suggests vegetable price increase is primarily restricted
to TOP (Tomato, Potato and Onion) and this has been
occurring with almost alarming regularity.
 Recently, some reports highlighting that this year there
could be droughts in onion producing regions
(Maharashtra and Gujarat) owing to low rainfall and
sharp increase in cost of production thereby increasing
the price of Rabi onion crops.
 Subsequently, the rise in onion prices in October could
continue further and might have some spillover effect on
other vegetable prices like Potato & Tomato. Past mandi
prices data suggests, there are certain instances where
all three commodities prices moved in the same direc-
tion.
 Examining the possible onion price impact on food YoY eighted i laio % of Potato, To ato & O io
inflation, we however find that even in the worst case
scenario, with onion prices registering 50% increase
from current levels, with a simultaneous increase in
potato and tomato prices will still keep inflation below
4%.
 Interestingly, assuming if the onion price touched its
previous high of Rs 4459 per Quintal in Sep’2015, still
we believe the impact on food inflation will be minimal
due to the high base effect. In last year, onion price had
touched Rs 3485 per quintal in Dec’17. so the Source: SBI Research
incremental increase of Rs 1000 will have a negative
contribution of 12 bps to the overall inflation.
 We believe if the potato prices increase in the coming
months, it will have positive contribution in the overall
inflation. However, the negative contribution of onion,
will negate the potato inflation. So, there would not be
any material impact on overall inflation in the coming
months.
SBI ECOWRAP

GLOBAL FOOD PRICES ARE ALSO LOW

 The trends in international food prices show that FAO Food Price I dex s CPI_Food I dex Gro th YoY %
international prices of wheat fell in September, pres-
sured by stronger export competition. Prices of
Maize also declined, reflecting expectations of a
large crop in the United States of America. Export
prices of rice generally declined. Sugar remains the
only commodity where international prices have ris-
en. India has also bagged an export order in Sugar.
 FAO’s latest forecast for global cereal production in
2018 has been raised by 3 million tonnes since the
previous report in September, to 2591 million
tonnes; still 63 million tonnes (2.4%) below last
year’s record high. Global trade in cereals is ex-
pected to approach 417 million tonnes in the
2018/19 marketing season, up 3 million tonnes from
Source: SBI Research
last month’s forecast but still 4.1 million tonnes
(1.0%) short of the 2017/18 record level.

 With mixed trends in food prices, India’s agriculture production will be determined by domestic cues. Exports
may get a boost only once the agriculture export policy is finalised.
 The FAO Food Price Index is a measure of the monthly change in international prices of a basket of food com-
modities. The index has declined from the peak of 179.0 in Jul’17 to 165.4 in Sep’18. The YoY growth of FAO-
food index is in negative zone since Jun’18, due to the base effect. Compared to FAO-food index, India’s
CPI-food index has increased to 141.8 in Aug’18 from 139 in Jul’17 BUT declined to 140.5 in Sep’18. However,
the YoY growth (%) in both FAO-food and CPI-Food indices indicate the declining trend.

*****
SBI ECOWRAP

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immediately after the State Bank of India was reproduced with proper acknowledgement. The

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technical advice to the management on is based on information & data procured from

economic and financial problems in which the various sources and no responsibility is

Bank has interest and which required expert accepted for the accuracy of facts and figures.

analysis”. The Bank or the Research Team assumes no

liability if any person or entity relies on views,
After the first reorganization of the Bank, when
opinion or facts & figures finding in Ecowrap.
specialized departments like Management
Science, Management Information Systems,
Planning and Market Segment Departments
took over the statistical work of E&SRD, the
Department was renamed as ERD.

However, with the ERD team now taking on

multidimensional functionalities in the area of
risk management, corporate analytics, strategy
and so on, who knows, the time may have
come to rename it again!

CONTACT DETAILS Email: soumya.ghosh@sbi.co.in

Dr. Soumya Kanti Ghosh gcea.erd@sbi.co.in
Group Chief Economic Adviser Phone: 022-22742440
State Bank of India
Corporate Centre : @kantisoumya
Madam Cama Road
Nariman Point
Mumbai - 400021