Informist, Wednesday, Aug 7, 2024
By Pallavi Singhal and Abhijit Doshi
MUMBAI – With market volatility high, the prices of vegetables, especially onion and potato, are likely to continue on their current trajectory with moderation likely only after a couple of months, Pushan Sharma, director of research at CRISIL Ratings, told Informist in an interview.
The high prices of vegetables, with inflation in vegetable prices at 29.4%, pushed retail inflation in June to 5.08%. According to an analysis by Sharma, who brings out CRISIL's monthly Rice and Roti report, data from a three-year period showed it is actually the prices of tomato, onion, and potato, collectively known as TOP, that are adding the maximum cost to a vegetarian thali.
Year-on-year, the inflation in all commodities appears to have declined owing to the high base effect, but it is still rising sequentially as well as when seen on a wider scale, he said. “A June 2021 to June 2024 comparison shows that prices of wheat flour are up 27%, pulses are up 27%, rice is up 27%, onion is up 19%, potato is up 47%, and tomato is up 61%," Sharma said. "Others, such as chilli, increased 32% and inflation in vegetable oils actually went down 15%.”
Vegetables are leading the rally because these commodities are more sensitive to weather events with a short shelf life, unlike paddy or wheat. While prices have been on the rise, a moderation can be expected once potatoes from cold storages begin arriving in the market, along with kharif onion and tomatoes, Sharma said.
Edited excerpts of the interview follow:
Q. High food inflation in June pushed up retail inflation. Prices of basic food commodities such as tomato, onion, and potato, amongst other vegetables, have remained firm. What is the price trajectory for TOP looking like?
A. Tomato, onion, potato have historically been seen as crops that suffer from high volatility. There are structural reasons for that. In onion, volatility creeps in towards the end of the monsoon season when the supply of the winter rabi crop diminishes and there is still some time for the kharif crop to come to the market. If there is any delay because of weather, that gap is where we see the spike in onion prices. The same logic of demand and supply can be attributed to price fluctuations in all perishable crops. An increase in unpredictable weather events has been adding to the price spike in the past two years.
In tomato, too, there is seasonality in the price spike, where prices shoot up every June-July.
The price rise in potato has come after a lag of a few years. The crop this year was affected in March as a late blight infestation in the states of Punjab and Gujarat affected the standing crop. The demand for potato has also seen a significant rise over the years as the demand for ready-to-eat snacks and the processed food segment goes up. With the impact on yield, the prices are expected to remain firm, but in the coming months we will see fresh potato coming in from the cold storage and that should moderate the prices.
In the case of tomato, we can expect some moderation in prices towards the end of August, when fresh supplies come from the southern and western regions. Even to the extent we talk about onion and potato, they have a shelf life. But other vegetables, that's where we see that the shelf life is almost non-existent. Any fluctuation in temperature, any climate incident in terms of rainfall that is in excess or unseasonal, tends to impact the crops.
Incidences of lack of rainfall in June, excessive rainfall in September, elevated temperatures in February and March are all causing volatility in the production of vegetables and, thereby, prices. But, interestingly, if we see a three-year trend, it is actually the TOP vegetables that are adding the maximum price rise to a vegetarian thali. A June 2021 to June 2024 comparison shows that prices of wheat flour are up 27%, pulses are up 27%, rice is up 27%, onion is up 19%, potato is up 47%, and tomato is up 61%. Others such as chilli increased 32% and inflation in vegetable oils actually went down 15%.
Any moderation in prices this year can only come in a couple of months when stocks from cold storage start arriving, along with arrivals of kharif onion and tomatoes.
Q. The India Meteorological Department has predicted the rainfall during India’s vital southwest monsoon period to be above the seasonal average. How do you see this translating to agriculture?
A. Overall, the rainfall situation is much better than what the early three weeks of June had shown us, and so things seem to be in control. Having said that, August is a critical month because this is the flowering stage for most crops and a lot of the yield depends on this. Last year we had about 36% lower rainfall in August, making it the driest ever, which had a significant impact on yield. With positive predictions this year, I feel the yield should not be negatively impacted. If the moisture is very high, there could be some pest incidences. But could it be the other way around? Yes. If there is excessive rainfall towards the end of August and early September, it can damage standing crops.
Q. A potential emergence of the climate pattern La Nina is expected towards the end of the year, when India sows wheat. How do you think that could affect production of the crucial crop?
A. In India, about 55% of our area under cultivation is irrigated and 45?pends on rainfall. From that perspective, reservoir levels are very important for us. If the rainfall is slightly on the higher side, what we see is that regions that get flooded during the kharif season tend to perform well in the rabi season. So, stretching that logic to a broader level, even if rainfall is slightly excessive, it is going to be good for both the kharif and rabi seasons, and wheat can benefit. As per current predictions, it looks like our wheat production is going to be quite robust this year as we do not expect to see the heat wave impact we had seen two years ago.
The supply is also expected to rise with robust output and a concurrent ban on exports. The ban on exports means that a portion of the demand has gone away, saving a good 5% in terms of exports. To that extent, India should have slightly more supply in the market, which could be beneficial for prices to stabilise.
Q. FCI is sitting on big stocks of rice, resulting in huge financial costs. Do you think there is a case for the government to lift the export ban currently in place?
A. The government has to walk a tightrope between consumer prices and farmer prices. For the farmer, there is a significant notional loss when export curbs are put in place. That weighs down their income and their ability to consume. The government is well-placed, of course, to understand the stocks that are there in the system and if the stocks improve, it would definitely be the right time to remove these curbs.
Q. Prices of pulses have begun falling after one year on the back of increased imports, stockholding limits, and rising prospects of a good kharif output. What is the outlook looking like? Can pulses inflation come down for good?
A. Farmers have taken a cue from the rise in prices of pulses and increased their sowing. There is definitely demand in the market. Through the pandemic also, from a consumption standpoint, we are seeing an increase in demand for pulses. They are being looked at as a rich protein source. A lot of the processed food industry and the packaged food industry also uses pulses.
This jump in demand is now being supported by higher areas. We are not expecting a surprise in pulses in terms of a price spurt in the near to medium term at least. But of course, weather will play a critical role in any agri discussion. Things could change in a month if August is dry or September has excessive rainfall. But as of now, looking at all the data points, pulses seem in control.
Q. The Economic Survey has suggested that the inflation target should exclude food prices. What's your take?
A. Food forms an essential constituent of inflation. If you keep it outside the ambit, and it goes under the radar of monitoring, one would not know what the inflationary pressures are. And food constitutes more than 40% of the weight in the CPI. If you keep out something that has almost half the weightage, it wouldn't be truly representative of what inflation is. End
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