According to the latest data, food inflation rose to 17.47 % for the week ended November 21, 2009 against 15.58 % in the previous week owing to spiraling prices of vegetables, pulses and sugar. If we talk about overall WPI inflation, it doubled to 1.34 % in October as compared to 0.50 % in the previous month. On year on year basis, food prices jumped by 13.32% in October only. Rice, pulses, sugar and potatoes, onions were up by 13.22%, 22.81%, 45.70%, 96.43% and 37.60% respectively.

Reasons for inflation and its impact on economy:

• Bleak monsoon coupled with worst drought in nearly four decades in the country situation is haunting the entire economy. According to an estimate, India may see a drop of 18% in Kharif crop. It will create further demand and supply mismatch. People will spend less, if prices will move in the same way and ultimately it will affect most of the sector of economy.
• To encourage farmers to produce more, government has recently increased the MSP (Minimum support Price) of rice, oilseeds, cotton, sugar and many more. Higher MSP immediately pushed the prices up. Though the long term impact of this step will be positive, as more farmers will produce more to get good remuneration.
• Hoarding by stockist, farmers in anticipation of further hike in prices is also creating a demand supply mismatch, resulting in higher food inflation.
• Government has to compete high with the large scale entry of private players, which procure grains aggressively for biscuits, millers and manufacturers of processed foods.
• Declining trend of public investment in agriculture is another concern for government at present.

Measures to check inflation:

• To give immediate relief from inflationary pressure, government is planning to check the supply deficiency. It has allowed importing sugar. It will import rice, as rice production is expected to drop in 2010. Import duties on oil seeds have been slashed.
• Money supply should be checked, otherwise in the time of scarcity excess liquidity will accelerate inflation further.
• Distribution process should be very fast and transparent. Currently we need a well managed and coordinated distribution of stocks through PDS (Public Distribution System), open market sales of public stocks etc. Hoarding should be avoided here and government should keep an eye on this.
• This rising inflation has become a major threat for economy. The only key way to check the inflation is to bridge the gap between demand and supply, which may control the price rise.
• Unfortunately, Indian agriculture is characterized by low input and low output systems. Hence we have to increase the productivity. For example: Yield of paddy in India is only 2.9 tonnes/hectare as compared to 7.5 tonnes/hectare in US.
• Check the rising cost of cultivation. Increasing land, labour, fertilizers and other inputs are discouraging farmers to produce more in absence of sufficient liquidity.
• Apart from grain, government should also create buffer stocks or strategic reserve of oil seeds and other crop, so that it can release it at the time of crisis.

Apart from reasons and measures to check inflation, other concern in Indian economy is the parameters to check inflation. It is well known that India is the only country which considered WPI (Wholesale Price Index) while rest of the countries measured CPI (Consumer Price Index). WPI consists of 435 goods over 1993-94, as base year in which the weightage of food items is only 16%, which has large weightage of consumer spending in India. Though WPI in India is still in single digit, if we consider CPI it is already in double digit due to dearer farm articles and their higher weightage in measures. In CPI, food articles have 50% weightage. Hence there is a wide gap between the weightage of food articles of WPI and CPI, which are unable to give the clear pictures. Furthermore, 2/3rd of the price quotations used to calculate the WPI are sourced from only four metros. Hence to get the real picture, area should be widened.

In the above chart, it is a comparison between food?inflation and WPI from January, 2008 to October, 2009. Line chart is representing WPI monthly inflation whereas bar chart is indicating food article inflation. It appears that food article inflation is on continuous rise while WPI monthly inflation saw both side movements. It has started its northward journey in the month of March-April and it is still continued. Arrival of kharif crop is less likely to cool it as we are expecting 18% decline in kharif crop. Hence downside will be limited, rather it may move in a range with upside bias.

The words of future

RBI (Reserve Bank of India) has revised its outlook for inflation and expecting that it should be between the range of 5% to 6-6.5% for the year ending March 2010. There is a fear in the economy that the real impact of almost 18% drop in kharif rice production is to reflect in inflation. It would occur when kharif produce; rice, pulses, oilseeds and cereals would start coming in the market. With witnessing favourable weather conditions, economy is expecting strong rabi produce, which may cool off inflation of food articles to some extent, however, we cannot rule out the possibility adverse weather. Ultimately what matters is final produce and yield. Government has to take care of everything like, demand ?supply equilibrium, money supply, distribution etc, otherwise it will become nightmare for aam admi and hamper the economic growth.

Gold and silver will remain hot favourite as safe haven buying. In bullions, gold can see a new high in 2009. On the other hand, base metals and those commodities used in discretionary purchases (autos, homes, appliances, and construction) can recover only very slowly or stay flat in the first half of 2009. In second half, it can see some strong moves. They will have to increase because there’s going to be shortages.

In a deflationary environment, since 70% of the base metals produce silver, if there’s a big recession, there will be a lot less silver available because there’ll be a lot less base metal mining production. So supply actually contracts automatically in a deflationary environment. So, again, on a per capita basis, there may be less silver minded per person in a deflation than there is in inflation.

In energy complex, natural gas right now is trading weak near the level of $5.55. It traded in the level of $13 to $14, which is nearly triple where we are today. Normally for natural gas there is a rally in February through June for two reasons: February is the highest winter price month using natural gas for heating, and the following peak arrives in a July and August rally as natural gas is used in power plants to run commercial and residential air conditioners. For two months it can trade fat with little upside. From mid of February, it can move up.

We have been focused on Saudi Arabia and the Middle East as our top U.S. oil supplier. The top supplier of crude oil to the United States is Canada; and Canada is also a very large supplier of natural gas. Canada needs a large amount of natural gas at their crude oil tar sands mines in Alberta for refining. These producers keep adding to their operations so natural gas demands continue to correspondingly increase.

In 2009, they will be supplying 10% less to the U.S. next year versus last year. This production cutback doesn’t matter for now as we temporarily demand less gas but for mid to long term it will give impact. In the future, prices should rise on less available supply from Canada.

Despite the OPEC cut, crude is trading weak as ship tankers holding a huge crude oil inventory. Until this on-the-seas-supply is off-loaded and used up, oil prices are projected to stay in the basement for several weeks. In 2009, when the new production cut will applicable and economy will revive then we see an uptrend in the crude oil prices. We can expect that oil will move in a range of $65 to $75, a substantial increase from the current level, but only after a major drawdown in global inventories months away.

U.S. has enough oil and gas to fuel 65 million cars for 60 years and enough natural gas to heat 60 million homes for a hundred and sixty years. The government estimates there is 30 billion barrels of oil on federal land now closed to leases and drilling. We cannot develop it under existing rules and law. That’s where we are now. Somebody else did a study, saying there’s $1.7 trillion in government energy lands that could create thousands of new jobs if, in fact, they would open up these oil and gas fields now off limits.

Currency trading might be one of the better markets next year.

· Pepper has a long history that is 4000 years old.
· It was used as “mode of payment”.
· It was used to pay rent in England.
· Pepper is grown in all seasons through out the year.
· The pepper plant has lifetime of around 40 years and starts producing the berries after 2-5 years.

FACT SHEET

Category· Spices

Type of Crop· Kharif

Sowing Period (India)· May-June

Harvesting Period (India)· January- March

Factor Influencing Prices of Pepper
· Production
· Export & Import
· Warehouse stock position
· Demand and Supply
· Stock Position in the Market
· Carry Forward
· Weather Position
· Stock to Consumption Ratio
· Quality
· Time of Arrival of new crop in the market
· Market Sentiments
· Seasonal variations and time of arrival
· Government interventions

Major producing countries
· Vietnam
· India
· Brazil
· Indonesia
· Malaysia
· China
· Sri Lanka
· Thailand

India’s share in the global Pepper production

· 20%

Major Producer of Pepper
· Vietnam

Major Exporter of Pepper
· Vietnam

Important World Pepper Market
· Vietnam at HCM City (Vietnam)
· Kochi (India)
· New York
· Singapore
· Rotterdam
· Lampung at Panjang (Indonesia)
· Sarawak at Kuching (Malaysia)

International Grade of Pepper

International grades of Pepper are mainly based the name of the producing centers.

Malabar Garbled (MG1) India
Lampung Panjang, Indonesia
Sarawak kuching, Malaysia
Vietnam HCM city, Vietnam

Contribution of Countries in Pepper Production

World Wide Production of Pepper (tonnes)

In this above figure, we can see that Vietnam production of pepper is larger in the year 2007 & 2008 as compare to the other countries, India holds second rank in the production of Pepper. The maximum production of pepper comes from Vietnam.

World Wide Export of Pepper

World Wide Import of Pepper

Above graph shows the import in 2008 is expected to less as compare to 2006 and 2007.

Indian Scenario Of Pepper

Major Consumer of Pepper
· India

Life of Pepper
· 40 Years

Area of Production
· 2.25 Lakh hectares in India

Current Scenario

· India harvests most of its Pepper at the beginning of the year. During 2007, production of Pepper in India was reported to be 50,000 tons against 5000 tons lowers then the production in 2006.

· Kerala accounts for 90% of India’s pepper production. The other producers are Karnataka and Tamil Nadu.

· The Indian Pepper crop in 2008 is estimated to be 48,000-50,000 tonnes. Harvesting was delayed because of heavy rains in October.

· India is the world’s top consumer of Pepper. IPC estimates consumption in the country at 55,000 tonnes in 2007—up from 50,000 in 2006. However, the international body’s projection for domestic consumption in 2008 shows a dip of 10,000 tonnes.
· India is expected to export around 30,000 tonnes in 2007 and 23,000 tonnes in the following year, with the decline being mainly because of high prices that will keep buyers away

During 2007, Indian exports of pepper amounted to 30000 tonnes, which was 23000 tonnes in 2006.The export in 2006 was the lowest quantity of pepper exported from India during the next year 2007

Following are the states other than Kerala and Karnataka in which pepper is being produced

· Maharashtra
· Goa
· Madhya Pradesh
· Andhra Pradesh
· West Bengal
· Orissa
· Assam
· Tripura
· Meghalaya
· Arunachal Pradesh
· Mizoram
· Nagaland
· Manipur
· Pondicherry
· Andaman and Nicobar Islan

When the Fed helped JPMorgan Chase to rescue Bear Stearns, it sent a signal to the markets—we will not let any bank fall. If the Fed was willing to save an investment bank, without any retail depositors, then the system would not be brought down by a counterparty in the derivatives market. The boost to confidence has helped banks to repair their balance sheets by raising large sums from both shareholders and the bond markets.

But all is not rosy on the fundamental front. Although the system as a whole is safer, plenty of problems remain for particular banks. In the money markets, the banks are still having to pay a high margin over official rates to borrow short-term money, despite the ingenious efforts of the Bank of England, European Central Bank and America’s Fed. Investors are still worried that banks could get into trouble. There is probably more troubling news to come on write-offs; declared losses so far are well short of the $945 billion that the IMF estimated were the global losses from the crisis, much of it outside the banking system.

The problem that started the crisis—the American housing market—is still getting worse.

And losses are now emerging in areas other than housing. After a long period with scarcely any bond defaults by companies, there have been 21 failures this year, according to Standard & Poor’s, a rating agency; some 122 issuers, with debt of around $102 billion, are deemed vulnerable to default. Ominously, corporate debt is the shaky foundation for trillions of dollars of derivative contracts. Here in India also huge derivative positions are open.

Consumers round the world are grappling with higher food and fuel prices. British house prices are now showing annual declines. Europe’s economies seem to be deteriorating. In April the Belgian business confidence indicator, a good gauge of the continent’s conditions, suffered the biggest decline in its 28-year history. Commercial property looks vulnerable, as do some emerging markets, especially in central and eastern Europe. And things are shaky in Japan, where industrial production declined more than 3% in the latest month.

America’s new president will be elected against the backdrop of a shrinking economy and on taking office will face months of economic malaise. That in turn will imply bigger budget deficits, and redefine next year’s big domestic policy debates: whether to roll back George Bush’s tax cuts for the wealthy, for instance, and how ambitiously to reform health care. It could fuel protectionist and populist sentiment, particularly since Americans are already unusually fed up. A new CBS/New York Times poll finds that eight out of ten people think the country is “on the wrong track”, the most since the question was first asked in 1991. Today the opposition is asking the same question of Next government inheriting the deficit legacy in India.

As we recapitulate the performance of some of the commodities this year, which is soon ticking away, Guar seems to bring with it good memories, particularly speculative Guar, as it enjoyed voracious trading. Driven by the well-built fundamentals in spot market along with active participation by buyers, Guar complex is proving perky for investors. Guar Seed and Guar Gum have already touched the eye-catching level of Rs.2, 100 and Rs.5, 300 respectively. With the production levels expected to stay at around 70-75 lakh bags and a decent demand from stockists and traders for byaj badla, Guar is expected to trade at an attractive level. The inflow of Guar this year has been better than last year but surging demand by stockists and traders for byaj badla, has lifted up the sentiments of Guar.

India is dominating the international scenario as regards export of Gum. It exports Gum to more or less 76 countries. 90% of the total production of Guar Seed is being processed into Guar Gum for export purpose. India exported Rs.1,067 crore worth of Guar Gum in 2005-06, which is projected to touch Rs.1,200 crore in 2006-07. Russia has moved towards India to meet out its domestic demand for oil drilling. This could lead to a further export order of 10-15,000MT. However, cheaper quotes of Guar Gum by Pakistan are giving stiff competition to India, eating out the Indian share in overseas market. Higher quotes, thus, seem to have a little trouble in the global market.

Increased buying by the “big players” with the intent of ‘byaz badla’ is also lifting up the sentiments of Guar in the market. Demand from mills is expected to surface from mid of December, which could enforce further momentum in the prices. Arrivals are low, as sellers are not offloading stocks in hope of higher prices in the approaching time. However, overseas buyers are strictly watching the domestic Guar crop. The country has witnessed a good yield this season and does not face a severe demand-supply crunch. However, a majority of the stockpile from Haryana is being utilized within the state itself owing to mounting up mills in the state and has lead to low stock arrivals in Rajasthan from Haryana. Rajasthan, Haryana, and Gujarat are the chief Guar producing states in India.

The widespread ambiguity in the market on the subject matter of regulatory measures on the speculative trading in commodities will border the upside in Guar Seed and Guar Gum. Guar complex appears bullish owing to good demand at spot market together with speculative activities. However, FMC, which is keeping a vigil on the future trading of Guar could stiffen the norms if any irregularities trace out. This though might dampen the spirit, on the whole, the trend of Guar is buoyant in the spot as well as future market. Prices on NCDEX are still bullish from January onwards owing to the expectation of decline in arrivals amidst anticipated demand rise.

Economic reforms in developing nations, insatiable hunger for the commodities worldwide, recession in US economy and tumbling dollar, turmoil in credit market, unpredictable stock market, on the contrary, rock solid performance of commodities and their record breaking prices, increasing income of people, new reforms in Indian commodity market ……….is this the perfect time to incorporate commodities in portfolio as a hot investment avenues.

Commodities boom appears far from over, rather there is a belief that what happened in past is just the beginning, at the time when other investment classes are not looking so promising. Moreover, strengthening regulatory body and taking various steps to nurture this market in India are expected to herald revolution in futures market and carry this forward to the fragmented physical market for commodities.

The Paradigm Shift
Earlier, while the global commodity markets were doing the experimentation with various new products and forms of derivatives, our commodity market was in a state of flux due to managerial and policy-induced constraints. Commodity market was never allowed to grow properly. Continuous interventions by the government and regulatory bodies have hampered its normal growth.

But, the recent welcome steps to strengthen commodities market in India are the encouraging signal to the investors that could result in broad-based involvement of players who matter rather than a handful of speculators. The move to arm FMC (Forward Market Commission) with more power and other revolutionary developments, which have already taken, viz., increases of position limits; revision of daily circuit limit etc. has rejuvenated the confidence of investors.

Additionally, it is also on card to launch new product innovations like option trading, trade in intangible products; like frieght, portfolio management, which is already very popular in the capital market, will provide more maturity to the market and increase corporate as well as retail participation in future. The country became the first in Asia to offer trading in carbon credits – an exchange of cash for costs saved from using environmentally friendly practices and products.

Ordinance (Forward Contracts Regulation Amendment Bill, 2006) has been passed to give FMC the status of independent regulatory body, is a silver lining to the commodity markets that might pave way for “transition towards a more mature market”. With the increased position limit in many commodities, big companies, which were reluctant to participate aggressively, hampered by low position limits, will now use exchanges to hedge. One can notice the increase in volume, which we can say is the evidence of rising faiths in commodity trading.

Forward Contracts Regulation Amendment Bill, 2006, will open the door for much awaited opportunities in commodities world in India. This bill will elevate the FMC to a government body to an independent regulator, like SEBI. Now, banks, foreign funds and other financial institutions (FIs) can also look forward to participation in commodity markets, which would bring more liquidity and better practices into the market.

Step to allow 26% FDI and 23% FII in commodity exchanges will bring significant resources to the commodity exchanges. Investors are desperately waiting for the allowance of option trading in commodities. The commencement of option trading will facilitate market participants, especially corporate to define their risk exposure, as this platform allows them to cover their loss after paying a pre-fixed premium.

There are some key challenges in Indian market firstly, to integrate the futures market with the spot market and going forward integrating the Indian commodity market with the global market. As funds flawlessly flow from one market to the other and the Indian commodity market begins to integrate with the global market. There are some challenges in commodity exchanges, which are crucial for a mature market. Lack of quantity and quality warehouses is a major drawback in Indian commodity markets. But, the government is pondering to allow 100% FDI in warehousing and the cold storage sector.

Future market is under the regulation of FMC while cash market is still under the governance of state government. This bifurcation of regulation has led to fears that it could result in “regulatory slippages and contradictions”. Out of 28090 rural markets (Wholesale 6359, rural primary 21731) only 7557 markets (Principal 2428, sub markets 5129) are regulated by Agriculture Produce Marketing Regulation Acts of various states.
As regards commodities performance, the upward stride of the commodity market, a journey that commenced sometime in 2003, has gained unprecedented momentum till now. Bull-run in a number of commodities including energy, base metals, precious metals and agricultural goods could be attributed to both demand and supply side factors. Investment of forex, mutual fund, pension fund, etc. in commodities, especially in gold is making this market wonderful. Mutual funds and pensions funds that have humungous sums of money (pension funds in the US is alone are estimated to have over $ 2 trillion) are seeking to invest in commodities. Central banks of Asia, Russia, Japan is reportedly looking for asset diversification in gold.

The long-term fundamentals of most commodities are trustworthy. The world’s population and infrastructure is growing at a rapid pace and will continue to require massive quantities of natural resources to meet growing demand. Population growth means that by 2020 the world will need 40% more food. And in Asia, which is considered as “movers and shakers” in the commodities, growth has only just begun. So for investors looking to tap into the commodities markets, it is simply a matter of knowing how and where to invest.

India is considered as a major futures trading hub in tune with its status of being amongst the top five producers of most of the agro commodities. No need to say that, in precious metals, we are the largest consumer, contributing 30-35% of the total world demand. With the advent of big supermarket chains, warehousing facilities are expected to get better.

Trading volume in Indian commodity exchanges, which has ballooned 50 times in just five years, has potential to become almost double in size within the next two years.

In our country, commodity related industries roughly contributes around 55% of the total GDP and the turnover of commodity future market of 2006-07 is Rs. 32,32,943 crore, which is growing at a much faster than the stock market.

To conclude, I would like to say, commodities are not just a good way to diversify a portfolio of stocks, property and bonds; they often offer superior returns and significantly they are not correlated to stocks and bonds. Bull markets in commodities goes along with by bear markets in stocks, and vice versa. Positive correlation of commodities with inflation has already made it hot favourite of investors. Hence considering higher worldwide inflation, comparatively weak performance of other asset classes together with rock solid fundamentals in commodities, one can diversify their portfolio in commodities.