Thursday, July 5, 2012

Corn Price Rise: Impact on India limited

Global corn prices are showing a sharp rise just as they did in 2008, this time on expectation of a poor yield in the U.S. Take a look at this 20-year chart of U.S. spot prices (from Vix & More). U.S spot prices for corn are up nearly 30% over the past month.


In India, the prices are up about 15% over the past month (see the NCDEX chart below – Maize Feed, Davangere).


As far as India is concerned, the largest impact would be on the price of poultry as more than half of the corn produced in the country is consumed by the poultry sector. With the poultry market growing by about 20% annually, as long as corn prices remain high, that would continue to put additional pressure on poultry prices.

What happens if domestic prices continue to rise? Given that India exports a large part of its corn, my sense is that government will intervene to arrest the price rise, most likely by banning exports. That is exactly the kind of thing it did during 2008, when corn prices were showing a sharp rise.

The only strange part in this whole phenomenon is that global prices are rising even as the International Grains Council is expecting a higher global production this year. Here is what it says in its report of July 2, 2012:

“Overly hot and dry Midwest weather conditions have led to a downgrade in the U.S. maize production forecast, with projected yields now likely to be below the ten-year trend.  Despite the downgrade, the crop is still forecast at a record 350m. tons, although the risks are to the downside.  However, projections for some other countries, including China and India, are increased this month.  Consequently, world maize production is still expected to rise by 5.7% to 917m. tons in 2012/13.”

It almost seems as if corn prices have been driven up more by speculation than by lower yields in the U.S. And just as in 2008-09, when the price dropped sharply, there’s every likelihood of the same happening this time.

Either way, although higher domestic corn prices would impact poultry prices and consequently food inflation, the overall impact on the economy would be fairly limited.