Monsoon Threatened by El Nino in India May Cut Crop Output

Jun 10, 2014 6:35 am ET

(Updates with economists’ comment in 12th paragraph.)

June 10 (Bloomberg) -- Monsoon rainfall in India, the main source of irrigation for the nation’s 263 million farmers, will be below normal this year as El Nino emerges, weakening prospects for crops from rice to soybeans and sugar and potentially boosting inflation.

Showers in the June-September season will be 93 percent of a 50-year average of 89 centimeters (35 inches), the state-run India Meteorological Department said on its website yesterday. That’s less than 95 percent of the average predicted in April. Rainfall in July, the wettest month of the monsoon season, may be 93 percent of the average and August may total 96 percent, the forecaster said.

Prime Minister Narendra Modi’s government is preparing contingency plans to deal with a sub-normal monsoon, while pledging to contain the fastest consumer-price increases among Asia’s biggest economies. A drought in the main growing regions may curb farm output and hamper efforts to revive the country’s economic growth from near the lowest in a decade.

“Out of the two things which the market is closely watching, one is budget and the other is monsoon,” Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai, said by phone. “The monsoon is extremely important because in case it turns out to be bad it will direct the government’s effort from reviving investment cycle to managing drought.”

Rupee Weakens

India’s consumer-price index increased 8.59 percent in April from a year earlier, compared with a 8.31 percent gain in March, the Central Statistics Office said May 12. The economy grew 4.7 percent in the year ended March 31, after a decade-low expansion of 4.5 percent a year earlier.

The rupee and government bonds fell on concern the weak monsoon will hurt farm output and undermine efforts to revive the economy. The currency declined 0.2 percent to 59.2938 per dollar as of 3:58 p.m. in Mumbai, according to prices from local banks compiled by Bloomberg. That’s the bigges drop since June 3. The yield on the 8.83 percent notes due November 2023 rose as much as three basis points, or 0.03 percentage point, to 8.58 percent.

The onset of the monsoon was delayed this year with rains reaching India’s Kerala state on June 6, compared with the normal date of June 1, according to the weather bureau. Rains, which provide water for 55 percent of the farmland, have been 44 percent below normal since June 1, bureau data show.

“Food grains output may fall by at least 10 percent as major rice growing areas of the country in the northwest may get less rains,” said Indranil Mukherjee, an analyst with Religare Commodities Ltd. in New Delhi. “Farmers will not go for early sowing, which will impact yield of many crops. The latest forecast may increase prices of many commodities.”

Food Costs

India is the world’s second-biggest producer of rice, sugar and wheat and meets more than 50 percent of cooking oil demand through imports.

Lower production may stall a decline in global food costs. A United Nations’ gauge of world prices fell for a second month in May aided by rising grain inventories. Rough-rice futures in Chicago capped on June 6 the longest run of weekly losses since 2008, while wheat futures dropped on the same day to their lowest level in three months.

The government may give subsidy on diesel to farmers to run water pumps for irrigation and grant incentives on seeds purchase if replanting is done, Agriculture Minister Radha Mohan Singh said yesterday. Growers may also be given subsidy on rescheduling of farm loans in drought areas, he said.

El Nino Impact

To stem inflation, Modi has called for price stabilization funds and measures to prevent hoarding of food, which makes up 50 percent of the consumer price index basket. The government may sell food grain from state stockpiles if the need arises while allowing imports of essential commodities to curb inflation, Rohini Malkani and Anurag Jha, Mumbai-based economists at Citigroup Inc., wrote in a report yesterday.

The outlook for agriculture is clouded by the delayed onset of the monsoon with a 60 percent chance of the occurrence of El Nino, the Reserve Bank of India said in its monetary policy statement on June 3. A below-normal monsoon will influence monetary policy as inflation may accelerate and curb rural demand, Standard Chartered’s Sahay said.

Forecasters from the U.S. to the United Nations have warned an El Nino event may happen this year, and ABN Amro Group NV said confirmation could spur support for coffee, sugar and cocoa prices. El Ninos can roil agricultural markets worldwide as farmers contend with drought or too much rain.

Rice, Oilseeds

India received normal or more-than-normal rains during only three El Nino years out of the past 10 occurrences, while the remaining were drought years, according to data from the meteorological department. Monsoon rainfall was the least in almost four decades in 2009, when El Nino occurred last, data show. Rice and oilseed harvests fell 10 percent, Agriculture Ministry data show.

El Ninos, caused by the periodic warming of the tropical Pacific, occur irregularly every two to seven years and are associated with warmer-than-average years. The last El Nino was from 2009 to 2010, and since then the Pacific has either been in its cooler state, called La Nina, or neutral.

Rains will be 85 percent of the long-period average in the country’s northwest, which includes cotton, rice and sugar cane growing states of Punjab, Rajasthan, Uttar Pradesh. Monsoon will be 99 percent of the average in the northeastern region and 94 percent in central India, the top cotton and soybeans growing region, Singh said.

Southern states of Karnataka, Kerala and Andhra Pradesh, which are the main producers of coffee, rice and rubber, may get 93 percent of the 50-year average rain, the bureau said.

--With assistance from Kartik Goyal and Shikhar Balwani in Mumbai.