The Price of Food

I stopped by at a local grocery store on my way back home to pick up something for breakfast. The idea was to wedge an  oregano infused, golden brown double omlette inside slices of whole wheat bread layered in garlic and chilly-garlic mayonnaise. The ensuing breakfast was bearable, but the previous evening commerce gave me something to write about: the escalating prices of food in India. The egg at INR 3 per egg is a lot of egg in the face and the whole wheat bread leavened me with its INR 22 tag. I would recommend heading to the nearest kirana store, especially if you haven’t personally shopped for a while. I am sure the prices will shock you. Any crescendo that escalates at c15% per annum would.

I am sure Humpty Dumpty would have an even mightier fall today than during the early 19th century when he/it was conceived as being perched on that wall. The reason is simple – eggs are dearer since poultry feed prices (corn, et al) are increasing fast both in local as well as international markets. And that may not bode well for companies like Godrej (Real Good chicken, sob sob) and Venky’s India Limited.

There was a lot of attention to the Reserve Bank of India’s (RBI) winging up of its repo rates in a bid to contain inflation. Whether this move has its desired effect or not remains to be seen (in media). Actually, such causality might be difficult nee impossible to establish. Since a section of the intelligentia remains convinced that monetary tricks do not influence food prices and therefore the hesitant intervention by the RBI may not really amount to anything. While you may have certainly caught the story of the repo rate hike, this sagacious comment by Montek Singh Ahluwalia may have escaped your notice:

Rural areas have benefitted from the economic prosperity seen in the country. Demand for foodgrain, milk, vegetable and protein have gone up. It is a good development

Of course it is! But our preparedness to tackle the implication of that (i.e. a higher price level) may not be. The Deputy Chairman’s (of the Planning Commission) comment reminds me of a similar observation by the President of the United States (was it Clinton?) that countries like India should eat less! Here are some facts: per capita income in India has increased from 24,095 in 2004/05 to 43,749 in 2009/10 – that’s a CAGR of 13%. Agricultural productivity has lagged this rapid growth in incomes – growing at only 2% per annum. The large transfer of purchasing power via the Rural Employment Guarantee scheme has indeed ushered in a new found prosperity in rural India. In my native village, I never used to see the local folk eat vegetables and fruits. It was always variations of millets and pulses. They now have started to add variety to their cuisine, and as Mr. Ahluwalia says, what’s wrong with that?

There is an expectation of rice prices coming down this year due to the copious amount of rainfall that we received this monsoon but that might be washed out too. For since 2005, there has been a continuous rise in prices regardless of the monsoon. So what gives? It has to be basic demand and supply. If demand goes up and supply remains constant then the prices have to increase, right? How I wish our planners get this right – the re-rating possibilities for the fertilizer industry (if it can get it’s gas supply worries sorted!), micro finance organizations, irrigation sector (Jain Irrigation, Yo!) would be significant.

Our production is focused largely on basic food grains which are certainly not income elastic – i.e. one does not start consuming more rice or chapattis if one’s income rises. However, things like eggs, butter, fruits, vegetables, milk, meat etc are most certainly in greater demand if income rises. This will be difficult for someone from the industrialized world to understand, but in India, these food articles are aspirational to many. There are 370 million people currently in India living below the poverty. Forget an apple a day, even if they have consumed an apple in a lifetime till today, they’d be lucky. But all that will change and is changing…slowly. We need good old Keynesian artifacts in Indian agriculture, not RBI’s intervention. The focus should be on the Agricultural Ministry and not the Ministry of Finance.

And while Shri Sharad Pawar remains overworked and occupied by the political flux in Maharashtra, I do not think he is the only one to blame. The reason for the rotting mountains of grain in the Food Corporation of India’s (FCI) godown is less a consequence of callous administration as much as it being a fallout of India’s federal structure of government. It’s a states of the Union vs. the Union issue. The center just cannot get the states to lift off the stocks – I do not know why but I can guess that it must be due to pricing issues. FCI’s hoards cannot be culled by a mere addition of storage capacity. That’s a long term process – the short term measure is getting trucks to line up at FCI’s godowns are carting the stuff away. At least Sonia Gandhi did admit that the responsibility of bringing down food prices is as much the responsibility of the center as it is of the states.

The other important aspect is the cost of farming. In my village, a daily wage woman labourer was paid INR 50 a day to plant onion seeds. This year she is getting paid Rs.100. Male labourers are demanding INR 150. Just like the BPO industry, cheap labour that gave Indian agriculture its competitive edge is blunting rapidly. Cotton is another crop that is sown by my cousins in their farms. They are paying farmhands Rs4.50 for picking cotton this year, again double from last year. They tell me that the total labour cost for cotton has touched INR 15 per kilo this year. I can only imagine the plight of the farmland owners in rich Punjab and Haryana! This again comes back to the point – if a business has to start paying more per unit of labour then it needs to extract greater productivity per unit of labour. The fracas over the modest brinjal shows how arduous the path to this goal will be. Our farms need more mechanization, drip irrigation (Jain Irrigation, yo!), better seeds, non-urea fertilizers and understanding politicians.

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Trade Ideas – Oct’10

Some trading ideas are occupying my mind at the moment. Much was said about the QE2 in the previous post but free capital must be employed and given my nervous, edgy nature these days, I prefer flitting in and out of positions hoping to compound to a modest proportion. While I am contemplating these opportunities that caught my eye yesterday, let me set the background score with these opening lines from Charles Dickens’ masterpiece about duality:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.

In fact some lines from the book are so very apt in the current global financial markets:

The Fed to all of us: “Keep where you are because, if I should make a mistake, it could never be set right in your lifetime”. Also, “For I’m the devil at quick mistakes, and when I make one it takes the form of Lead”

The global economy to its planners: “Crush humanity (read economy) out of shape once more, under similar  hammers (read printing presses), and it will twist itself into the same tortured forms”.

Inflation rate in US to whoever cares to listen: “It is a far, far better thing I do, than I have ever done; it is a far, far better rest that I go to than I have ever known”.

And so on. These are issues far beyond my full comprehension, so I’ll do what I am forced to do – seek some new punts and see what happens. I just can’t remain still for long. And rotting my money in the bank is criminal.

1. Jain Irrigation Systems: I know that this seems to be a fairly valued stock with it’s 1 yr forward P/E running at 30 and that it’s market cap is in the region of INR 8,700 crores (= USD 1.9 billion) on an expected FY11 sales figure of INR 4,200 crores (= USD 933 million). The stock has recently seen a 1 yr forward P/E band of 33-34 as well, so on that logic there could be some steam there. The company has compounded it’s revenues at a crazy 40% CAGR over the past 5 years using a mix of organic (!) and inorganic methods. So, the market obviously feels that this kind of growth will continue into the future (say 3 – 5 more years) and that’s why a P/E of <40 appears justified. But I am not sure if net earnings growth will also grow at the same clip. Currently, around 6% of the money that the company earns goes into servicing its debt. But I picked up a (moderate sized) position today as I feel that there is a short term 10% – 15% opportunity here. Another important point for me is that this company is from my home district, Jalgaon so I do feel my agrarian roots rising up as I sow this small packet of capital here. But really, the company is cool, having delivered world class drip irrigation methods to a country so sapped of water. It is now pioneering the concept of using drip techniques for paddy – the killer crop when it comes to water requirements. If that clicks, then it will be awesome for the country. From the chart above, I guess 1050-1075 seems to be a support level and given the Lower Bollinger Band touch, a negative plunge of the MACD and a code red, buy signal from the RSI, I will venture out here. A mental stop loss of 1000 is in place. 1000 also appears to be the next support? Lets see.

2. Balmer Lawrie: We have been hearing and reading so much about logistics and transportation being a huge opportunity that many of us may not even bother to check if the story still has some room for possible fresh investments. I have invested in and out of Balmer Lawrie in the past and like the logic for Jain Irrigation above, I guess this could turn out to a small, skim the top kind of opportunity. But in this case, I would be content to hold on to this stock for longer given that A) it is cheaper than Jain Irrigation and B) I am familiar with the company. I once worked in an office buidling next to a Balmer Lawrie Grease Division plant and I like to believe that the proximity and therefore some induction effect helped me make money on this counter in the past! I have not yet taken a position here but the chart on the right looks tempting to me.

 3. Banco Products: What I am really doing is flipping coins between Balmer Lawrie and Banco Products. This one is a Gujarat based company which has been around for 50 years but appears to be selling cheaply as well. It has made auto-equipment all these years and is now getting into cement business as well. Duh. It supplies it’s gaskets and radiators to companies like Tata Motors, TVS Suzuki, M&M, Maruti Udyog etc. It’s operating margins (@ 26%) are highest amongst peer group companies like Bosch, Bharat Seats and UCAL fuel systems. With an expectation of a FY’11 EPS of 12, the CMP gets discounted 9.25 times – that’s not bad. This really has been a turnaround story over the past couple of years with the share price jumping up from the 20s to the current 110 levels. Given the market cap of INR 800 crores (= USD 178 million) over an expected sales of INR 550 – 575 crores for FY’11, the stock still looks a tad cheap. Recently they acquired a company in Europe and are setting up a cement plant in Tanzania. Seems like these guys are confident of what they are doing. On the charts, I see a Bollinger Squeeze which to me means that it can shoot up or down from here. But the RSI and MACD are not there yet for me. I am biased towards Banco, so I think I’ll throw in some coins tomorrow. Let’s see.

4. Talwalkars Fitness; KSB Pumps; MIC Electronics were other punts that came to mind. And a long term possibility on TV Today (but that requires more thought, and I don’t have time at the moment. Maybe later this week).

(I had taken a position on 31Aug’10 in MIC Electronics and written about it in my Earths, Lights and Money post but got out with a 14%. It has corrected only around 8% since then. I’m not fully sure but I do want to hitch a ride on it again and again since the story appeals to me a lot)

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