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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Sugar me baby

Sugar me baby, NOT.

The problem with too much of a fixation on charts is that we sometimes tend to ignore their non causality. Past patterns may not repeat. Just because a stock is at its 52 week low/high does not automatically mean that it will start rising/falling. In fact, quite the opposite. Momentum surfers say that, if accompanied by strong volumes a rising tide is likely to rise further and a sinking ship is bound to plunge deeper. Trouble is that we amateurs tend to sell too early (“too much of greed is not good”) or hold on to falling lines sliding further. That is what I had in mind when I said (here and here) that its not important when you buy – when you sell is what determines your worth. Another category of misadventures has to do with those with blood on their hands as they attempt to catch falling knives. Many look at a 6m or 1yr chart, and buy into a stock if they see that its fallen quite sharply. These are  people hopping onto a slide midway in the hope that the slide will magically metamorphise into a roller coaster and take them up. While they lose lesser than the ones who have been around at the top before the slide, it hits the ego more. Guys who have been losing money on a losing investment for some time seem have turned accepting to the fact that they have hit a rough patch and bravely ignore  further losses. Guys who get in fresh in the middle of a drop have to brace themselves for the stock market equivalent of a tight slap.

If there’s some sudden, extraneous shock (the PIIGs dominoing themselves to bankruptcy, terrorist strikes, political events, my turning up to work in pink  corduroys, et al) then it can help to get in during sudden drops. Else, it’s not so simple. Better bet would be good stocks that have done nothing and might be on the verge of a breakout. See the chart of Reliance Industries Limited (RIL), for instance – there has been a reconcilation between the brothers, global energy stocks are firming up, entry into communications and power…but the RIL stock has been sleeping.

On the other hand, one sector that has definitely turned quite bitter of late is sugar. Take a look at the chart alongside – while the NIFTY has done a handsome 23%, the sugar stocks have fallen from 12% – 32% during the past 12 months. EID Parry has trumped the NIFTY though to return a nice 46%, but then only 65% of EID Parry is sugar. Now, I do remember a colleague of mine buying into one such sugar producer and losing quite a bit in the bargain. Not a sweet deal at all. Same has been the case with Airtel. A couple of people I know bought into the leading telco, drawn by its image and brand name hoping for a quick rebound. But the rebound has not come about and they are still ringing up losing numbers.

Food is not good here in India. The stomach turns to see so many people going hungry only to realise that mountains of rice are allowed to rot in the Food Corporation of India’s (FCI) godowns.  The Indus Valley civilization taught us to build granaries but somewhere down the line we forgot how to manage them. Its pointless to blame Mr. Sharad Pawar since he is, by his own admission, quite overworked. I am not quite sure what role the food ministry mandarins have played in the local sugar mandis, but the the picture looks bleak for these cane crushers.

Sugarcane is quite a popular crop back there in my village. Its yield per acre is high since these grasses can be planted quite close to each other. Its almost impossible to venture deeper into the growth since the stems are quite stubborn and the rough leaves do scratch and irritate the skin. Wild boars gorge themselves on the canes and I remember my cousins/uncle/labourers taking turns watching over the farm under the starry skies.  Later in the morning it was always a pleasure to watch a village belle walking around, with unkempt hair digging her incisors and tearing into the outer skin of a sugarcane stump with a beautiful ferocity that can now be matched with the savage manner in which some investors have been mauled into losses over these stocks.

Sometime back there was a shortage of cane since there were many takers. There was talk of ethanol doping of fuel, the liquor companies where in attendance too, the gur producers and of course the sugar refiners. As a kid, I remember seeing serpentine queues of bullock carts laden with sugarcane waiting to offload their ware at the local sugarcane factory. I am not sure if you know but sugarcane needs to be processed immediately upon harvesting, else the sugar content declines rapidly. But a year or so back, we heard of millers coming directly down to the farms to collect the produce. This is a cyclical stock and once you see such un-natural behaviour (home pickup), it is almost sure that the good times are about to turn.

The heady demand drove up cane prices and the sugar producers had to stock up on inventory procured at very high costs. They are still holding on to these stocks. Since sugar prices are coming down now, the sugar companies have no option but to eat this cost. Further, since the Indian monsoon seems to be ok ok this year, there will be fresh produce coming into the sugar mandis later this year. Which will cause prices to fall even more. Also, there is a wide acceptance of the fact that the RBI might increase domestic interest rates. I do not know offhand, how much debt is carried by the sugar producers, but if they indeed do – then its one more nail into the coffin. Domestic brokerages have thumbed the sector down – many are predicting a 30% – 50% drop in quarterly profits.

Only deregulation of the sector can spike up the sector. But one wonders why talk of deregulation always surfaces when the sector underperforms. It is again a digital event, not in one’s control – and with Mr. Sharad Pawar overwhelmed with work, this is one coin flip which we’d rather ignore. These are cyclical stocks – roller coasters, ferris wheels, etc. Lets have them increase their P/Es first and then look at investing in them. Depressed earnings of cyclicals reduce the denominator of the P/E ratios and therefore they become attractive when their P/Es are high.

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