Drought: A natural disaster made worse

The economic impact of the drought will be more severe in emerging markets. With the global economy slowing, the bad harvests could not have come at a worse time. India has had trouble taming its inflation and now it will get worse

The world’s food supply is in danger. Droughts around the world have slashed harvest forecasts. This time the problem is especially severe in the United States. Two consecutive La Niñas, cooler than average water temperatures in the eastern equatorial Pacific, have pushed the polar jet stream to the north opening up a large sections of the agricultural rich Midwestern US to temperatures in excess of 37°C and little rain. It has been the warmest 12-month period in the continental US since record keeping began in 1895. The effect on crops has been a disaster.

It is the worst drought in 55 years. As of late July nearly two-thirds of the US is experiencing some precipitation deficit. As of this week, the American Agriculture Department (USDA) declared 1,369 counties in 31 states as disasters. The designation is important because it allows the local farmers to qualify for aid. This is the largest number in the history of the program. The USDA also reported that 45% of US corn fields were in ‘poor’ or “very poor” condition up from 38% a week before. While 35% of the soyabean crop was in ‘poor’ or “very poor” condition, up from 30% a week ago.

Of course, the markets have reacted. The price of corn has hit a record high at $339 per metric tonne, 6% above its previous high in March 2011. Soyabean is not far behind. It is now selling at $662 per metric tonne, 20% above its all-time high reached in June 2008.

But the drought is not just a problem for the US. American corn represents 52% of the global exports in that commodity and 43% of the exports for soyabean. And the weather is not just bad in the US. Droughts and sometimes floods have also hit the Chernozem, the black earth belt that includes parts of Serbia, Bulgaria, Romania, Ukraine and Russia all the way into western Siberia. In Kazakhstan the world’s sixth largest export, the crop will be only 48% of last year’s record harvest. The price of wheat has risen 35% from May and is now selling for $356 a metric tonne. While this is still 18% below the record price of $439 reached in February 2008, it is certainly not really good news. 

The weather is also bad in India. Two months into the monsoon and the season rainfall is 22% below normal. In the significant agricultural areas of Maharashtra and Punjab it is only 30% to 40% of average. Brazil’s soyabean crop was hit by dry conditions and was 13% below prediction. Western Australia, its biggest wheat growing region, had below average rain in April to June and an exceptionally dry July. Only France and Germany expect good harvests.

The economic impact of the drought will be wide spread. With the global economy slowing, the bad harvests could not have come at a worse time. Food inflation will complicate stimulus efforts. The US is expecting food prices to rise by 4% to 5%. The impact on emerging markets will be far more severe. Food makes up a far greater part of the budgets for the poorer populations in emerging markets. India has had trouble taming inflation and now it will get worse. Inflation was slowing in China, but the rise of global food prices and recent efforts to prevent a hard landing may reverse that trend. In addition, many more people are dependent upon agriculture for their incomes. In India half of the population is dependent upon agriculture for their income. Although urban populations are rising, even in China, 49% still live on farm incomes.

Government planning for famine has been common since the Egyptians, but more recent well meaning efforts have exacerbated the problem rather than solving it. Almost all countries have some sort of subsidy programme in place. They subsidize cheaper food or inputs like fertilizers. Some countries subsidize agricultural prices. Other countries use more drastic means like price controls or export bans. Often farmers’ profits are restricted to benefit the urban poor, who are more likely to riot and possibly overthrow governments. The result is often the same. These attempts to manipulate the market do not encourage farmers to grow more food. Often they simply bankrupt governments’ budgets.

Another more destructive form of subsidy has been the use of crops to create bio-fuels. Food margins are quite narrow and the difference between a surplus and shortfalls are small. In the US 40% of the corn crop has been artificially diverted for the production of ethanol. The reason for these programmes is all the same. Although economically inefficient, they are politically useful.

Government planning for disaster is certainly well within the purview of good policy. Perpetuation of a particular party by distorting the market is simply the recipe for more disaster.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected].)


SEBI permits online subscription of bonds

SEBI said it decided to extend ASBA facility in order to facilitate a system for making online applications for public issue of debt securities

Mumbai: Market regulator Securities and Exchange Board of India (SEBI) has allowed online subscription of bonds, a move that will reduce timeline for completion of the process, reports PTI.

" order to facilitate a system for making online applications for public issue of debt securities and to reduce the timelines of the issue process for public issue of debt securities, it has been decided to extend ASBA facility to public issues of debt securities," SEBI said in a notification.

As per the existing regulation, Application Supported by Blocked Amount (ASBA) is allowed in case of initial public offer of shares.

It has also provided option for subscribing to debt securities through an online internet interface with a facility to make online payment, it said.

Bond issuer should provide, through a recognized stock exchange which offers such facility, an online interface enabling direct application by investors to the public issue, it said.

The regulator has directed exchanges to put in place necessary systems and infrastructure for implementation of this notification.

Besides, it has also directed depositories, merchant bankers and registrars to create awareness among issuers and investors about the various modes available for making applications.



SEBI fears small brokers used as front in midcap crash

SEBI is looking into the possibility of brokers being used as front entities by some foreign investors, HNIs financiers and even company promoters

New Delhi: Some little-known brokers have come under the scanner of market watchdog Securities and Exchange Board of India (SEBI) for suspected manipulative activities in stocks by spreading rumours about certain listed companies, including a few mid-cap entities whose share prices fell like nine-pins last week, reports PTI.
The regulator is now looking into the possibility of these brokers, whose trading activities have not been material in the past, being used as front entities by some foreign investors, high net-worth individual (HNI) financiers and even company promoters.
Immediately after these stocks were battered down on Thursday, Moneylife sent a mail to SEBI, which remained unanswered till writing the story. However, next day, both NSE and BSE cut the price band of these stocks, in consultation with the market regulator. 
According to sources familiar with the matter, SEBI's preliminary investigations into the last week's sharp plunge in some mid-cap stocks have thrown forward certain interesting facts and it could be possible that the rumours could have been spread with an aim to beat down the stocks.
However, the regulator has yet not completely discarded the possibility of stocks having plunged due to large-scale sale by financiers having provided funds to promoters or other investors in lieu of pledged shares, as also exit of certain Mauritius-based funds.
Sources said that it was also possible that some Participatory Note holders might have directed the foreign institutional investors (FIIs) to offload their shares immediately, as such investments are already under scanner for possible re-routing of black money from India back into the country through locations like Mauritius.
However, there are some common threads in almost all the affected stocks and these include certain speculations doing the rounds about their businesses, promoters and foreign fund raising plans, sources said.
The regulator has yet not been able to establish any link between the brokers and major clients having dealt in these stocks, but most of the suspected transactions in these shares have been conducted through relatively smaller brokers.
Soon after these stocks were battered down on Thursday, the market regulator had swung into action, while the two stock exchanges, NSE and BSE, next day decided to reduce the price bands of the six affected stocks to five per cent on surveillance concerns.
These stocks are Parsvnath Developers, Tulip Telecom and Era Infra Engineering, Glodyne Technoserve, Radico Khaitan and Pipavav Defence & Offshore Engineering Company, all of which witnessed sharp plunge in their share prices on Thursday.
On Friday also, Parsvnath, Pipavav Defence and Glodyne Technoserve plunged by up to 20%, although Tulip, Radico Khaitan and Era Infra managed to move up.
On Thursday itself, SEBI and the two stock exchanges had begun seeking clarifications from major brokers and clients having dealt in these stocks, while the regulator started inspecting data in its market surveillance system to identify the unusual trades.
Sources said that the SEBI's inspection is not limited to these six stocks as hectic activities are being seen in many other mid-cap and small-cap stocks amid similar speculations regarding a high level of pledging of promoter shares, offloading of shares by financiers and sale of shares by Mauritius-based foreign entities in the market.
SEBI as well as the bourses, which function as front-line stock market regulators, are accordingly looking into trading pattern of a host of other midcap and small-cap stocks.
Although the market barometer Sensex on Friday, the last trading session, saw a smart rally of close to 200 points (1.2%), the mid-cap and small-cap stocks were under pressure and their indices closed nearly 1% in the red.
The companies like Parsvnath, Tulip and Pipavav on their part have said they are not aware of any material developments and termed the speculations as mischievous in nature.




4 years ago

Many mid-caps tumbled last week. The reason attributed was exclusion from "F&O segment. Shares like Development Credit Bank went down in spite of good earnings. Was the attributed reason real? Was it not an organised rigging?

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