Economy
Weak correlation between monsoons and food inflation, finds Nomura
After two consecutive years of deficient monsoons, the Indian Meteorological Department has projected above-normal rains in 2016.  But, monsoon forecasts by the IMD have been wrong in the past. Will a poor or below-average monsoon lead to higher food prices or will a good monsoon lower food inflation? In fact, there has been little correlation between poor monsoons and food prices, despite what market commentators, economists and policymakers would have us believe. A recent research titled ‘Busting the monsoon and food price inflation myth’ by Nomura finds that while rains do impact food production, the production and food price inflation link is weak across food categories. Nomura expects food inflation to be approximately 5-5.50% in FY16-17 versus 5.10% in FY15-16
 
According to Nomura’s research, correlation between rains and food price inflation is has been low. In the past, during bad monsoons, food inflation has been less than 5% for FY01-02, FY02-03 and FY04-05. During good monsoons, in FY06-07, FY08-09 and FY10-11, food inflation has been above 8%. Despite two below-average monsoons over the past two years food inflation has remained below double digits. 
 
Using data for the last 15 years (FY01-02 to FY15-16), Nomura calculated the correlation between monsoon rainfall (percentage deviation from normal) and food price inflation is 0.14. Ideally, if a poor monsoon leads to higher inflation, the correlation should be negative.
 
The research finds that the average food price inflation in years with below-normal monsoons is 6.5%, surprisingly lower than for a normal monsoon year which is at 7.6%, indicating a weak correlation between monsoon rains and food price inflation.
 
 
Could the low correlation be because of the monsoon only affect certain food items? Analysts at Nomura find no clear link. The write that, “There is no single category driving food price inflation up (down) in bad (good) monsoon years. Food shocks have hit different food products across different years, irrespective of monsoon performance.” They find that “From pulses, edible oils, fruits & vegetables to cereals, the drivers of high food price inflation keep changing. Nor is the impact symmetrical. For instance, FY04-05 and FY09-10 were both below-normal monsoon years. Yet, protein food price inflation (pulses, egg, meat, milk, fish) was very low in FY04-05, but rose significantly in FY09-10.”
 
Rather than the monsoon, Nomura states the key drivers of food inflation are minimum support prices, nominal rural wages, non-labour agriculture input costs, and global food price trends. And since the above drivers have already stabilised, they do not expect food price inflation to fall from current levels, even if monsoon rains are normal. The analysts write that the, “Ongoing public infrastructure construction could raise demand for rural labour and gradually push up nominal rural wages. Rising diesel prices can incrementally add to agriculture input costs.” Similarly, they expect the government to remain prudent in its MSP announcements in 2016 and do not expect hikes to be any lower than the last two years. Hence they expect food inflation to be approximately 5-5.50% in FY16-17 versus 5.10% in FY15-16.
 
On 5 April 2016, the RBI Governor in the first bi-monthly monetary policy statement mentioned that “Going forward we will be looking for further monetary room in signs of good monsoon, further readings of low headline inflation, indications of softening in core inflation and further evidence of transmission of rate cuts.”  In an interview he also stated that “We’re looking for signs of a good monsoon. Unfortunately, India is still somewhat sensitive to monsoons, though people find it hard to see a link between monsoons and food prices. But there is potentially (a link), with this being the third bad monsoon in a row (if) that happens.” 

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COMMENTS

Karuthiah Gajendran

9 months ago

It is the failure of both central and state governments by not addressing the issue of drought and floods. If they had set up a proper infra structure to save and regulate rain and river water, there wouldn't be drought in India.

FedEx acquires TNT Express
FedEx has acquired TNT Express. The €4.4 billion acquisition combines the strengths of the companies – the world’s largest air express network and an unparalleled European road network, which will expand the existing FedEx portfolio and reshape the global transportation and logistics industry, according to a release form FedEx.
 
"This acquisition is a significant accomplishment and marks the beginning of a new era, filled with promise for our people, customers and shareowners,” said Frederick W. Smith, Chairman and CEO of FedEx.
 
“Over our 43-year history, FedEx has repeatedly reinvented and revolutionized the industry, from the first overnight express service backed by a money-back guarantee to the invention of internet shipping. And just as we revolutionized the U.S. domestic parcel business through the acquisition and development of what is now FedEx Ground, the acquisition of TNT will change the way customers view FedEx around the world,” Smith continued with nostalgia.
 
The integration process will begin immediately. The FedEx track record of successful acquisition integrations in the U.S. and globally will serve the combined companies well to leverage investments in technology, infrastructure, facilities and operational capabilities to position the combined companies for long-term growth and success. In the near term, customers can expect to interact with each company as they always have and receive the world-class service they have come to expect. Once the integration is complete, FedEx expects customers to enjoy an expanded global offering that draws upon the breadth of expertise from both companies.
 

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