Currently, the weather in India is threatening the development of agricultural crops and supplies locally and globally. The El Niño weather pattern has arrived in the country and is causing extreme droughts.

Just to give you an idea: the Indian nation recorded its lowest level of rainfall in the last 100 years in the month of August. As a result, climatic adversity is increasing volatility for commodity market participants.

In this post, we’ve invited Lívea Coda, Market Intelligence Coordinator at hEDGEpoint, to explain:

• The importance of India in commodity production
• The region’s macro situation
• Top commodities impacted by India’s weather
• The role of risk management in protecting your business.

Keep reading to check it out!

What’s the importance of India in commodity production?

 India is the second largest sugar producer in the world, behind only Brazil. In addition, the country’s population is the largest consumer of this commodity on the entire planet. Thus, a large part of its production is destined for the domestic market.

“While Brazil consumes around 9 million tons, India consumes approximately 29 million tons,” Lívea Coda pointed out.

The Indian nation’s production capacity is similar to Brazil’s, but today there’s one specific highlight: the ethanol being produced from sugar cane. According to Coda, the Indians are evolving this technology to increase the ethanol blend each year to reduce their dependence on foreign oil.

“The country imports fossil fuels, a highly volatile market dependent on international geopolitics. The challenge is to reduce the need for energy commodities such as oil. To this end, growth in biofuel demand has been encouraged,” she explained.

Cotton and rice are other significant crops as India is the second largest producer of these commodities on the planet. The forecast is that 26 million tons of cotton will be produced in the next season, a total which is 4% above the previous harvest. Rice is forecast to yield 127 million tons for the 23/24 cycle. This data is courtesy of the United States Department of Agriculture (USDA).

El Niño, inflation, and elections: Find out about India’s real situation

El Niño occurs when temperatures in the central and eastern Pacific Ocean rise above normal. This warming trend brings changes in atmospheric patterns which cause a weakening in monsoon circulation over the Indian subcontinent.

In the last four years of El Niño, India has faced constant drought conditions, with rainfall 90% below average. In 2023, the phenomenon was confirmed again, and the monsoons were delayed. There was little rain between July and September, confirming a historic minimum in this period.

 You can also read: 

• The influence of climatic phenomena on commodity markets

Furthermore, there will be critical elections in India next year, and inflation is currently above the rate that’s been targeted.

“Inflation stands at 6% per year, but the target is 4%. I’d like to highlight that food inflation is even higher as it’s reached 9.5%. The government wants this number to decrease, given the upcoming electoral scenario. Therefore, it intends to prioritize the internal market,” Coda clarified.

For you to better understand the logic, it’s vital to know that the Indian government controls sales to the domestic market, as well as imports and exports through quotas. If production is poor, the chances of issuing export quotas are reduced, which have effects on the total trade flow.

The Weather in India: Which principal commodities are most impacted?

As you can see, India faces several factors that generate volatility. According to Coda, the period from June to September is crucial to assess whether the sugarcane was able to develop.

This year, the low rainfall in key states for sweetener production impacted development during this period. Supply, therefore, should be further reduced in a scenario where stocks are already low.

The abnormally dry weather is threatening the sugar supply, with the risk of even making the country’s exports unviable.

“In years of good production such as the 21/22 season, India managed to export a record 11 million tons of sugar. In the 22/23 harvest, adverse weather conditions reduced productivity. The surplus was smaller, with only six million tons of sugar being exported,” hEDGEpoint’s Market Intelligence Coordinator asserted.

Also read: 

• How does volatility impact commodity markets?

With the historic drought, the 23/24 sugar harvest was compromised, and production is estimated at 30 million tons. The surplus could therefore be only one million tons. This volume should be intended to increase the country’s currently low reserves. India’s target is at least three months of consumption, having ended the 22/23 harvest well below this level at four million tons.

The restriction on exports has already been priced in by the market. Meanwhile, the Indian government appears determined to increase the country’s reserves at any cost. Even with all the investment in the country’s alcohol sector, India seems determined to restrict ethanol production based on sugarcane juice and Type B molasses. These products contain a higher sucrose content which allow only the use of the lowest quality byproduct, Type C molasses.

In this way, achieving the desired target of mixing ethanol together with gasoline is at risk, slowing down the pace of its biofuel program by prioritizing the sweetener’s production.

“The effect of this measure will add around 2Mt of sugar to the country’s available supply, generating more comfortable stocks at the end of 23/24, and enabling India to return as an exporter in 24/25, if the weather cooperates,” Coda concluded.

Rice and cotton also suffer due to drought since they’re crops that depend on water to fully develop. 23/24 cotton production will likely fall 7.5% year-on-year. If this situation is confirmed, imports could more than double compared to 2022, according to local sources Reuters Mumbai and the Cotton Association of India (CAI).

Sugar: Evidence of world deficit favors Brazil

Thailand is another important global producer in the sugar market. However, unfavorable weather has also hit that country. The export availability of the merchandise there fell from eight to five million tons in the following season.

Thai domestic consumption is only three million tons of sugar, normally guaranteeing a greater surplus when compared to India. With these two nations affected by adverse conditions, the first quarter of 2024 is expected to present deficits in relation to trade flows.

“This should happen from the moment the international market needs Indian and Thai sugar. Hence, the price may increase due to the supply reduction in the Northern Hemisphere,” added Coda.

In this sense, Brazil can assume a leading role as it expects a harvest of excellent sugar production, estimated to set a record in the 23/24 cycle. In this way, the country should account for a large part of global trade.

hEDGEpoint: Managing risk to protect you from volatility

Imagine that you have a candy company, and you need sugar. With the weather causing serious consequences for production in India and Thailand, there may be changes in this key commodity’s price.

In this context, risk management becomes more essential for companies that depend on the specific commodity. Using hedging instruments, participants in this market are able to protect themselves against volatility.

hEDGEpoint exists to put together hedging products, market intelligence, and insights that closely follow movements in the agricultural and energy sectors. With a team of professionals who operate on five continents, we conduct analyses that contribute to solid decision-making.

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