Monsoon Wetting: India Gets Its Rains

A late revival in monsoon rains in India has fueled hopes that it will help limit damage to the country's summer crops and prevent further increases in food prices. But it may be too late to lower prices substantially.

Weather's impact on commodities is big in most countries, but nowhere bigger than in India. Following scanty rains in the first half of the June-to-September monsoon season, prices of staple food items such as sugar, edible oils and vegetables have risen by an average 30%. That has stoked fears of a return of inflation that could hinder an economic rebound in Asia's third-largest economy.

A farmer puts pesticides on his rice near Amritsar, India, last month. The U.S. this month sharply cut its forecast for Indian rice production.

As of Aug. 17, monsoon rainfall was 27% below the 50-year average, resulting in 246 of the country's 625 administrative districts officially being declared drought-hit.

There has been some respite after monsoon rains returned late last week. The revival of rains "may limit damage to the sugarcane crop [and] improve the sucrose content in cane," said C.B. Patodia, president of the Uttar Pradesh Sugar Mills Association. Late rains also will help reduce pest attacks on sugar cane.

Heavy rains in the last four to five days over the grain bowl states of Punjab and Haryana, and the country's second-largest sugar producer, Uttar Pradesh, have improved the outlook for rice and sugar cane, traders said.

U.S.-traded sugar-futures prices have rallied to 28-year highs in part because of the dry monsoon season, but rice prices haven't risen in kind.

Analysts say there is a good chance rice prices will climb.

September-delivery Chicago Board of Trade rice did surge in July, from $12.34 per hundred pounds (45 kilograms) at the start of the month to a high of $14.005, but has since retreated. Thursday, CBOT rice was at $13.185, up 1.1 cents on the day.

The July surge was fueled largely by U.S. Department of Agriculture data for the U.S. crop. In its August estimate, the USDA cut India's expected rice production by 15 million to 15.5 million metric tons to 84 million for the 2009-2010 marketing year because of the drought. U.S. analysts said a cut that drastic in one month could mean the problem might be worse.

Bill Nelson, an analyst with Doane Advisory Services, said the situation is bullish, but that it "hasn't hit the radar yet." People could get caught off-guard, he said. "Historically, these Indian monsoon failures have an appreciable impact on rice, and rice prices can do pretty crazy things," Mr. Nelson said.

Whether prices could see a leap depends on how Asian countries react to tightening supplies. After rice prices rallied to all-time highs last year, nations stopped exporting, which fueled a near-panic among importers, such as the Philippines, analysts said.

According to the India Meteorological Department, India's western region, a key producer of cotton and sugarcane, was likely to get more rains from Thursday. Major rice-producing states such as Uttar Pradesh, Punjab and Haryana were also likely to get more rains.

Meanwhile, sugar prices in the Indian market declined by 80 rupees per 100 kilograms, or 2.6%, to 2,970 rupees on forecasts of more rain. Pigeon-pea prices have eased by 2% to 5,400 rupees per 100 kilograms in the past week.

Prices of pulses, or edible seeds, also may soften a bit on hopes of better-than-expected output, but a major decline isn't likely due to strong demand and low carryover stocks, said Chowda Reddy, an analyst with Karvy Comtrade Ltd.

In other commodity trading:

NATURAL GAS: Futures fell below $3 a million British thermal units to a fresh seven-year low as government data showed inventories continued to swell last week, though the injection into storage came in slightly below analysts' expectations. Gas for September delivery on the New York Mercantile Exchange settled down 17.4 cents, or 5.6%, at $2.945 per million BTUs.

CRUDE OIL: Futures finished higher but remained below the peaks for the year as the economic recovery still looked too tenuous to justify any further climb. Crude for September delivery expired at its settlement of $72.54 a barrel, 12 cents, or 0.2% higher on the day.