Rupee turmoil shakes up Indian ag-market

21.11.2016

The shock demonetisation of most of India's cash money is supporting cotton prices there, weighing on palm oil demand, and could hit the next wheat crop.

Last week Prime Minister Modi announced a surprise decision to withdraw the country's 500 and 1,000 rupee banknotes.

The plan is that the obsolete notes will have to be deposited at banks, bringing them to the attention of tax authorities.

At a stroke this should increase tax revenues, as well as making the cash earnings of crime and graft worthless.

But given that India is primarily cash economy, and most that cash was in the form of 500 and 1,000 rupee bank notes, the transition has been predictably chaotic, with a short tem cash shortage freezing economic transactions.

Cotton price support

The move has hard a marked effect on a number of agricultural products.

For cotton, the effect has been to push prices, as supply chains break down.

Commerzbank said the demonetisation "has resulted in payment problems, delivery delays and an increase in domestic cotton prices".

"Instead of the 150,000-200,000 bales per day that would be usual for this time of year, only 30,000-40,000 bales of cotton per day are currently reaching the market in India," Commerzbank said.

"Because India is an important cotton exporter, the available supply on the world market is also tightening as a result."

Threat to wheat

Wheat production could also be hurt, according to an article in the Times of India.

Farmers are unable to purchases inputs for the crop, delaying sowing, the newspaper reported, with seed and fertilizer sales down.

The result could be a lower crop due to the delayed planting, as the ideal window for the sowing is rapidly closing.

Pressure on palm

But the move is bearish for palm oil, of which India is the top importer.

Reuters reports traders in Malaysia have seen cancellations and delayed orders from India, due to lack of liquidity.

According to Reuters, trading expect a 20% drop in crude and refined palm oil imports in December due to the demonetisation.


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