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    Effect of market developments over stock prices for agricultural commodities

    Uploaded Date 01-May-19
    ncdex

    Agriculture commodities, their international and local trade, and market prices lay an influence on their stock prices. The stock prices are dynamic and are influenced by developments at a local and global scale alike. Share market tips and NCDEX tips shared by a knowledgeable stock advisor can be very useful for long term and short term investments across sectors such as agriculture and pharmaceuticals.


    Let us consider some examples of how global and local factors in the agricultural sector lay an effect upon stock market.


    Forecasts by IMD (Indian Meteorological Department) point toward nearly normal rainfall for the monsoon season in India, which typically lasts from April through to September. Worries for a rainfall below normal are hence done away with.


    If we go by the history, we come to realize that stock investors are deeply concerned regarding demand and inflation in the rural areas, but monsoon related news seldom worries them.


    This happened in 2014. IMD made a prediction of rains that were 95% of LTA (long term averages) for April and rainfall prediction for June was further reduced to 93% of LTA. Total rainfall for the phase was lower still, and stood at 88% of LTA. BSE Sensex nevertheless rose by 18.79% for May-September.


    It is since the beginning of 1979 that Sensex data has been made available. There have been 22 occasions wherein the rainfall has been surplus and 14 wherein it has been deficit.


    If we look at the 22 occasions of surplus rainfall, we come to realize that the Sensex yielded negative returns in four of them. In the 14 occasions of surplus rainfall, the Sensex was red on four occasions. 


    It is hence safe to conclude that the relationship between monsoon and the stock markets is marginal and not very significant. Monsoons in India do not exercise a great deal of power over Indian economy.


    There are a number of factors nevertheless which may have a bearing upon agricultural commodities and their stock prices.


    It was recently announced that the waiver which permitted India to import crude oil from Iran despite the sanctions imposed by US in May’s first week would be lifted. This builds a certain degree of uncertainty over India continuing to import crude oil from Iran.


    Export of certain commodities will be influenced with such a development. Iran is an important importer of Basmati rice from India. As the sales of the product are affected, it may lay an influence over Basmati rice industry as well.


    As India stops importing crude oil, it may even affect the pending dues for shipment of Basmati rice which have already been made. It lays an effect on financial position of such exporters. The effects may further extend to entities who do not export to Iran.


    Prices of Basmati rice are likely to reduce globally with stoppage of exports to Iran. Further, prices of raw materials such as basmati paddy have risen in recent times. Exporters have hence been maintaining a high cost inventory. Reduction in prices of Basmati rice does them no good. Another important influencing factor over prices of Basmati rice will be Indian government’s trade policy with Iran.


    The US government had earlier granted waivers simultaneously to eight of the countries. This permitted them to continue importing crude oil from Iran. A condition disallows direct funds transfer to Iran. In order to comply with the same, the refiners who import crude oil from Iran deposit payments in escrow accounts in IDBI and UCO banks.

    The payments are then released to exporters who export commodities such as agro products and pharmaceuticals.

    As uncertainties over payments were normalized, export of basmati rice to Iran was boosted to Rs. 3680 crores following Dec 2018.


    US government has nevertheless announced that in first week of May, the waiver will be lifted. India is seeking an extension for the waiver. If the same does not materialize, India might no longer export crude oil from Iran.


    In case exports from Iran are insufficient, recovery of payments for exports of commodities such as Basmati rice will be uncertain, and this is just one of the factors which affects share prices of agricultural commodities.