Commodities have firmly entered the Indian investor’s psyche. And the flood of liquidity expected in 2011 will open up an unprecedented opportunity
In banquets across India, it is customary for the diners to chew on cumin (jeera) after the meal to benefit from its digestive powers. But for a bunch of commodity traders in November 2010, it was indeed the main course.
On the 18th of that month, rains lashed Saurashtra, the main cumin growing region in India. It was clear that 2011 would be a year of cumin shortage; prices would rise. But the traders hadn’t waited till the rains came. They had considered weather forecasts and had bought cumin cheap. A week later, they were counting their fortune.
The incident showed that India’s commodities market was now processing information not just quickly but in anticipation of events. “Commodity traders have become sharp and mature and are starting to behave like their equity brothers,” says Kunal N. Shah, head of commodities research at brokerage Nirmal Bang.
History will record 2010 as the year commodities entered the mainstream of investing in India. From a bunch of insiders controlling supply as well as prices, the market has evolved into a complex, active and information-hungry universe of a range of investment options. Dipak Sheth, who has engaged in physical trading of commodities for 35 years, acknowledges the change and believes that buying commodities online is the ‘new sunrise industry.’ “Physical trade needs storage facility and a lot of logistics background,” he says. “But investing in commodities through futures or spot markets is convenient, easier and cheaper. Internationally also, commodity and debt markets are much bigger and have more investors than equity markets. India will also follow the same trend.”
While the Indian commodities market is still largely a trading arena dominated by short-term calls and volatility, it is possible for the prudent wealth-builder to partake of some of those gains in 2011. Here’s how.
Agri Commodities
The slow-moving US economy and the Federal Reserve’s favourite ploy of throwing money at all problems have pushed down the dollar’s value. As the currency remains weaker, real assets are gaining in value. In India and China, which account for a third of the world’s population, demand for food and other commodities is rising steadily. The combination of all these factors is bound to lead to an increase in agri commodity prices in the New Year.
The biggest opportunity for investors lies in crops where carry-over stocks from the last year are low, the harvest next year is expected to be poor or the demand is rising more than supply. “It is one area where most of the volatility comes from the supply side. Everyone knows that with growing population and change in consumer profile, demand for food will only increase,” says Madan Sabnavis, chief economist at Care Ratings. But what makes them volatile, he explains, “is the vulnerability to supply shocks in the form of climate.”
Already, excessive rains in parts of India and Australia, frost in Russia and dry weather in South America have brought volatility in prices of spices, rubber, soybean and wheat. In particular, pepper and soybean are good opportunities as the tight supply will not be able to meet demand growth globally.
Avoid commodities like rice, wheat and sugar. These are regulated by the government and may be banned from the futures market when the whim hits the wise men and women in Delhi.
(This story appears in the 14 January, 2011 issue of Forbes India. To visit our Archives, click here.)