Financial Sense Online:

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What is not being adequately discussed is the loss of rice production in India due to the failure of the monsoons. India, with more than 1.1 billion people, has a near dysfunctional system of providing water to agriculture. That ramifications of this dire situation are made more apparent when the monsoons fail. A significant portion of the Indian Agri-Food harvest will be lost this year due to the water situation. And note, rice and sugar are not produced in factories, but must be grown in a field. Once part of a crop is lost, it is permanently lost. Not till a year later will a new crop be available, unlike the production of a factory.

India will likely be forced to enter world grain markets to make up the shortfall in domestic production. Unfortunately, the global grain bins cannot supply unlimited amounts of grain at today’s prices. An important bottom, therefore, is being put in place in global grain prices.

Many do not understand that the global Agri-Food network is much like a Rubik’s Cube. A change of one block influences all sides of the cube. The same is true with global Agri-Foods.

My comment: This is something to follow in both the short and long term. In the short term the worst drought in India in 80 years is going to force India to enter the world grain market to buy sufficient grain for its people. India will buying into a market that is already at near record low inventories. Depending on what happens with harvests in the US and how much grain India buys I suspect grain prices may be going higher.

In the long term India has a serious water problem. The Indian government gives farmers free electricity to run irrigation pumps. As the water is essentially free the farmers have no incentive to conserve or use more sustainable irrigation techniques. Consequently they are pumping water from rapidly diminishing aquifers that have taken hundreds if not thousands of years to fill.

John Polomny
The Real Deal