As monsoon rains fail to materialize, water shortages are raising questions about the outlook for India’s agricultural production and potash demand.
More than 660 million Indians went without power earlier this week as erratic rainfall failed to produce enough water for the country’s hydroelectric dams, the source of one-quarter of the country’s power. While the blackouts are the product of a number of factors, insufficient rainfall is becoming a serious concern for the country’s agricultural sector, which constitutes 18 percent of India’s gross domestic product.
More than 320 districts in the country’s northern agricultural region have received rains described as “deficient” (below 90 percent of normal) to “scant” during the June to September season when the country is supposed to receive 75 percent of its annual rainfall. Water shortages are forcing many of India’s farmers to use electric pumps to irrigate many of the country’s key crops.
India’s farm minister, Sharad Pawar, has begun offering Indian farmers support. Pawar told the press that “[a]ll regions having 50 percent deficiency in rainfall will qualify for diesel subsidy which will be borne by both state and central governments on 50:50 basis.”
The Economist noted that climate experts who met this year in the Indian capital of Delhi suggested that the country could see more frequent floods and droughts, longer consecutive dry days within monsoons, more rapid drying of the soil as the land heats, and increased chances for the spread of plant and animal diseases.
While the likelihood that these predictions will prove true remains unknown, it is certain that current water shortages will have an impact on India, one of the largest consumers and producers of sugar, rice, cereals, oilseeds, and pulses, not to mention the potash required to grow them.
India’s potash demand
In 2009, India experienced a significant drought that greatly reduced its agricultural output and led to a surge in food prices and export restrictions. These events carried significant impacts for agricultural and potash markets.
Current water shortages in India are coinciding with record heat and dryness across North America, which has weighed heavily on agricultural output expectations and global cereal prices. News of spiking global cereal prices has also driven shares of global potash producers higher as investors are betting that heavy potash applications will make up for the fall in crop output.
PotashCorp (TSX:POT,NYSE:POT) CEO Bill Doyle has been vocal about his view that current droughts will mean increased potash purchases in the coming months.
“[The drought] reinforces the importance of farmers focusing on the things that can be controlled,” Doyle told analysts and investors. “Soil fertility is at the top of that list.”
India has been a big part of the recent potash story as government subsidies for potash and phosphate, along with farmer fertilizer demand, have been reduced. Indian farmers have struggled to afford potash-based fertilizer as the depreciating rupee struggles to keep up with rising potash prices, leaving a significant gap in recent global potash purchasing.
Despite these factors, potash contract prices continue to grow stronger, averaging $505/MT compared to $445/MT a year ago, according to Green Markets data referenced by Bloomberg.
India has no significant supply of potash and engages in contracts with foreign importers like Canada’s Canpotex and Russia’s Belarusian Potash. India imported 3.9 million tons of potash last year, down from 6.3 million tons the previous year.
India’s second-largest fertilizer producer, Rashtriya Chemicals and Fertilizers, last week announced plans to begin buying potash resources and mines in countries like Canada in hopes of securing more stable supply.
In the meantime, Minister Pawar is focused on the here and now of supporting local farmers. He commented, “[w]heat and rice stocks are quite comfortable but there would be some shortages in cereals.”
The impact on agricultural markets appears to be playing into PotashCorp’s projections, as Doyle stressed the importance of preparation for not-so-rainy days.
“We expect the remainder of 2012 — and the years that follow — will bring a sharp new focus in the world to the necessities of food production and proper crop nutrition. We have prepared for this and will be prepared to deliver.”
Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company or commodity mentioned in this article.