In anticipation of this year’s Southwest Monsoon in India, many agricultural commodity risk managers are closely tracking the daily weather forecasts. Now that we are in the second week of June and the onset is slightly behind the “normal” schedule, there is a heightened level of uncertainty.
The map below from the India Meteorological Department (IMD) shows the progression of the northern limit of this year’s Monsoon vs. normal; by this date, the Monsoon has typically progressed to reach much of Karnataka and Andhra Pradesh. Given last year’s rainfall deficiencies, coupled with the recent heatwave which has reportedly been responsible for over 2,200 deaths, the importance of the annual flow of moisture to the subcontinent in 2015 takes on a special significance. In addition, the behavior of the Monsoon will directly affect the Indian agriculture sector, but the effects go beyond physical commodities. A healthy Monsoon means more agricultural production, leading to more liquidity into ancillary markets, and stimulating overall economic output.
The IMD has forecast another year of deficient rainfall for India, in part due to the developing El Nino conditions, which may serve to limit the availability of moisture for parts of Southeast Asia. However, there are other groups (notably Skymet) who are publicly challenging the IMD view, calling for a better distribution of Monsoon rains this year. Skymet’s methodology cites physical drivers such as the positive phase of the Indian Ocean Dipole (IOD), which correlates with conditions supporting better Monsoon convection and flow. Looking at both discussions, there are certainly plausible physical reasons to support both Monsoon scenarios. Any forecast, by nature, contains uncertainty, so regardless of which forecast camp one may belong to, additional tools are needed to assess (a) the direct weather risk, (b) the commodity value at risk and (c) the broader economic value at risk associated with Monsoon rains.
As we discussed in a recent post on sugar cane, the world’s physical sugar balance has been in a surplus situation for the last five years, but through a combination of weather events and market forces, excess supply could be in jeopardy for both this year and next (2015/16 and 2016/17). If Monsoon rains are deficient in India (as well as China, Thailand and Australia, which are all important sugarcane origins), we could see the supply-demand balance reverse, supporting higher prices in the months to come.
While seasonal forecasts can, and should, be used as a guide, assessing the seasonal progression in real-time, by crop and by geography, is a more prudent means to assessing crop and price risk. With aWhere’s global agricultural weather platform (see example from a sugarcane region in UP, India below), commodity risk managers and analysts can focus on their specific areas of interest to monitor and assess weather, crop potential and risk as it applies to their portfolio. Rather than wait for a forecast to verify, a proactive means used to manage agricultural risk will put the engaged user in a position to take advantage of market moves “before the weather becomes the news.”
Please continue to follow aWhere as we prepare to launch a series of tools in the coming months to help agricultural practitioners and risk managers plan and respond to whatever Mother Nature decides to throw our way.