amarharolikar's  Instablog

Global corn prices are showing a sharp rise just as they did in 2008, this time on expectation of a poor yield in the U.S. Take a look at this 20-year chart of U.S. spot prices (from Vix & More). U.S spot prices for corn are up nearly 30% over the past month.

In India, the prices are up about 15% over the past month (see the NCDEX chart below - Maize Feed, Davangere).

As far as India is concerned, the largest impact would be on the price of poultry as more than half of the corn produced in the country is consumed by the poultry sector. With the poultry market growing by about 20% annually, as long as corn prices remain high, that would continue to put additional pressure on poultry prices.

What happens if domestic prices continue to rise? Given that India exports a large part of its corn, my sense is that government will intervene to arrest the price rise, most likely by banning exports. That is exactly the kind of thing it did during 2008, when corn prices were showing a sharp rise.

The only strange part in this whole phenomenon is that global prices are rising even as the International Grains Council is expecting a higher global production this year. Here is what it says in its report of July 2, 2012:

"Overly hot and dry Midwest weather conditions have led to a downgrade in the U.S. maize production forecast, with projected yields now likely to be below the ten-year trend. Despite the downgrade, the crop is still forecast at a record 350m. tons, although the risks are to the downside. However, projections for some other countries, including China and India, are increased this month. Consequently, world maize production is still expected to rise by 5.7% to 917m. tons in 2012/13."

It almost seems as if corn prices have been driven up more by speculation than by lower yields in the U.S. And just as in 2008-09, when the price dropped sharply, there's every likelihood of the same happening this time.

Either way, although higher domestic corn prices would impact poultry prices and consequently food inflation, the overall impact on the economy would be fairly limited.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

A research report from a macroeconomics consultancy firm called Capital Economics seems to be getting some degree of visibility in India's media. As per news reports, the firm attributes the recent slowdown in India to governance issues, estimates sub 5% GDP growth for Q1 and believes no reforms will happen till the 2014 general elections.

Based on all my analyses of the past one year, I believe Capital Economics might have got some of its economics wrong. I don't mean to pick on Capital Economics in particular, but this is another example of shallow analysis by a set of experienced folks.

Growth slowdown caused by governance issues?

Let's take a look at its first point attributing the recent slowdown to governance issues. That seems a little farfetched, when seen in the context of the strong growth that has happened in the past five or six years, a period marked by an acute lack of governance. The slowdown of the past few quarters is purely short-term business cycles playing out, driven primarily by a slowdown across the globe.

Take a look at India's GDP chart below, which shows the absolute value of GDP at fixed prices over the past seven years. The chart clearly shows that the long-term trend has been pretty much intact, though interspersed with short-term cyclical slowdowns. The key point to note is that year-over-year growth rate charts are not always the right way to interpret these numbers.

Sub 5% GDP growth in Q1 2012-13?

As for sub 5% GDP growth in Q1, I really don't have a call on such a short-term and error-prone number. But even if the year-over-year GDP growth was less than 5% and in, say, the 4.5% range, the long-term trend would remain intact. All that it would mean is that there was a short-term cyclical slowdown.

No reforms till 2014?

Regarding Capital Economics' third point about the reform process remaining stalled till the 2014 elections, they might have got this one horribly wrong. In a previous analysis I had argued how, with Mamata sidelined, Mulayam in its fold and Pranab as president, Congress has not had it so good in many years. Mulayam provides the numbers in parliament to pass some reform measures and Pranab was seen as somewhat of an anti-reformist. My sense is that the reforms process will pick up steam as the elections come closer, in order for the government to showcase its developmental story.

Capital Economics past record

Let's now take a look at Capital Economics' past forecasts. Here is an excerpt from a Bloomberg story dated Dec. 7, 2008:

"Capital Economics' Khan expects India's $1.2 trillion economy to grow 5 per cent in 2009, less than the 6.3 per cent forecast by the International Monetary Fund."

In 2008-09, actual GDP growth was 6.8% and the forecast was made when half the year was already over and they still got it horribly wrong!

Low-quality research from top-ranking firms

In my previous analyses, I have been very critical of the quality of research at some of the top firms including Goldman Sachs, Morgan Stanley, Fitch and S&P's. I guess Capital Economics falls in the same category, though it is in no way considered a "top" research firm.

But good research also exits

Among the top research firms, I have found JP Morgan India (Kalpana Morparia?) to have a very good sense of India's long-term growth story. They had the courage to publicly talk about their confidence in India's long-term growth trend during October 2008, at the time Nifty was at around the 2,500 level. They continue to stick to their stand on the long-term growth trend for India.

There is a nice analysis in the New York Times from Vivek Dehejia. He is among a handful of economists who have been able to differentiate between long-term trends and short-term business cycles.

All my detailed analyses of the past nine months have continued to suggest that India's long-term growth story has been very well intact for the past decade.

Related analyses

• June '12: Pranab & Mamata Out, Mulayam In: Reforms on!
• June '12: JP Morgan India: Courageous leader
• June '12: India's Growth Story Intact
• June '12: Interpreting Macro Numbers the Right Way
• June '12: Be Wary of S&P's Ratings
• May '12: Be Wary of Research House Estimates
• December '11: Macro-Technicals Point to a Possible Bottom

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

All the messaging from the Prime Minister's Office continues to point towards only one thing - reforms are on!

In my story last week (Pranab & Mamata Out, Mulayam In: Reforms on!), I pointed out how, with Mamata sidelined, Mulayam in its fold and Pranab as president, Congress has not had it so good in many years. And that meant the reforms process was now on.

In fact, I had pointed this out as far back as May 2012 (Reform Initiative: Mulayam to decide, not Mamata nor Manmohan). This was after Mulayam "pledged" support to the UPA government.

"So what does that mean now for some of the major reforms and other governance measures that have been on the backburner? Many of those measures are likely to go through … Mulayam is expected to be flexible …"

The government's decision to postpone implementation of GAAR-related tax provisions by one year, and a promise to clarify the provisions and remove uncertainties in the minds of foreign investors, was a major sentiment booster, with equity markets going up nearly 5% over the past week.

This was followed by an interview of the prime minister with Hindustan Times yesterday, where the messaging continued. "The India growth story is intact. We will continue to work, as we have been doing for 8 years, to keep the story going," said PM Manmohan Singh. He further said that in the short term the plan is to focus on bringing complete clarity on all tax matters, control fiscal deficit, revive mutual fund and insurance industries and provide a major push to infrastructure.

This messaging continues with reports that the government might bite the bullet on diesel subsidies, with partial decontrol of diesel prices after the presidential elections.

So why had the reforms process stalled for so long? There was a nice story in FirstPost a few days back (PM-Pranab-Sonia hiatus was key cause of policy paralysis), which captures some of the background dynamics that might have contributed to this situation. Here's what it says:

"It seems the PM wanted to keep the finance ministry with him even in 2004 but was dissuaded from doing so by the party. So Chidambaram got the job. When Chidambaram was removed in 2008, Pranab Mukherjee got it. After UPA's resounding victory in 2009, the PM made another bid for the job and failed."

"What this history makes clear is that Dr. Singh was always keen on doing the finance minister's job himself, or getting another economist whom he trusts to do the job for him."

"The gap between the PM and his FM grew widest during the tenure of Pranab Mukherjee, when the latter subtly kept the PM out of the loop. The possible reason is ego: Pranab felt that he was Manmohan Singh's senior in politics. (Mukherjee was FM in the 1980s, when Singh was just a bureaucrat under him.)"

All in all, after a very long gap, there seems to be some real hope that the reforms process is getting back on track.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.