Editorial Today – Rains, reservoirs and food prices

Issue It is generally believed that a good monsoon keeps food prices in control.

What is the advantage of using reservoir data? It serves as a sort of proxy measure of groundwater levels.

Findings of the study The data partly helps explain irregular years such as 2015 when monsoon rains were deficient.

Impact of other factors on food inflation Minimum support prices (MSPs) in agriculture and Global food prices.

Analysis We now have three ‘variables’ affecting food prices—MSPs, global commodity prices and reservoir levels.

It is generally believed that a good monsoon keeps food prices in control.
But a study has found that there is no simple correlation between the monsoon season (June-September) and food prices. What matters is not the rain, but the reservoirs.

Reservoir not only tell us about rain that has just fallen, but also rain that was stored, especially from non-seasonal showers, which are becoming more frequent with climate change.
It also serves as a sort of proxy measure of groundwater levels.
Reservoirs tell us not just about how much water has been stored, but also how much moisture there is in the soil when it is needed.
They also reflect cost of production directly, given that surface water irrigation (via reservoirs) is cheaper than groundwater irrigation (via mechanical pumps).

Thus daily data on the water stored in 90 of the country’s largest reservoirs were analysed to see if they were associated with food prices.

The data partly helps explain irregular years such as 2015 when monsoon rains were deficient (14% below normal) and yet, food inflation remained contained.
Perhaps it was the sufficient water stock in India’s reservoirs (6% above normal in the pre-monsoon month of May), because of unseasonal rains from a few months before that helped keep food inflation low.
On the other hand years such as 2008, 2010 and 2012 when monsoon rains were normal, but reservoir levels were in deficit and food inflation accelerated.

It is found that reservoir levels in July are most significant.
It is not surprising, because June and July are the important sowing months.
It is also found that July reservoir levels are determined by a combination of May reservoir levels (that indicate the carry-over from pre-monsoon months, especially the remains from prior rain spells), and June and July showers.

In the study many factors were considered but minimum support prices (MSPs) in agriculture and global food prices turned out to be important.
It is found that MSPs, in turn, are explained by rural wages (domestic factors) and crude oil (international factors), given that the two double up as proxies for all other input costs. It means MSP is decided on the basis of what would be the input cost of farmer. For example if rural wages is high then MSP should be high because the cost of input increases as farmers has to give more to labours as wages. Same is the case with crude oil prices. If crude oil price is high then price of all other goods becomes higher and thus input cost of farmer increases.
But it is also known that setting MSPs entails a high level of discretion. As a result, the explanatory power of these relationships is limited.
It is no surprise that global food prices are also important in explaining inflation in India, especially in recent years, when agricultural trade has intensified, increasing the links between domestic and global prices.

We now have three ‘variables’ affecting food prices—MSPs, global commodity prices and reservoir levels. This ‘model’ works well in explaining past food inflation episodes.
Of the three drivers of food inflation, two are at odds with each other. Global commodity prices are rising (both fuel and some food products like sugar), but MSPs have been kept in check (under 5% year-on-year for the key produce such as paddy). That leaves the last candidate, reservoir levels, to determine food prices for the remainder of the year.
This year we are entering the season with a notable deficit in reservoirs (water levels were at 17% of capacity at the end of May versus 27% at the same time last year), early rains will matter much more than before.
In short, rains may not impact food prices directly, but through their association with reservoir levels, especially this year, they are likely to. Sufficient and timely rains are now critical. In fact, every drop will count.

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