08 Jun 2016
The GFMS (metals) and Lanworth (agriculture) research teams at Thomson Reuters combine forces to forecast gold demand in India, based on expectations for monsoon rainfall.
By Sudheesh Nambiath, Adam Turchioe, and Libin Zhou
Nearly one-third of Indian gold demand comes from farmers, making them the world’s largest consumer.
However, how much gold they can accumulate in a given period is largely determined by fluctuations in their income, which relies heavily on the monsoon.
This article presents our forecast for this crop year (September 2016 to August 2017), based on expectations for monsoon rainfall during the upcoming June to September period.
Below normal monsoon is extremely unlikely in 2016
The Indian monsoon is one of the most prolific monsoon systems on earth, meaning the potential socioeconomic impacts associated with a failed or intense monsoon are huge.
This year, we forecast monsoon rainfall to be 4% above normal, following two years of below normal rainfall. Kharif crops (rice, maize, sorghum, etc) will be the first to benefit from improved rains, with rabi crops (wheat, barley, mustard, peas, etc) following suit once plantings begin after the monsoon season.
Crop production expected to improve
A weak monsoon, and the resulting soil moisture deficit, substantially lowered crop production in the past season.
Actual food grain production in 2015/16 may be even lower than current estimates; severe drought earlier this year indicates that winter wheat production could be as low as 87-88 million tons. This would be 6-7 million tons below the Ministry of Agriculture’s most recent estimate of 94 million tons.
The USDA estimated India wheat production at 88 million tons in its May WASDE report. We expect that the India Department of Agriculture will lower its 2015/16 India food grain production in its 4th Advance Production Estimate in July and August.
If the monsoon is indeed normal to above normal, widespread drought will be alleviated and soil moisture will be recharged. Adequate monsoon precipitation will likely raise crop planted areas and yields from last year, when severe drought delayed planting and resulted in substantial area and yield losses. Crop production will likely rebound from the prior two years.
Indian gold expenditure expected to increase 11% in 2016/17 crop year
Over the past two years, below normal monsoon rainfall has weighed on gold consumption from households dependent on farming income. Consumption from this segment is not sensitive to gold price levels, but exhibits high elasticity to income levels.
This income sensitivity is evidenced by increases in nominal gold expenditure during years of normal or above normal monsoon.
In 2015/16 – a year of drought – farm revenues were reduced by 1% in nominal terms, and 3% in real terms. The impact of the weak monsoon was offset by an average 4% increase in Minimum Support Prices per unit of crop output.
Based on our expectations for monsoon rainfall and its impact on crop production, we expect crop revenues to rise by approximately 5% this year. This forecast assumes crop production will average levels realised in 2012 and 2013 and that the Minimum Support Prices for crops remain unchanged from last year.
We ran a regression analysis on the raw data of crop revenue (x) and gold expenditure (y) for the series starting 1985/86 to 2015/16. Important to note is that 2015/16 data is limited to third advance estimates of last year’s crop production released by the Ministry of Agriculture on 9th May.
Based on crop estimates, we have estimated that gold expenditure declined to the lowest level in five years. This was evident in the first quarter 2016, when gold demand hit its lowest level since the first quarter of 2009.
Given the forecast for a near or above normal level monsoon this crop year, we estimate that, in nominal terms, demand from households dependent on rain-fed crops will increase by 11% in the 2016/17 crop year to its highest level in three years.
With 40 to 60 tonnes of additional buying emerging from agricultural households, which accounted for 315 tonnes of Indian demand last year, demand is expected to improve on the back of an improvement in monsoon conditions.