Delayed rains and a heat wave over northern India have raised worries about whether rice production and exports from the World’s No. 1 supplier will dry up this year.
But the bigger worry is not poor weather conditions, but rather a war-like situation near Iran.
Monsoon rains have arrived over southern India, albeit with a week’s delay, and therefore it won’t be too long before they sprinkle their bounty over India’s northern grainbowl states. As it stands, northern Indian farmers in recent years have gravitated towards hybrid rice crops that require less water and cuts the time period between sowing and harvest by10-15 days.
There is of course the worry that rainfall distribution may not be even through the 4-month monsoon season. However, dams and reservoirs are well stocked in northern India following unusually heavy snowfall, which means the impact on crop irrigation may not be sufficient.
It won’t be surprising if India harvests another bumper rice crop, but the bigger problem for exporters may be what to do with it as exports to Iran — which accounts for 30% of shipments — appear in danger following a collapse in crude oil imports since last month.
Why is this hurting rice shipments?
In recent years, payments against Iranian crude sales to India were being parked in an Indian bank account and this was in turn being used for paying shippers of Indian goods including rice to India.
In short, it has been functioning as a barter system to avoid the hassles of settling payments through international channels, especially since Iran has been subject to western sanctions.
This mechanism was working fine for the rice trade as India and 7 other countries were exempted from US sanctions on Iran when they were re-imposed last October.
However, the exemptions for Indian purchases of Iranian crude has ended since last month, resulting in a collapse of the imports. This would mean that whatever Iranian money is lying in Indian accounts will dry up soon and, therefore, it won’t be possible to finance Indian rice exports to its largest customer.
The lack of a payment mechanism to Iran has already seen rice prices of exported varieties drop by 5% within a month.
But the bad news does not stop there.
Following a series of attacks on oil tankers and oil facilities near the strategic Straits of Hormuz, a war-like situation is developing including Iran and Saudi Arabia, both of whom account for half of India’s rice shipments.
There is also the danger of a wider Middle East conflict, which together accounts for the biggest and most lucrative market for Indian rice.
If a war indeed breaks out, some of the countries may in fact stock up more rice as emergency supplies.
But given the financial and logistical complications, the supplies may not be drawn from India. In the very least, the atmosphere will be of huge uncertainty. Indian rice exporters, therefore, may be better off praying to the Gods of War than the Rain God in the near future.
Bandini Chatterjee, the columnist, is an independent analyst focusing on the ups and downs of the commodity markets.