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Analyst Corner| Agrochemicals — Rainfall unlikely to impact demand


By Prabhudas Lilladher

Skymet weather expects 2019 monsoon at 93% of LPA impacted by devolving El Ni o. We believe that the timing and spatial distribution of rainfall spread across all four months hold more significance and from that perspective, it is unlikely to materially impact the agriculture production or agrochemical demand at this juncture as rainfall is likely to be below-normal in July and normal in August/ September (v/s deficit in June @77% of LPA). Post-emergent herbicides (~40% of herbicide consumption) may see some impact in demand as deficit rainfall in June may lead to lower growth of weeds. However, normal monsoon in August/ September may lead to higher pest infestation/disease occurrence resulting in higher consumption of insecticides and fungicides.

While the domestic agrochemical market continues to deal with the vagaries of monsoon, exports have grown by 17.4% in volume and 22.8% in value y-o-y for the agrochemical industry YTD 11MFY19. Hence, we continue to remain positive on companies with sizeable exports/international business like PI Ind and UPLL, given their high-revenue growth visibility and consistency in performance. We also like DAGRI and INST but their fortunes are entirely dependent on how the monsoon pans out in India.

Skymet weather expects 2019 monsoon @ 93% of LPA, i.e, below normal, impacted by devolving El Ni o. It expects probability of occurrence of El Ni o to be ~80% during March May which would be dropping to 60% for June-August. Skymet expects El Ni o to be declared anytime now as moderate El Ni o conditions are prevailing over the Pacific Ocean. However, Indian Ocean

Dipole (IOD), which currently is in neutral phase could turn positive during the monsoon season. Positive IOD is generally associated with higher rainfall.
Timing and spatial distribution of rainfall (well spread across all four months) holds more significance from the agriculture and agrochemical consumption perspective than the absolute count of rainfall. Monsoon is expected to be in deficit only in the month of June @77% of LPA. Rainfall in July is expected to be marginally below normal rainfall @ 91% of LPA, while August/September are expected to be a period of normal rainfall (102%/99% of LPA). At this monthly precipitation breakup, we are likely to follow a mix trend of FY16 and FY17.

In case of inadequate rainfall farmers defer sowing by ~15 days and/or switch from long duration crops to short duration crops. We expect similar pattern to recur this year again. Hence, kharif sowing area and the production of foodgrains and horticulture crops are unlikely to change materially as has been the case in FY16 and FY17 as well.

In its outlook on 19 March, 2019, the Bureau of Meteorology had also upgraded its ENSO outlook from El Ni o WATCH to El Ni o ALERT due to weakening of tropical pacific trade winds which resulted in warmer water in the tropical pacific region (Americas) not flowing towards west (Asian-Australian region). This is generating moisture in the tropical pacific region leading to rainfall there. However, the Bureau has also cautioned that current outlook has minimal validity for the period beyond May, and therefore predictions for the latter months should be viewed with some caution.