With another Diwali round the corner, it’s time to look back and see things in retrospect — how the commodity market has performed over the past one year. According to commodity market analysts, from the point of view of a commodity investor, the past 12 months have represented a watershed period, throwing up plenty of surprises in terms of valuations. Indeed, prices of several important commodities increased markedly, leading to decent returns on investment (ROI). In addition, turnover on commodity exchanges has also increased substantially, especially if one considers the combined turnover figure of all exchanges. Two specific examples cited by those who operate close to the mandi – dhania (coriander) and red chillies. The prices of these two commodities, between the past Diwali and the present festival season, are said to have increased 25-40 per cent.

“The trend may be viewed against recent developments that have impacted prices of foodgrains, oilseeds, sugar, pulses and other edible items, each of which find a crucial place in the list of everyday consumables. Decline in production, a result of the drought in many parts of the country, is the major factor that generally influenced commodity prices,” said Nilanjan Dey, director, Wishlist Capital Advisors.

In the non-food segment (specifically metals), gold and silver were the clear winners. The same holds true for critical metals such as copper and zinc. Trends in this segment again underline the view that commodities can be a good hedge against inflation and volatility displayed by other asset classes.

Dey said for an investor, the two issues that came into focus in the past 12 months are: Higher realisations, leading to better top line of companies, including agriculture commodity players, and increasing ROI in commodities/commodity stocks in absolute terms.

Despite the significant impact of the global financial crisis and economic downturn on all sectors of the economy, agriculture was relatively better off. And it was not without reason. This is because the demand dynamics, such as increasing demand for food, feed and fuel still remain in place, while inventory levels have not built up substantially and is limiting the downside. Therefore, prices of most of the agricultural commodities bottomed out by December 2008 and witnessed a spectacular rally thereafter. In the Indian markets, the price rally was also supported because of the drought in most part of India.

Amar Singh, head of commodities research, Angel Commodities Broking, told FC Invest, “A stronger-than-expected agricultural commodity supply response last year, particularly in developed countries, and much lower oil prices have resulted in significantly lower commodity prices from 2007-08 highs.”

Singh picked up examples of guar seed, turmeric and soybean to drive home his point. “The name golden spice given to turmeric has proved to be true this year. Farmers and stockists have and are minting money from this spice. Lower production of the spice provided this opportunity. Prices skyrocketed to the levels of Rs 8,500 per quintal from a mere Rs 3,500 per quintal. During the peak arrival period — in March–June 2009, prices moved in the range of Rs 3,500 — Rs 5,500 per quintal. This year, we were able to witness spot prices that are higher than future prices. The difference between the spot and future remained at Rs 400 per quintal. The production of turmeric in 2009 projected at 45 lakh bags later got revised to 41-42 lakh bags. Turmeric, being a rain-fed crop, requires timely and adequate rainfall for growth. “This resulted in poor output and yield in 2008-09,” Singh said.

Singh said soybean prices witnessed a sharp rally and touched a high of Rs 2,826 per quintal in July 2008. “From there, prices collapsed by almost 50 per cent to touch a low of Rs 1,517 per quintal in November 2008. Thereafter, prices have rebounded from there and touched again a high of Rs 2,824 per quintal in May 2009. However, higher prices could not sustain themselves on account of higher global oilseeds production estimates and are recently trading as low as Rs 1,933 per quintal.”

Guar complex witnessed a very volatile year 2008 with prices touching a two-year high and also its three-year low driven mainly by macro-economic factors. However, since the start of year 2009, guar prices have witnessed an uptrend, with prices gaining by almost 60 per cent till date. The reason behind the sharp rise in guar prices was the recovery in the global economy coupled with the delayed and deficient monsoons, which led to a drastic fall in guar acreage and yield.

Where do these facts and figures lead us? “In addition to these commodities, we also expect a very positive outlook for most of the other agriculture commodities, including pulses, sugar and rice. This is because below- normal monsoons in 2009 would hit output, thereby creating supply tightness in the coming year. Rising global demand from emerging economies and low worldwide supplies, shifts in world diets, and greater demand for alternative energy would continue to support agriculture commodity prices in the months to come,” Singh added.

Looking from the investors’ perspectives, Dey also is extremely optimistic.

“Looking ahead, the possibility of higher growth (in the quarters to come) may spur fresh investments in commodities. However, investors will want some assurance that entry-level valuations are reasonable enough. Once they are sure of this, investment decisions will be easier to take. There may also be some profit-taking by those who want to liquidate some of their holdings during the festivals, especially because they have succeeded in securing decent gains in the run-up to Diwali,” he said.