Don’t Ignore Ancient Wisdom in Predicting Monsoon, Drought

Monsoon prediction has long been a touchy and sticky issue in India. Monsoon has price implication on commodities as well as on the perceived health of the overall economy. Monsoon is the greatest single factor in Indian agriculture and thus myth impinges on it as well.

According to legends, Vritra (personification of drought) kept the waters of the world captive. He was killed by Indra (Lord of Heaven) by destroying all the ninety-nine fortresses of Vritra before liberating the imprisoned celestial rivers.

Humans have always wanted to predict the future. Never this has been truer than when it comes to the weather. The difficult part is in getting the forecasts correct. There are different criteria between long-range and the shortrange forecasts. The information available in a longer term is much more of the trend variety, so the temperatures will be ‘above average or below normal’ or ‘a heat wave or a cold wave’. It’s nothing specific as in the short-range. The department of meteorology uses all the internationally-approved parameters as well as cutting edge technology. The state-of-the-art Doppler S Band radar in Mumbai, costing around Rs 10 crore, does not have many expert interpreters. A nation which has spent thousands of crores of rupees on capital-intensive equipment still looks to experts like fishermen to spot the altered behaviour of fish to predict the rains.

The farmers continue to rely on the age-old almanac (panchang) to predict the local rainfall. It is not only the challenges to dissemination of forecasts (in absence of information delivery mechanism) but the ambiguous forecasts like ‘medium to heavy rainfall is expected around West Coast’ leaves a question mark on the veracity and utility for the local farming community.

The classical Indian almanac gives the calculations that enable many people to predict bi-weekly average rainfall. Though its correctness has often been denounced by the modern meteorologists, however, the high level of the usage in rural and semi-urban India cannot be undermined. In the ‘panchang’, the lunar year has been considered with every fourth year having thirteen months to adjust to the earth’s natural year. Various stars, planets and constellations in the sky are divided into 27 parts, called the nakshatras. Every nakshatra cannot be located easily like a zodiac sign because it is a part of the sky as seen only from a particular point on earth. Of the 27 nakshatras, nine are during the monsoon, and are called the monsoon nakshatras. Two important treatises by Sage Varahamihira called ‘Brihatsamhita’ and ‘Panchasiddhantika’ gives the details of how the calculations are done and the principles used in formulating predictions.

Anand Agriculture University (AAU) scientists are conducting a study to see if these movements have an impact on the occurrence of rains. The study aims to blend astrology and meteorology to predict the quantum of rainfall in a particular year -- whether it will be a good monsoon or a drought year. AAU has already distributed the questionnaires and the almanac to ‘sarpanchs’ and ‘talatis’ of the 18,000 villages across Gujarat. They have been asked to fill in details like the quantum of rainfall and how long it rained, on a daily basis in the calendar and reports it monthly to AAU. The daily rainfall data received from all villages as per the astro-meteorological calendar will be collected and compared with 100 years of rainfall data of 200 rainfall stations across Gujarat. AAU will then study and analyse as to what extent does astrological movements affect rainfall.

Over the last decade, the monsoons have become more and more erratic. In spite of using the 16 parameter model for long-term rain prediction, the forecasts are going exceedingly haywire.

Published in The Economic Times 

Commodity Markets Lack ‘Good Intentioned’ Credit Flow

Cash markets in commodities are often marked by price opacity and credit flow constraints. Market modernisation planners often argue to bring price transparency and free flowing credit into spot market -- a very noble cause with a perfect theoretical underpinning.

The lack of “good intentioned” credit flow into the commodity market has also been constrained by limited access of spot markets for the financial institutions. The market modernisation plan implementation will bring in the national common market perspective to the country.

In contrast to financial commodities markets, which are tightly scrutinised by national watchdogs, the physical markets are largely unregulated. The industry relies on common law and on private pricing agencies for price discovery. Even, The International Organisation of Securities Commissions (IOSCO) has told G-20 that physical commodity markets were beyond the jurisdiction of most regulators.

Commercial speculation in agriculture has traditionally been used by traders and processors to protect against shortterm price volatility, acting as a sort of price insurance while helping to set a benchmark price in the cash market. The non-traditional traders who are not interested in the commodities themselves have increased the interdependence between commodity and financial market in the West.

A possibility exist that if not regulated properly, by making the spot window available nationwide the localised commercial speculation will get a chance to translate into a larger financial speculation in the physical space. The increasing demand and at times sudden withdrawal by non-traditional traders is considered by many, to have influenced the demand and supply fundamentals.

If the cash market is opened on a nation-wide scale, the buyers are likely to get multiple location windows to buy. Some argue that the seller producers due to location specificity and a low withholding power tend to have naturally reduced bargaining capacity. The proponent of the electronic markets may argue on the contrary that the sellers get to sell the produce nationwide. Good logic, however, we must recognise that the severe impediments like poor digital-infrastructure, information asymmetries, limited access to affordable credit, weak institutional support and globalisation of supply chains with rising barriers for small producer constraints the producer-seller. Taken together, they all represent a low bargaining capacity. A transaction between unequal cannot be called balanced only by mere increase of virtual geographic space.


Agricultural producers often sell a significant part of their crop soon after harvest in order to obtain cash to cover expenses and other financial obligations. At that time, the prices of the harvested products are most likely lower than later in the season. With efficient financing, farmers do not need to sell their product immediately after the harvest to obtain cash. If goods (in storage) can themselves become a vehicle for obtaining credit, pressure to sell will be greatly reduced.

An electronic cash market can act in a broader range of ways to stimulate trade in the commodity sector. This may be through the use of cash or ‘spot’ trade for immediate delivery, forward contracts on the basis of warehouse receipts or the trade of farmers’ repurchase agreements (repos). The extent to which prospective enhancements are delivered in large part depends on the choice of services offered and the strategic priorities that are pursued. The access to ‘bridge financing’ will facilitate in reducing bargaining inequality in the transactions. 

Published in The Economic Times

Need a Standard Solution for Insuring International Commodity Traffic

During the transport or storage of commodities, the cargo is exposed to various risks, depending on the type of commodity and means of transport. There are no standard solutions for insuring international commodity transactions. Each transaction is more or less unique. 

Then there is the ongoing impact of piracy which, while centered in Somalia, is again spreading to other parts of the world. Piracy restricts free trade and has direct implications for vessel operators and their crews, cargo owners, shippers and insurers. The consensus of opinion is that the menace of piracy will be around for a long time. Discussions have now started to focus on shipping and insurance.


The cases of Somalia tend to follow a pattern. The ship crew and cargo of commodities are taken to Somali waters and detained there. The hijacker’s then demand a ransom. Typically the pirates ask for $3-4million and settle for a ransom of about $1-1.5 million. The ship owners usually control the negotiations via their professional negotiators and pay the ransom at the first instance. The negotiations usually take some time, between 6-8 weeks being the norm before the ship, cargo and crew are released. The hijackers seem to be more interested in the ransom money than trying to sell the cargo or ship.

Sometime back one large vessel and the crew were captured at Gulf of Aden and negotiations started shortly thereafter. The owner of the cargo (a large commodity trading house) argued that the vessel capture has irretrievably deprived of the cargo. Therefore, the cargo becomes an Actual Total Loss (ATL) under Marine Insurance. Alternatively, the trading house filed for Constructive Loss (CTL) on the basis that the actual total loss appeared to be unavoidable so the cargo had been abandoned. An ATL requires that recovery is in fact impossible.

Within a month of the vessel being captured, the owner of the cargo gave a notice of abandonment of the cargo to the insurance company. Just ten days later the ship-owner paid a ransom and secured the release of the vessel and the crew. The vessel arrived at the discharge port almost nine weeks after the hijacking and the cargo was discharged undamaged. By this time the price of the commodity had moved. 

Subsequently, the insurance claim filed by the trading company reached the judicial quarters. It was pronounced in the judgment that the trading company had lost only possession and not the property of its cargo. Therefore, the claims are not admissible. The ransom payments are considered illegal. However, the ransom payment under this case was considered as recoverable as sue and labour expense. This throws a wider issue whether a depositor having insurable interest in commodities should abandon a cargo or wait till the carrier/custodians bow to the pressures of ransom payment. Is ransom payment not contrary to the general standards of public policy? 

On similar lines if a vehicle in India, carrying commodity is hijacked at any of the disturbed areas, should the owner of the good or the transporter pay the ransom amount and charge it off as recoverable labour expense or file a claim under an insurance cover? 

Published in The Economic Times