FMCG: No rain but no pain, yet

7 Sep 2023 , 10:19 AM

With India witnessing its driest August in the last 122 years, there has been an increased debate around the potential impact on FMCG consumption in FY24. Analysts of IIFL Capital Services analysis suggests that a sub-par South-West rainfall in one year, by itself, is unlikely to cause a meaningful dent in major cereal production, a spike in inflation or a deceleration in FMCG growth. However, it may dampen the consumer sentiment, delaying the anticipated recovery in volume growth. Factors such as power availability and the North-East monsoon need to be carefully monitored. 

CY23 likely to be a year of large rainfall deficit: 

Rainfall recorded in August was 36% below the long period average (LPA) — resulting in the driest August in the last 122 years. Cumulative rainfall till August has been 10% below normal; with the impact of El Nino prevalent, September is also likely to witness a below-normal rainfall. Therefore, it is likely that the overall South- West monsoon in India will finish more than 10% below LPA – only the sixth instance in the last 23 years. 

Impact on crop production: 

Analysts of IIFL Capital Services analyse production of the major crops in India – rice and wheat – over the years. Both rice and wheat production suffered a meaningful decline in three out of five instances of significantly below-normal South-West monsoon. However, these instances occurred primarily in the previous decade (2000-2010); crop production has been largely stable in recent years, even in instances of large deficit in the South-West monsoon. Analysts of IIFL Capital Services believe that improvement in factors such as irrigation and power supply have resulted in shielding the impact of low rainfall on crop production, in recent times.

Real agri GDP is more impacted: 

Real agri GDP growth in the five years of significantly below-normal South-West monsoon has averaged a decline of 1.2% vs an average of 3.3% growth in the past 23 years. Real agri GDP growth has been impacted in all the five instances of significantly below-normal monsoon that have occurred in the past 23 years. While rice and wheat production are relatively less impacted — crops that are largely rain-fed such as oilseeds and pulses — are likely to suffer more due to deficit monsoon. 

No visible impact of poor rainfall on inflation: 

There is very little correlation between overall food inflation (CPI) and South-West rainfall performance over the years. Also, buffer stocks of rice and wheat at 18%/27% of annual production are at a reasonably healthy level. Further, government has displayed a very pro-active approach to managing inflation (banning non-basmati rice exports, increasing export duty on onions, etc.). These factors are likely to prevent a spike in food inflation in the improbable event of low cereal production. 

FMCG growth impacted in second consecutive year of sub-par rainfall: 

In the past 23 years, there have been only two instances of aggregate FMCG growth decelerating – FY03/16, coinciding with periods of significantly below-normal South-West monsoon (five instances in past 23 years). In FY16, the slowdown was broad-based across most companies, given that it was the second-consecutive year of South-West monsoons being significantly below normal. In FY10 too, there was a slowdown; however, it was more due to the price war between HUL and P&G rather than poor monsoon.

Conclusion: 

Factors such as improved irrigation coverage, buffer stocks, pro-active management by government, among others, are likely to limit the impact of a significantly below-normal SouthWest monsoon – an event that looks increasingly probable currently. However, this could serve as a sentiment dampener in the current environment of an already-subdued volume growth, delaying the expected recovery. A significantly below-normal rainfall for the remaining year (including North-East monsoon) and a volatile power situation could also compound matters.