El Nino Risks Derailing Nascent Rural Demand Recovery

Fast-moving consumer goods makers are keenly watching the El Nino forecast this year as rural demand remains stressed.

The U.S. government’s weather agency, National Oceanic and Atmospheric Administration, has indicated the possibility of an El Nino—a condition which upsets rainfall patterns due to changes in ocean temperature—to develop in April and become dominant towards the middle of this year.

A long summer with rainfall deficit, as a fallout of the El Nino weather phenomenon, could mean lower sowing and crop yields, hurting farm incomes. And this coupled with persistent inflation, which may have slowed from its peak but remains high year-on-year, may derail the recovery in rural demand, which comprises 36% of FMCG sales.

"The possible occurrence of El Nino condition could spoil the monsoon season and as a result it will certainly have a significant impact on rural demand," Mayank Shah, senior category head, Parle Products told BQ Prime.

"The pace of rural consumption is picking up well in anticipation of a bumper Rabi season in March and April, so we expect volume growth to make a turnaround in FY24 unless there is any impediment. That said, at this juncture, we are only hopeful that the impact of El Nino condition remains subdued this year as it is just one of the factors that impacts Indian monsoons," Shah said.

The last El Nino—Spanish for Little Boy and refers to an event when the warming of Pacific waters affects weather patterns—occurred in 2018. That year, India received below-normal rainfall. Since then, four successive good monsoons followed.

While a good monsoon translates into higher disposable income and higher spending on consumer goods, even a slight delay of monsoon affects demand.

"We have observed that rainfall deficit is one of the major factors that leads to rural slowdown," Abneesh Roy, executive director, Nuvama Institutional Equities, said.

Pan-India rainfall last year was 6% higher than long-term average. Yet, populous states such as Uttar Pradesh, Bihar, Bengal and Jharkhand reported deficit that affected paddy sowing.

"Hence, the El Nino conditions remain a key monitorable that can hinder rural slowdown turn around," said Roy, adding a more reliable picture of what the phenomenon could entail would emerge only closer to April-May.

Just as FMCG companies are beginning to see signs of recovery in rural markets that have been under stress for the past few quarters, an El Nino year has emerged, potentially jeopardizing their progress.

According to market researcher Nielsen IQ, the proportion of dip in rural volume growth has eased for the FMCG sector. It fell by 2.8% in the October-December period versus 3.6% decline in the previous quarter.

Consumer spending was impacted primarily because of inflation, echoed by consumers in the shift to smaller packs, and by manufacturers via grammage reduction. Companies like Hindustan Unilever Ltd., Dabur India Ltd., Marico Ltd. and Emami Ltd., however, are counting on indications of better farm income, better realisation on food, construction services returning to normal and remittances of government to support rural consumption. But now the risks of El Nino could exacerbate a prolonged rural recovery.

"We are hopeful of rural demand reporting a smart recovery on the back of a record farm output and increased government spending," Dabur chief executive officer Mohit Malhotra said in a post-earnings conference call. "Downtrading is a reality in rural for now but in a couple of quarters, we expect rural should come back to its old glorious days as the quantum of inflation moderates."

According to Sanjiv Mehta, managing director & chief executive officer at HUL, inflation has been the biggest contributor in the decline in rural volume growth because the value growth is still present.

"Commodity inflation seems to be moderating from peak levels. With lower inflation, strong winter crop sowing and signs of pickup in farm incomes, it is likely that rural slowdown is bottoming out. The next few months will give us further certainty," Mehta said.

Apart from rainfall, Roy highlighted that a few other factors that need to be monitored for rural recovery are the government’s policies for rural India on free food grains and the job scheme: MGNREGA.

HUL's Mehta also said that another indicator shall be how the market shapes up, which would then be linked to what happens to harvest, and net realisation of farmers and rural wage growth.

Some companies, meanwhile, are expecting to benefit from the extended summer. As soaring temperature sets the stage for higher sales of cold beverages, ice-creams, juices and dairy products, it has prompted firms to increase building of raw material inventories to ensure steady supply.

"This summer looks promising for many of our categories like ice-creams and dairy beverages as we are already seeing early demand trends with rising temperature," said Manish Bandlish, managing director, Mother Dairy.

"In line with demand trends, we have ramped up our sourcing, production, cold-chain infrastructure and invested in asset deployment at customer touch points to ensure shelf strength and cater to any surge in demand."