Tejinder Narang
As on September 1, 2013, India?s total stock of foodgrains, stored and managed by FCI, was 65 million tonnes (mt). At an average economic cost (includes carrying cost of about $100/tonne per annum) of R24,000/tonne (R27,000 for rice and R20,000 for wheat?in a 55:45 ratio), the stock is worth R1,56,000 crore, or roughly $24 billion. The maximum buffer requirement, after considering the Food Security Act, is 34 mt (presumptive on October 1, 2013, according to the CACP discussion paper number 6 on buffer norms). Thus, a surplus of nearly 31 mt, or of R74,000 crore ($12 billion), is well established. The need, however, is to substantially plough back this excess into the national economy.
The question remains, why haven?t we been able to recoup even most of it? Speedy disposal of grains from the central pool has become crucial for the reduction of domestic inflation of cereals, which is averaging 17%, and reining in unsustainable fiscal deficit/CAD, given our potential for export. But the food ministry has repeatedly conceived non-viable proposals for reduction of ballooning inventories while the Cabinet Committee on Economic Affairs (CCEA) has endorsed them. The status quo remains.
Another dampener is that the policy initiative for export of 2 mt of wheat at $300/tonne freight-on-board is bound to fail with the price pegged at approximately 20%, or $60/tonne, above the tradeable value. Not a cent more is ever paid in the fiercely competitive international market. This is mirrored by the fact that attempts in July this year to dispose 8 mt of wheat, including three old stocks (2011-12) at R15,000/tonne in the domestic market (ex-Punjab, Haryana) came a cropper.
Hesitant food ministry?
On August 9, CCEA approved the disposal of 2 mt of wheat through exports at around $300/tonne fob.
Three PSUs under the commerce ministry issued tenders for only 1,60,000 tonnes on September 12, due on October 4, to be kept valid for acceptance till October 14. November 15 has been fixed as the deadline for shipment. Actual shipments could spillover to December?five months shall lapse between announcement of disposal and encashing of such a limited tonnage. Import tenders for 1 mt of urea are wrapped up in less than a week by these very PSUs in consultation with the fertiliser ministry where similar guidelines are applicable. This lethargy gives the impression that the food ministry is hesitant in destocking even though FCI has the capability to procure about 30 mt of wheat in less than 2 months.
Phony export pricing
Unless the food ministry decides to export at the current international parity of $240-250/tonne fob (R16,000), even this exercise of limited volume may prove futile. The value realisation at a price of R16,000/tonne is reasonable, given the Open Market Sale Scheme (OMSS) quote of R15,000/tonne. Let us consider the arguments often given to justify for pricing wheat at MEP of $300/tonne fob (R19,200): Indian wheat is better, so it should fetch more realisation than those of other origins; the market price can?t be assessed; there is a need to determine price with transparency; the market is going to move up; and India has already sold wheat at $300-310/tonne fob. These arguments stem from a mindset of ignorance and isolation from any conception of how commodities are traded. These justifications of the price setting would fly in the face of the following counter arguments. Indian wheat carries much higher quantities of foreign matter in the form of stones, dust, rags, dead pests, etc, thanks to sub-standard storage practices. This requires that prices be correspondingly discounted from that being quoted for wheat of competing origins (Russia/Ukraine). Thus, value realisation above mark-to-market rates defies rationality. If the officialdom is unaware of internationally traded values and futures exchanges, then it should have little right fixing the price at $300/tonne fob. It needs to hire a competent consultancy.
Coming to price transparency argument, it is important to note that a price transparency seen in, say, August will not be applicable in, say, October. Also, any expectation of markets moving up is speculative. Business has to be done at the value tendered, not imagined. Else, the government will end up carrying foodgrains at the cost of the taxpayer?for storing and managing 40 mt, extra cost of $800 million is incurred in two years.
Domestic disposal?
Domestic tenders for sale of wheat to bulk users (ex-Punjab/Haryana) opened by FCI in end-July drew quotes for only 7,000 tonnes (note, only quotes). One of the reasons for the poor response is overpriced (floor price of R15,000/tonne plus taxes) new and old (2011-12 stocks) grains in cover-and-plinth storages to be collected on a ?as is where is? basis. Most of these depots were at locations with no rail connectivity. The payment had to be up front. This adds up to an ex-depot cost of R16,000/tonne, while good quality, new crop is trading at R15,000 ex-UP with negotiable credit terms. Thus, the cost of dealing with government regulations pushes up costs for traders.
In March-April this year, the government offered 1 mt of wheat for export to private players at the OMMS price of R14,840/tonne for old crop from Punjab and Haryana. This translated to an fob cost of $320/tonne versus a tradeable value of $290. Thus, tenders were issued and closed without any worthwhile disposal.
The remedy
First, for wheat export, shorten bidding and decision-making period to one week for better price realisation; price wheat on mark-to-market basis as per best offers received. Sell forward for October, November, December, and so on at 7,00,000 tonnes a month from multiple ports on the east and west coasts as was done last year. Old wheat can be ?assessed? on the basis of MSP in FY12 with lower quality parameters or at $20/tonne less than that for milling quality. Second, wheat for domestic consumption/bulk buyers/traders/roller flour millers may be priced for delivery at R15000/tonne in all states. Such a policy was followed between 2000 and 2004?domestic tenders were dispensed. This will mitigate wheat inflation and grains will move from Punjab/Haryana to other states. Third, create a policy for selling excess rice in local market at R20,000/tonne. Large volumes can be offloaded at this price and carrying cost can be economised. Fourth, the food ministry merits a performance audit immediately.
The author is a grains trade analyst. Views are personal
