India’s wheat production this year is estimated to be at 93-95 million tonnes (mt). The government is holding 21 mt of wheat as on March 1, 2014 and will add about 30-34 mt of the new rabi crop of the 2014-15 in the next two months. Against buffer of 20 mt, it will accumulate 48-50 mt by June —about 150% higher inventories than required.
Food Corporation of India (FCI) has been shedding excess stocks through exports. Surprisingly, FCI has decided to deprioritise exports at a time when the world market is unusually upbeat. The reason—by diverting export demand to mandis, the government wants to escalate the open market price—more than the MSP—at harvest time (April-May), to shrink wheat procurement to the minimum.
FCI has exported about 5.5 mt through PSUs in the last two years but is suddenly dithering to contract even the last leg of 0.5 mt. Recent tenders specify pruned down quantities to 30,000-35,000 metric tonnes each, instead of twice or thrice—70,000-1,00,000 metric tonnes offered earlier. The future of exports from FCI is uncertain, while conditions are slightly bullish for the world wheat market.
Globally, wheat is up by $30 or 10% since mid-February owing to developments in Ukraine and weather issues in the US. FOB realisation can be around $295-$300 per mt or more in April-May, against a recent average sale price of $280 and the minimum export price of $260. Shipping out large tonnages at low prices earlier (November-February) and restricting exports now, when prices are bullish, defies common sense. Domestic market is agog with rumours of a possible prohibition on wheat exports. Logically, shipments should be stepped up when a niche window of higher values is available. The market maxim that governments are seldom logical, and largely political or irrational, stands proven!
One view could be that the food ministry is gunning for lesser acquisition of grains in the new season due to the substantial carry-in stocks and because the Food Security Act has been held in abeyance. Pressing of the pause button by the FCI may be key to that strategy.
The tactical move is to let the private exports continue from open markets. Farmers will prefer selling to exporters at R15,500-15,700 per mt—NCDEX price for May 2014—instead of going to the FCI for an MSP of R14,000 per mt. Some short export sales can trigger a scenario of even better prices (for a very limited tonnage). Farmers may