Whittling down wheat profits

Updated: Apr 3 2014, 08:30am hrs
Indias 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 reasonby diverting export demand to mandis, the government wants to escalate the open market pricemore than the MSPat 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 thrice70,000-1,00,000 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 mtNCDEX price for May 2014instead 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 thus be tempted to hold back produce from the FCI. By end-June, FCI will exit procurement with lower acquisition and growers will have to fend for themselves for rest of the year.

However, higher domestic prices coupled with stronger rupee may make exports unviable. Exporters generally pay on 30-day credits to growers; FCI pays against delivery. Due to unseasonal rains in March, exporters will avoid damaged crop. Farmers preference for the FCI may remain. Historically, FCI procures significantly more in those years when the harvest goes bad with some quality issues. The R1,500 per mt bonus offered by Madhya Pradesh will also lure farmers to offload to official agencies. Gujarat has reported about 1.5-2 mt more output over last year and will thus curb inflationary pressures. Anticipation of a prohibition on export will tank the market. On the contrary, the prospects of the government ending up procuring more are rather high. The net result would be: missed exports, lower procurement game of the government fails and farmers despair.

The recent trend in the government to meddle and manage prices of food items in a upward direction, to the detriment of consumers in the name of farmers, contradicts sound macroeconomic policies. The principle of equity and fair play is negated when governments surreptitiously create conditions of short-term, non-sustainable high prices that finally put growers in a loss or erode profitability.

Official procurement of wheat should take place as per the policy. If the policy is unsound then redefine rules transparently. Governments are meant to create an environment conducive to business rather than to be in the business of distorting business and prices. This unfair game of market price manipulation must be shunned and exports, when stocks are plenty, be enabled both from official and domestic sources at best prices.

Tejinder Narang

The author is a grains trade analyst