Column: States distorting maize market

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Published: November 6, 2014 3:03:41 AM

In addition to incurring huge losses, they are destabilising both exports and domestic market

At a time when the food ministry is attempting lesser procurement of grains, liquidating excess stocks of FCI/central pool, and reviewing food policies at macro level to restructure FCI, some state governments—Andhra Pradesh, Karnataka, Maharashtra and Madhya Pradesh—are doing exactly the opposite. Although FCI has stayed away from MSP-based procurement in maize, these states have undertaken intervention operation at their own initiative. In addition to incurring huge losses by trading in maize, they are destabilising both exports and domestic market.

From October 2013 to September 2014, these states purchased about 1.18 million tonnes of food-grade maize at an MSP of R13,100 pmt to support sagging market values of R10,000-11,000 pmt. The MSP of maize is decided nominally and state governments are under no compulsion to intervene arbitrarily without assessing macroeconomic environment and market trends. Their claim for this discretion is that this benefits farmers. When maize values are plunging to bottom domestically and internationally with little hope of upward trend, socialism of price policies is an anachronism devoid of accountability.

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Over the last four years Indian maize output has moved up from 18-19 million tonnes to about 23 million tonnes. This has enabled India’s export to the Far East and Africa of about 3-4 million tonnes per annum, but in 2014-15, it may drop by 50%. Indian maize, currently quoted at $200 ‘fob’ pmt (R12,200), has no takers, while MSP-based costing (R13,100 pmt) would be $250 fob. Under current scenario, Argentine maize is priced at $210 delivered (cif) in Asia. Indian grain can be traded at $190 cif in Asia ($20 discount to Argentina) or $165 fob or about R10,000 pmt delivered at port. If state governments continue to artificially push prices up, export demand will diminish and this will drag local prices further down. That may affect sowing in rabi crop of maize produced in Bihar.

Farmers are not poor
Let it be understood that Indian farmers are not as poor as deemed in 1966-67 when the MSP policy prescription was initiated. Farmers are growing 2-4 crops in a year including oilseeds, pulses and vegetables. Thus, they are not dependent solely on one season’s earnings. Rice and wheat take about 120 days each for maturity; pulses 60-75 days; sugarcane can grow for three consecutive years without fresh plantings. Latest technologies of seeds, hybrid varieties, Bt cotton, etc, and inputs—water, power, irrigation, fertilisers, pesticides provided at subsidised rates—have enhanced yields per hectare. Higher output at even lower prices is also remunerative.

Since 2002, India has become the world’s largest manufacturer of tractors with 29% of world’s output in 2013. It is also the world’s largest tractor market ( Acquisition/usage of tractors can be exploited by producers with reasonable income. Farmers are also owners of land—an asset class—with tax-free earnings. India has graduated from a poor country to an emerging economy. Poverty-mania for farmers is not valid any more. Disparity in incomes in all sections of society exists anyway.

Visible losses
A back-of-the-envelope calculation reveals that state governments spent about R16 per kg (including taxes, bags, financing) against an MSP of R13.10 per kg, while average price realisation by disposal of part tonnage of 0.5 million tonnes is R10-11 per kg. Almost 0.6 million tonnes remain unsold as of October 1 whose quality may be doubtful and may be sold at lower prices. The total loss may range close to R550-600 crore or 30% of acquisition costs. Unconfirmed reports of Madhya Pradesh having sold the entire 85,000 tonnes at R1 per kg under some subsidy scheme to the poor are also circulating amongst traders.

There is a possibility of round tripping of the maize bought at R10-11 per kg and sold back to these very states at R13.10 per kg in this season (2014-15). These state governments procure food-grade maize but poor handling and storage transforms it to feed-grade where realisation is bound to drop dramatically. It is well acknowledged that 50-60% of Indian maize is used for cattle feed (for livestock) with higher levels of foreign matter and allowance for fungus. All exports are also of feed variety. Buying as food-grade and selling at feed-grade prices is another contradiction in interventionist policy.

The very idea of attaining higher production is to minimise per unit cost of any commodity. Benefits of elevated output are annulled, if blind intervention is applied at MSP. Had the government stayed away, the possibility of export could have improved and the industrial/feed use grain consumption would have been at the market price.

Maize needs no MSP
The very concept of continuation of MSP prescription in preference to the market-based price discovery in current context of rising agri-output and trade getting integrated with world markets is debatable. In any case, maize/coarse grains with predominant feed application should be excluded out of MSP policy because this starchy item, which readily sucks moisture (and rapidly promotes fungus), cannot be handled by FCI/state agencies in appropriate quality format.

The DGFT notification of September 29, 2014, has ‘freely’ allowed import of maize. Landed (cif) import price of non-GMO corn from Russia/Ukraine in India will not exceed $200 pmt or R12,200 pmt against R13,100 pmt ($215). The probability of international values dipping down in the coming months is not ruled out. The pressure to import will escalate. There would be a dilemma to regulate imports by ad hoc customs duty. The best alternative is to shun intervention and let local market discover its own prices on arm’s length basis.

The author is a grains trade expert

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