Column: No point hoarding dead wheat stocks

By: | Updated: February 24, 2015 11:36 AM

Sell the new crop to Indian consumers while the old one can be disposed of abroad

After exporting about 14 million tonnes (mt) of wheat between 2012 and May 2014, India stands isolated in the world market despite having almost 17 mt (as of October 1) of excess stock in the central pool after accounting for the holding under the buffer norm, of 14 mt.

Wheat futures prices, tracked by the Chicago Board of Trade (CBOT), fell by 22% in last one year, which cannot be attributed solely to supply-demand divergence or drop in crude oil values. The primary reason for this sharp reduction can be nailed to the Russian—Ukraine (Black Sea nations) conflict and the subsequent sanctions/counter-sanctions.

Wheat-price

These two countries export about  35 mt of wheat annually against the  28-30 mt exported by the US. Ukraine alone exports 20 mt of corn. Thus, Black Sea countries are a determining factor for the price discovery of grains, thus, these have a direct bearing on the quotes at CBOT. Logically, bilateral and multilateral geo-political tensions should have curtailed these nations’ capabilities to export, while opposite has transpired.

Post-conflict financial fetters applied by the US and the EU led to 30% and 55% depreciation in the Russian and Ukrainian currencies, respectively. The entire agro complex is thus rattled by lower prices of wheat and corn which have pulled down soybean, sugar, edible oil, ethanol values. Russia and Ukraine also offer blended versions of milling and feed-grade wheat, which can be priced as low as $210-$220/mt fob.

Unless there is a considerable appreciation in the currencies or grain supplies in this region are choked due to harvest losses, drought or war, the revival of prices to the 2012-13 levels (around $350/mt fob) is not foreseen. On the contrary, a higher world output will keep the downward pressure on wheat prices. Pakistan has imposed a 20% import duty from November 5 onwards to curb imports by private traders—who fear further fall in the future values—to protect its domestic supply. The import of at least 1 mt by Pakistan from the Black Sea nations is expected in 2014-15.

The Indian government has been very quick in mopping up stocks, but has always dithered in liquidating the huge inventory. The moot point is whether India wants to remain a silent spectator of market movements or make an effort to bite into the commodity cake through proactive action. For the last 25years, various governments remained inert observers. By keeping stocks dead, the officialdom is displaying very little accountability. The pricing of stocks on a marked-to-market basis means answerability. Why not consider professional opinion on the pros and cons of hoarding dead stocks vis-a-vis a realisation of 85-90% or market-related payment?

If the government is in the business of grains, then it has to mean business and minimise erosion of public funds sunk into the procurement of grains. In this backdrop, does the WTO matters? Yes, it does. India must set aside its tough stance and hail the peace clause which insulates India till 2017 and settle the matter in the larger national interest. It will be a win—win agreement for all.

The prime minister has urged secretaries of various ministries to come up with novel ideas of good and deliverable governance. The food secretary tweeted on November 3, 2014, FCI’s stocks, detailed year-wise till October 2014, from which it can be inferred that FCI has around 6-7 mt of the 2013-14 crop of wheat. This grain will become 3-years old by April 2015, in just five months. It is incurring a carrying cost and is being stored in poor conditions. It is preferable to sell the new crop to Indian consumers while the old one can be disposed of abroad.

For increasing the profitability of the old crop, exclude taxes. Taxes are not exportable. That is the international norm. Recall that at the Heathrow airport in London, VAT is refunded. Discount the carrying cost of two years, if it doesn’t attract buyers. The old crop can be pared suitably by 10%. Match the world price under the WTO peace clause and earn $1.6-1.7 billion (R10,000 crore) by activating exports. If a similar solution is being considered for the private sugar mills, why not for publicly funded grains?

The government lost two valuable opportunities, the first one in Q4FY13, when it dithered in offloading wheat slightly below a $300/mt fob price, and again, in Q4FY14, when it failed to sell at about $270/mt fob. Any lack of action now will leave us stuck with another precipitative fall, to about $ 200/mt fob. Isn’t it better to realise $235-240/mt right now than to keep perpetuating losses by hoarding? Any temporary spikes in the prices should be taken advantage of, provided the authorities are ready with right policy frame work.

The price of internationally-tradable Indian wheat is $235/mt fob at the moment, while the government/FCI estimates it at $265-270/mt, based on current MSP and logistics costs. This underscores how urgently India must move forward.

The author is a grains trade analyst.

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