Wheat prices are recovering—the government must ship out some stocks
If one glances through media reports on agro commodities over the last six months, large exports by the US, Brazil, Argentina, Russia, Ukraine, France, Romania and Australia, of wheat, soy, soymeal, corn and sugar can be seen. India is conspicuous by its absence. The year 2014-15 is annus horribilis for Indian agro exports. The accompanying chart captures all commodities in the negative zone for exports—soymeal (-87%), corn (-67%), all oilseed extractions (-41%), wheat (-30%) and sugar (-17%)—at this point of time. Except rice, all exportable commodities are languishing for price parity. The estimated export of all Indian cereals/meals was about 24 million tonnes (mt) in2013-14. It may not exceed 16-17 mt in 2014-15, with rice alone contributing 10 mt. A 30% shortfall in quantitative terms in the agro sector is foreseen as of now. It is a nightmare for all traders, exporters and policymakers who revelled last year over India’s export competitiveness.
The fall in crude price from $115 (June 2014) to $70 per barrel may be a divine intervention for India’s CAD but it will influence cuts in biodiesel/ethanol production. Edible oil prices will plunge more. That will be extremely bearish for soy, corn and sugar. India continues to rely upon the current yield pattern of soy and corn of 1 tonne and 2.5 tonnes per hectare, respectively. The impact of the currency depreciation of Black Sea and South American countries, and the falling crude prices will compel Indian agro exports to become a trickle.
India must decide whether it wants to be a marginal player or have a permanent presence in international markets and whether we want our farm economy to be a world-class, competitive business or a high-cost, non-remunerative activity.
The world soy and corn prices are flexible (can withstand high volatility) because of high yields attained through hybrid and GMO technologies to which India largely remains insulated. For example, India has a crushing capacity of 80,000 tonnes per day and that requires 24 mt soybeans annually (300 working days) while our current production hovers at 11-12 mt in the best years. GM soy yields about 3 tonnes per hectare. GM corn gives 5-10 tonnes per hectare. Application of the latest technology is the only viable strategy where we can triple our output. If GM crops are being deemed environmentally safe by the US, Brazil and Argentina, and if China is making abundant use of them, why are our policymakers delaying the introduction of GM crops?
Though India has settled the concerns of trade distortion over its public stock holdings with a permanent peace clause at the WTO, its export subsidies remain under the prohibited category. Large public stocks alone are not the only factor responsible for trade distortion. Take the case of steep depreciation in the currencies (30-40%) of Russia and Ukraine, triggered by sanctions and counter-sanctions due to geopolitical convulsions; these have also distorted world markets of wheat, corn, soy, edible oils, etc. There should be a provision at the WTO for calibrated subsidisation of exports at the absolute discretion of any affected government when markets are destabilised by hegemonies of powerful nations or a group of nations. Today, Indian trade is looking for weather-related problems in other parts of the world—with a prayer of price parity—and also hoping that a strong dollar with some imminent depreciation in the rupee helps. Since markets are dynamic and not static, only optimism lets the trade survive.
Recently, the Bangladesh government received wheat offers of $270/mt landed at Chittagong from the Black Sea nations and France, the inference being that international wheat prices are $225/mt fob (excluding a freight charge of $45/mt) whereas Indian wheat, from the open market, will cost about $275 fob at Kandla. This is partly attributable to excessive procurement by the government and the resultant squeezing of availability of stocks in the open market, given the government is hoarding about 10 mt of extra wheat at the taxpayers’ expense.
Global wheat prices are showing signs of recovery, of about 6-7% since the last week, and if the food ministry takes the initiative of commencing short-term tendered offerings in next four months, 2-3 mt of “milling” wheat could be shipped out based on the last year’s nominal MEP of $260 to the Middle-East and Africa (Australian wheat is at $270 fob).
States such as Karnataka, Andhra Pradesh, Madhya Pradesh, Telangana, etc, have arbitrarily intervened for procurement of corn at MSPs that are much above the market price. Not only have the lower prices available to the poultry industry been affected, the viability of any limited exports has diminished too. Latin American and Black Sea corn is at $180 pmt fob, while Indian corn costs $215 fob.
Indian soymeal is offered at $480 pmt fob, with no takers, vis-a-vis the $430-440/mt fob offfered by Brazil and Argentina. Market players believe that India’s high soybean prices are the result of some select players concluding soymeal deals with Iran, under the rupee payment arrangement, well above the prevailing market price—of around $700/mt last year. Farmers have tasted blood and acquired the financial muscle to hold on to beans at the cost of starving crushing capacity. Traditional markets (such as Middle-East, Far East and the EU) of soymeal remain underserved by India and have been lost to competitors. Pro rata edible oil is unavailable domestically, thus pushing for higher imports of oil—currently about 12 mt per annum. The industry has appealed the government for a hike in import duty on edible oil to protect their interest—cheaper imported oil versus expensive oil crushed locally!
Brazilian raw sugar is so cheap that it is selling at 90 c/lb or $20/mt discount at the New York ICE futures. Landed price of Brazilian raw sugar in the UAE will be around $365/mt versus $415/mt for that of Indian origin. The viability of Indian business depends upon the R3,300/mt ($53) marketing subsidy by the government which defies the WTO. There is a big question-mark on this subsidy. Unless the nuisance of fixing irrational state advisory price (SAP) for sugarcane is resolved, the momentum in sugar export cannot be built. Sudan, Somalia, the UAE, Bangladesh, Iran, Sri Lanka and Yemen would remain targeted markets if parity with Brazil is attained.
In this complex market of varied commodities, the government cannot do much except that allowing the application of newer technologies in agriculture, taking up with the WTO the case of permissible export subsidies given world markets are distorted by deep depreciation in currencies due to geopolitical reasons, and offloading FCI wheat stocks at market prices .
The author is a grains trade expert