Exposing agro-trade to higher risks

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Published: August 17, 2015 1:07:24 AM

If one scans through agro-policy profiles of various governments across the globe, they are generally irrational, full of rhetoric for political agenda and lack pragmatism.

If one scans through agro-policy profiles of various governments across the globe, they are generally irrational, full of rhetoric for political agenda and lack pragmatism. Thus, trading entities fear “increased” risks from governments than odd developments in the market triggered by supply-demand mismatch, weather, speculation or going wrong on trading positions.

A few illustrations support the assertion in the foreign trade policies of some governments. The Indian government is talking about 4 million tonnes of sugar exports via barter trade. Prime destinations of Indian sugar include Sudan, Somalia, Sri Lanka, Tanzania, the UAE, Iran, Ethiopia, etc. Barter with whom and in what time-frame? Is it practical to structure barter in a highly volatile commodity and in such countries?

Sugar is largely traded amongst private parties based on criticality of international parities. Induction of two governments, their official agencies, banks with escrow accounts, etc, to facilitate barter in export process and involving non-sugar related private/public entities—be it of pulses, edible oil, crude oil or any engineering project—is the best way to abort sugar export. The talk (that cannot be walked) projects an illusion to farmers that the government is serious in remedying the glut of sugar stocks—though trade fully understands the passivity of the policy. The upgraded version of barter is called “counter trade”—which in this case implies “counter to the trade” and therefore is mere rhetoric.

Is the Indian action to impose 10% duty on wheat import in public interest? Flour millers in South India are affected by destabilisation of a steady duty-free policy of last 7-8 years. The government is attempting in vain to protect its turf for disposing of FCI-owned low quality wheat at higher prices, while restricting import of good quality cheaper grain from abroad, thus inducing inflationary pressures. The right way would be to discount its official prices at which the low quality grain is tradeable, otherwise the short life of this grain will render it inedible for human and feed consumption. All cost will be then sunk cost.

The Thai government, in 2011-12 and 2012-13, in order to generate political populism of farmers, introduced procurement of paddy at $500/mt versus market price of $280-330/mt. Good and bad paddy was procured not only from Thailand but even through illegal entry from Cambodia, Myanmar and Vietnam. Thai traders lost their primacy in the world’s rice market due to non-competitiveness. Today, the new Thai regime is struggling to dispose of 18 million tonnes of accumulated rice, of which 6 million tonnes is unfit for human consumption and 10 million tonnes require reprocessing. The estimate of unverified loss is about $16 billion.

Iran, though it prohibited import of Indian basmati rice in 2014-15, imported about 0.9 million tonnes in the same year—basmati rice is banned officially but select parties are given quotas and licences to import from nominated Indian suppliers. This amounts to state-sponsored canalised import via private importers. Official ban represents crony nexus between the powers that be.

China imports soy seeds (74 million tonnes), and corn (4-5 million tonnes) is imported from the US, Argentina and Brazil. Such cargo is exposed to rejections by citing phyto or GM-related issues, which rattle world markets. By such negative actions, Chinese buyers hammer down world prices or enter into renegotiated contracts at lower values. Foreign suppliers sustain losses silently. Indeed, such actions would have the tacit support of the Chinese government. Traders fear to go legal for the fear of reprisal in future Chinese businesses.

China does not buy Indian non-basmati rice, but it sources the same from Pakistan. The denial by China is irrational and is pro-Pakistan. Right now, annual rice import from Pakistan is limited (0.5 million tonnes), but considering the appetite of the Chinese market, India will be at a disadvantage if this issue remains ignored. The ambiguity in China’s decision is inexplicable—it continues to acquire all shades of rice from Cambodia, Myanmar, Vietnam and Thailand, totalling 5-6 million tonnes annually.

Nigeria is another example of distorted rice import policy for political patronage. Rice imports are 3-4 million tonnes. Indian exports to Nigeria are 1-1.5 million tonnes. Nigerian importers who have a stake in domestic production can import rice at 30% duty, while standalone/pure traders pay 70% import tax. Effectively, anyone having a rice mill can import with 30% duty, but others are denied equitable treatment. Licensed tonnage depends upon proximity with the ruling elite. Neighbouring Benin also imports huge volumes of rice, which is smuggled into Nigeria. Rice traders have earned, and lost too, substantial money by applying the Benin route to Nigeria.

Russia exports 20-25 million tonnes of wheat annually, against the production of 53-60 million tonnes. Its government is known for abrupt bans/export duties. None can decipher when an intervention will take place. Since Russian grains are one of the lowest priced commodities, the world has to live with the antics of the Russian government.

There are other factors such as monthly “estimation” provided by governments of sowing, yields, production, demand, exports and imports—all of which influence the markets. Estimates are only “guesstimates” or, at best, some reasoned conclusion based on assumptions and weather reports. For example, the Indian official forecast of the monsoon has gone wrong so far, while there have been contrary private forecasts. The monsoon news heightens speculation and volatility all the more.

Governments are seldom right. Since they wield authority to act arbitrarily and without accountability, nations, people and trade suffer mutely.

The author is a grains trade expert

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