Global turmoil hurting Indian agro-exports

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Updated: March 23, 2015 12:16:56 AM

India is grossly out-priced for most commodities and this is likely to continue as long as the ISIS and Ukraine strife remain

The WPI inflation is down to minus 2.5% in FY15 while it was at 5.53% the year before. (Reuters)The WPI inflation is down to minus 2.5% in FY15 while it was at 5.53% the year before. (Reuters)

In FY15, India saw a double-digit decline in agro exports after seeing a rising trend for the five years from FY10. Indian export of agro and allied products stood at $32 billion in FY14. In FY15, it is slated to total $29 billion, lesser by almost 10% than the year before. A difference of about $3 billion would matter little to the commerce ministry in a year when falling crude oil prices have gifted the government nearly $50 billion.
However, the fact remains that when high agro-output is hit by falling exports, it becomes an invisible and indirect taxation of farmers due to demand compression. Even the trading community is nervous about this decline.

The WPI inflation is down to minus 2.5% in FY15 while it was at 5.53% the year before. The WPI-food remained stable around 8% in both the years while the rupee has weakened by 10%. Thus, the export efficiency of India should have increased, even though marginally. But the exact opposite has happened. International commerce stands destabilised by strategic confrontations of big powers, creating deflationary shift in commodity prices.

The world’s food demand cannot be compressed substantially. A sharp fall in agri-commodity prices is due to the anticipated contraction in the demand for biofuels, like ethanol and biodiesel. With 50% cut in crude oil values, the demand for ethanol (blended with gasoline) will shrink significantly. A third of US’s corn produce is currently dedicated to ethanol production. That portion is set to taper. The excess corn will, therefore, make the commodity cheaper for food and other non-fuel purposes.

Similarly, sugarcane is used for both sugar and ethanol production. Ethanol from sugarcane will also be exposed to manufacturing cuts. More molasses is likely to be diverted for sugar output, triggering a steep downward trend in sugar prices.

Surely, corn and sugar values are bound to head further southwards, if crude oil and shale gas continue in the sub-$60 per barrel range. Corn, wheat and soyameal are all also used for animal/poultry feed. If corn price falls, it will induce a resultant easing in the prices of connected items such as wheat and soyabean meant for animal fodder—as corn prices fall, more of it will be driven towards poultry/livestock fodder, thereby diminishing the demand for feed wheat and soyameal, causing their prices to fall, too. Cheaper soyabean will also mean cheaper soyaoil with a domino effect on palm-oil prices.

The precipitous fall in crude oil prices, to around $50 per barrel, is not a natural economic phenomenon of supply-demand mismatch. Has the demand evaporated by 50% over the $100 per barrel days? No. The supply surge of crude oil seems to have been an intended fallout of the Saudis trying to destabilise certain other oil-producing regions. Even with the shale gas production in the US, prices could have stood at the ruled $80-90 per barrel. The game of price-rigging seems to have been orchestrated by the US and Saudi Arabia as part of an unconventional war to hit the economies and commerce of Russia and some West Asian countries. A stronger dollar—owing to lower oil values—and sanctions have depreciated the currencies of India’s competing countries such as Russia, Ukraine and Brazil.

At the same time, the European Central Bank has decided to depreciate the euro through QE to prop up the European economy—this has the obvious fallout of making European goods inexpensive. Currency manipulation and deep depreciation in major currencies have disabled India’s prospects of exports given the rupee remains fairly stable. The only positive is that India’s CAD situation has improved. But the world has to face high volatility as long as the turmoil in West Asia, thanks to the ISIS, and in Ukraine, thanks to Russia, continues.

The WTO seems to have become a toothless body when it comes to reining in the hegemonic designs of Western powers. The WTO cannot question them why crude oil prices and currencies are being artificially manipulated. It cannot stop China from keeping the yuan perpetually devalued, nor can it rein in Thailand from selling rice at half the cost of procurement. Even Pakistan has announced a subsidy of $55 per million tonne for wheat exports from government stocks. It is time for Indian authorities to call out the WTO for this discriminatory state of affairs. Indian export subsidies, too, should not be questioned as long as such inequitable conditions remain.

Export-agro

The Indian government belatedly announced a $64 (R4,000) per million tonne subsidy for raw sugar exports. Another export subsidy from Maharashtra, of $16 (R1,000) per million tonne of raw sugar is also being rolled out. But even with this $80-per-million-tonne subsidy, sugar exports remain challenged. Logically, the Indian government should also subsidise wheat, corn and soyameal exports given the WTO is not intervening in the case of crude oil and currencies going south irrationally.

Indian wheat exports—at the rate of $275 per million tonne fob—have no takers from the private sector. According to the food secretary, the government stockpiles will not be touched for export, with India being in no position to export wheat unless it is subsidised by about $70 per million tonne.

Buyers seem keen on French/US wheat (priced at $200 per million tonne fob)—with the euro falling by 26% in the last 52 weeks. The Russian rouble is down by more than 138%. Russian wheat could remain below $190 per million tonne in the next few months if the export tariff of $45 per million tonne, imposed temporarily, is abolished.

The export figures for agro and allied items in January 2015, as estimated by the commerce ministry, are alarming, given the negative realisations. The assumptions that the lower realisation is because of the fall in commodity prices may only be partly true as the quantity of wheat, sugar, corn, soyameal and cotton exports are insignificant this year. The conclusion is that India is grossly out-priced.

The Indian domestic demand for corn and soya has also amplified. Thus, their yield and land-under-cropping must go up. Simultaneously, the Indian government has the task of not letting its stockpiled wheat and rice rot—produced through the support of a host of subsidies, including power, fuel, fertiliser—in the storages. If the value of the grains/agro items are not realised either through market prices or through corresponding subsidisation to attain marginal parity in markets abroad, authorities would have ended up just mismanaging the entire economy.

The author is a grains trade expert

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