Russian wheat supremacy and bearish values create a dilemma of duty for India.
If there is one notable development that needs to be acknowledged in commodity markets, it is the supremacy of Russia in global wheat trade. Russian wheat production has scaled up from 38 million tonnes (MT) to 81 MT in the last five years—an increase of 113%. Productivity in terms of yield is up from 1.8 tonnes to 3 tonnes per hectare—about 67%, in the same period (see chart). Russian productivity is even higher than that of Australia; the rouble is a weak currency, further weakened by US sanctions over Crimea; has limited storage silos space; inadequate holding capacity with farmers; consumes annually about 40 MT (50% of production)—all these factors contribute to lower prices in dollar. Multinational corporations like Glencore, Cargill and Olam have built silos and export terminals, take positions on wheat trade on break bulk cargoes of 30,000-50,000 tonnes. Just as India is the largest player in rice internationally and any restrictions or ban or export duty will fire world values of rice, any of such actions by President Vladimir Putin can ignite wheat markets.
Globally, wheat trade price discovery is made at CBOT for US SRW wheat and those values are applied with certain premium and discounts for determining sale/purchase quotes of other origins (for example, Australia, the EU, Canada, Black Sea, etc). But this process is changing fast and Black Sea wheat prices of Russia and Ukraine now have a bearing on CBOT quotes. The Soviet Union was once dependent upon wheat supplies from the US and elsewhere. In 2017-18, Russia alone will again surpass the US in wheat exports. It is expected to ship out 32 MT in 2017-18, versus 27 MT by the US, according to the International Grains Council (IGC), London. In 2015-16 also, Russian exports exceeded those of the US by 5 MT (see chart). Egypt, which is an annual importer of 11-12 MT of wheat, has been buying bulk of its purchases from Russia, and against competition from other major origins. Most of the Middle East also seeks Russian cargoes. Indonesia buys most of its wheat from Australia due to logistical reasons, but has switched over to Russia because of lower costs. The Food Corporation of India (FCI) import of about 8 MT in 2006-08 had a substantive component of Russian cereal.
Russian/Black Sea wheat, also referred to as red wheat, has four major varieties, which include feed wheat (meant for poultry and livestock) and milling grain (for flour). Depending upon the protein content and other parameters like gluten (stretch ability) blending of feed wheat with milling wheat can reduce the price of a cargo. China, by its efficient productivity in consumer goods, has kept the lid on inflationary pressures globally. Russian grain, too, has traded within a limited range of $160-200 ex-warehouse for the acceptable quality type-3 grain in the last three years, giving tough competition to global traders including others in the Black Sea region. Although there may be specific quality issues with Russian wheat, they do not justify much higher premium of other nations.
Indian flour millers blend imported wheat with local wheat for getting specified specifications of flour. Low-priced imported wheat lowers wheat quotes and wheat flour inflation. From India’s perspective, surpluses of Russian wheat and its price of around $190 per tonne landed/CIF, it costs about $234 per tonne, or Rs 15,000 (10% duty paid plus expenses of Rs 1,500 per tonne), which is lower than Indian local market prices of about Rs 16,000-17,000 per tonne, or $250-275 per tonne, in Indian north zone (Department of Consumer Affairs). The price of Indian wheat in the south zone will be much higher. Thus, it prompts imports from Black Sea and Australia. The downward price pressure on Russian crop will continue over the next three months, and is bound to exert corresponding bearish sentiment on Indian wheat. Import intensity can rise with another $10 per tonne fall in prices, making imported grain cheaper, lowering local values that will not be remunerative to Indian farmers. Though some cargoes, earlier imported at $220 CIF/tonne prices, and old stocks stuck with importers may have slower lifting at a marginal loss, new contracts at $180-190 CIF will make up the loss, provided import duty is not hiked from the existing level of 10%. The IGC expects India to import about 3 MT by March 2018, of which 0.2 MT has arrived so far. In addition, higher duty will completely block any imports from Australia, where production is down and prices are averaging about $260 CIF.
The government also needs to beef up its stocks that bottomed to 8 MT in April 2017. Fixation of high Open Market Sale Scheme (OMSS) price of Rs 17,900 per tonne is meant to ensure that FCI reserves get depleted to the minimum. Should import duty be fixed at 20-25%, it will discourage imports, which would create a demand pull from the domestic market, including the FCI. With August 2017 WPI inflation rearing its head again to 3.2% from a low of 1.9% in July 2017, can we afford not to give priority to the consumer at the cost of the farmer? That is a very challenging call. Russian bearish wheat values notwithstanding, the government has to do a tough balancing act on wheat inflation and between farmers and consumers.