Agricultural output is in distress and, therefore, whispers of wheat import by the government due to a skewed supply-demand equation are logical
The probability of a minimum 5-6 million tonnes (MT) of wheat import in 2016 on government account after nine years—the previous import got concluded in 2007—by the Food Corporation of India (FCI) through PSUs is not ruled out both due to apparent and logical reasoning.
The apparent analysis is that private millers imported about 0.6 MT of wheat primarily from Australia during July-October 2015 and negotiations for further imports from Australia for delivery in April-May 2016 are already gaining speed; India has turned into a net importer of corn of 0.5 MT in January 2016 from an exporter of 3.5-4 MT a few years ago; after 2006-08, PSUs are likely to get back in the business of sourcing large-scale import of pulses; and intensity of import of edible oil is touching 16 MT (up from 14.4 MT of previous year) due to fall in production of oilseeds.
On the other hand, agricultural output is in distress and, therefore, whispers of wheat import by the government due to a skewed supply-demand equation are logical.
Market reports appearing in the media are indicative of wheat output of 80-82 MT. And a further decline in this crop is not ruled out. Indian wheat production was 90.78 MT in 2014-15 and about 95.85 MT in 2013-14 (CACP Rabi report of 2016-17). The steep fall in output is attributed to lower seeding by about 5%, continued inclement weather, and reduction in yields in Madhya Pradesh, Rajasthan, Uttar Pradesh and Gujarat. FCI’s overall procurement may not exceed by 20-22 MT by May 2016.
FCI stocks, as on February 1, 2016, are about 20 MT and are estimated at 14 MT as on April 1, 2016, as against 17.2 MT as on April 1, 2015. Stock depletion during the last few months has been at the rate of 3 MT per month. Therefore, in 2016-17, the government’s demand is a minimum of 36 MT for official consumption under various schemes plus buffer of 7.5 MT—a total of 43.5 MT. To what extent the requirement of the National Food Security Act is to be supplemented is not in public domain. The difference between physical and paper stocks has also to be reconciled. To say the least, the government requires around 45 MT (rounded off) or above.
Here is a simple calculation: We have a supply side of about 22 MT—Punjab (10), Haryana (6.5) and other states (6)—of FCI procurement and 14 MT of its stocks. It comes out to a total of 36 MT against imminent consumption plus buffer norm of 45 MT. This means a shortfall of 9 MT. Even if FCI acquires 2-3 MT extra cereal (total approximately 24-25 MT) by crowding out private trade, as many as 6 MT will have to be accumulated through official imports. The exact tonnage may, however, crystallise by May 2016, after FCI is done with its procurement. The decision to contract from abroad requires urgency by June 2016 as, logistically, imports may commence (arrive) by September, at the rate of 1 MT per month at the minimum, so that the entire tonnage is discharged at Indian ports by March 2017.
Now, what about private imports, which are subject to 25% duty till March 31, 2016? Will policy-makers abolish this duty effective April 1, 2016? Eliminating duty at a harvest time is anti-farmer and, therefore, politically incorrect. If duty is removed on April 1, private importers will resort to import of significant tonnage and that will escalate international values and set bullish overtones. Thus, government purchases will become expensive.
Should the duty be maintained, then private importers will import less and cover their immediate demand from the local market during the harvest season. This might result in lesser procurement by official agencies and may compel higher imports. In 2005-07, the food ministry prevailed upon private importers not to enter domestic market during April-June—the period of FCI procurement. The government, in any case, has to allow duty-free import for FCI. The timing of notifying “zero duty” will be a pertinent call by food and finance ministries because the pursuit of private imports critically hinges upon it.
World wheat trade
Fortunately, there is surplus wheat available in world market—around 213 MT, and about 71 MT with prime exporters like Argentina, Australia, Canada, the EU, Russia, Ukraine and the US (according to IGC London). Such a humongous volume of import will be sweet music to international traders who are scratching their heads for any emerging opportunities in the falling market of commodities. Wheat prices are subdued and vary between $180-200/MT-fob from France, Black Sea and the US. Indian private trade is seeking Australian wheat at $215-220/MT-fob or 235 cif (landed) or R15,980/MT in Cochin/Tuticorin (without duty) for April shipment from MNCs and other international trade. NCDEX spot price in Delhi is approximately R17,000/MT.
Private millers sourcing from Australia stipulate that wheat must have a low concentration of ergot—a fungus—as per Indian phytosanitary conditions. The ergot restriction makes Black Sea shipments risky, leaving Australian wheat in a strategic position to capitalise on this new demand. It is likely that the government, for its own import, will relax ergot stipulation, as was done in 2005-07, so that Black Sea wheat could be accessed cheaper.
The abundant availability of grains and the trend of steep depreciation in global currencies—especially of the rouble and the euro for wheat—will keep dollar prices under downward pressure. The upside will be limited despite such massive imports. This negates the necessity of hedging in Chicago Board of Trade (CBOT) futures now, but a close watch on price volatility for an alternative view may be kept.
Will the government impose prohibition in private imports of wheat when official import tenders are issued? Will the food ministry restrict non-basmati rice export next year to conserve foodgrains in the country? These issues are bound to come up for consideration. Trade has to be vigilant of knee-jerk reactions of the officialdom—though none of such actions are warranted. India can easily afford such imports now, but policy-makers have to configure policy profiles so that the recurrence of such imports is done away with.
The author is a grains trade expert