The cut in wheat import duty on September 23, 2016, from 25% to 10%, is a tacit but an indirect admission that wheat output for FY16 was indeed much lower than governments own estimates of 93-94 million tonnes (mts).
The cut in wheat import duty on September 23, 2016, from 25% to 10%, is a tacit but an indirect admission that wheat output for FY16 was indeed much lower than governments own estimates of 93-94 million tonnes (mts). This is also evident from the fact that flour millers are buying grain at R18-21/kg versus the MSP of R15.50/kg.
Market-players estimated Indian production for FY16 to be around 82-84 mts. That is why private traders and South Indian flour millers contracted around 1 mts of wheat, mostly sourced from Australia, Russia, Ukraine and France; of which about 0.7 mts was warehoused in custom-bonded areas owing to talk of imminent reduction in the duty. Price of contracted Black sea/French wheat is around $190-200 CIF (approximately R13/kg without duty), while Australian superior quality APW grain is at $235-245 CIF (approximately R16/kg without duty).
It is high time that the government accepts that Indian production is not within the range of 93-94 mts owing to
Lower area coverage—29 million hectare in FY16 against 31 million hectare in previous fiscal
Two successive droughts;
Fall in yield/productivity (slightly below 3 tonnes/hectare);
Lower procurement of 23 mts by FCI/state agencies as against an initial target of 29 mts. While the official reasoning for low procurement was that private traders procured more from the market, this can easily be disproved as there was a strong OMSS demand (Open Market Sale Scheme), import intensity and a rise in wheat prices.
Reluctance of FCI to fully service OMSS’ annual demand of 7-7.5 mts.
Moreover, the rationale behind duty reduction to 10% (at a time when next wheat crop is to be sowed in the rabi season) was to soften the local prices and to let private traders import as much wheat possible, so that the government/FCI does not have to resort to import on its account.
India’s annual “food” consumption (excluding seeds, feed and wastage) given by NCAER in FY13 was 82 million tonnes and “even if” we take 1% increase in usage, it is projected at 85 million tonnes on non-compounded basis.
The accompanying chart details “Indian Wheat Budget” in comparison with deemed official estimates and rationale of market perception of grains available for human consumption. A back of envelope calculation shows that country may have to resort to import of about 4.8 or 5 million tonnes if trade sentiments are accounted for.
This 5 mts import will have to be understood as 2 mts via trade and 3 mts through FCI/Government. Also, private traders do not have the financial muscle and logistics to handle more than 2 mts and, therefore, the government needs to consider filling the gap.
So, this scenario of 3 mts import by FCI or the government is projected on the assumption that
Physical and paper stocks for “food usage” match perfectly and furthermore, there is no impairment in
Average monthly demand of 2.8 mts will exceed this limit after October 2016.
CAP or Covered and Plinth storages, which are open air storages, have 2.7 mts and thus exposed to damage and severe mitigation in quality for food usage
Moreover, Reserve Bank of India (RBI) had in April this year ordered that all banks with exposure to the Punjab government’s food borrowing programme to provide for potential losses after discovering that food grain (wheat, paddy, rice) supposed to have been bought with bank funds had vanished from godowns.
FCI’s attempt to block or prune OMSS facility to prevent depletion of central pool stocks will be an imprudent move because import is viable for port based flour millers, while in the hinterland OMSS is the necessity and farmers have no stocks to sell.
Another assumption that good monsoon has enriched soil moisture and therefore FY17 rabi (winter) wheat will be bountiful, may not be fully true. In FY15 a large wheat crop was hit by heavy rain just prior to harvest time compelling a downgrade in the quality.
There is little time to dither on decision to import. Nation’s wheat stocks are bottoming out swiftly and may well become infinitesimal before April 2017. Hence, there is a dire need to initiate contingency measures including 3-4 million tonnes of wheat import by the government. At $200/mt CIF current price, about $800 million needs to be budgeted for this import. Procedurally if the government decides “today” to import, the first ship will touch Indian shores in mid-December 2016.
The author is a grains trade expert