BASMATI RICE TO IRAN-- BONANZA OF $4 BILLION TO INDIAN FARMERS

This is an article from Business Line ePaper appeared on 9th November, 2013

Please click on the following link to read : 

http://epaper.thehindubusinessline.com/index.php?rt=email/viewemail&a=MjAxMzExMDlBXzAwOTEwMTAwNg==&V=UGRm

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BASMATI BONANZA OF RS. 24000 CRORES ($4 billion) FOR FARMERS

Tejinder Narang

The sudden spurt in prices of paddy of Basmati rice around Diwali can be inferred as the blessing of Goddess Lakshmi for farmers of Punjab, Haryana and Uttar Pradesh. They are richer by at least Rs. 24000 crores in less than a month.

 India produces about 8 Million Tons of Basmati Rice or 12 million tons of paddy (at 66% conversion ratio) primarily in three above mentioned states. Last year exports touched 3.5 million tons eq to Rs 19000 crores($3 billion) of assorted type Basmati rice.(see chart)

Apart from pure Basmati, production of Pusa 1121 / 1509-- which are hybrid varieties-- and almost four times the yield of traditional Basmati have also become popular in India and export market of Iran and Middle East. US sanctions on Iran have resulted in promotion of export of 1121 Basmati rice to Iran under rupee payment agreement and diminished competition with Thailand and Pakistan.

Paddy prices of 1121 and pure Basmati  

 Average price of Pusa 1121 paddy was around Rs.2000/- per quintal in 2010-11 and 2011-12.  It also touched Rs.30/- per quintal in 2012-13 for some time.  In 1^st week November, paddy - 1121 has jumped to Rs.4000/- per quintal —that doubles the average traded value in previous years.

Likewise acquisition cost of pure Basmati paddy has escalated by 60% from Rs.3500/- per quintal to Rs.5500/- per quintal.  All major rice millers are frantically purchasing paddy of both these classifications at elevated levels without disclosing the intent of abnormal demand. Even at the time of writing this article, prices are ascending daily .

Thus, farmers are realizing minimum Rs.20000/mt more upfront as market determined bonus/ premium, in addition to the normal profit.

Tax free income

A back of the envelope calculation reveals that 12 million tons of Basmati paddy, with Rs 20000pmt extra margin, translates into bonanza of Rs. 24000 crores ($4 billion) for the farmers. This entire income is free from income tax. No local taxes/ mandi fee/cess to be paid. Any local taxation of states is to the account of millers/traders. Trade risk of this high priced paddy gets transferred to the millers/ trade.

Why this spike?

The reason for 100% higher value realization on 1121 - paddy is inexplicable because market observers point out better crop output with higher acreage sown this year. The only guess estimate could be that some millers/trade sources have got the whiff of substantial Iranian procurement of around 1.5 million this year, under Indo-Iran rupee payment arrangement against imports of 0.8 to one million tons in preceding years. It is also true that 1121 Rice with its superior grain length of 8.3 mm and excellent elongation characteristic upon cooking, has caught the fancy of Iranian market.

Pricing rice

As per current market scenario, Pusa 1121 paddy when milled as rice will cost above $1450 fob pmt and pure Basmati around $1850 fob pmt.  For last three years the tolerance level of Iran—that is maximum value which they are prepared to pay-- for Pusa 1121 has been around $1150-1200 fob/mt or so, despite its cost being higher to Indian sellers.  Iranian side has been concluding business with Indian millers/traders with blends of Basmati and Non-Basmati rice or other long grain cheaper varieties to average out  costing. But that practice often gets stuck with controversial claims and counterclaims, cropping up from both sides and delaying execution of business/ realization of payments.

Rupee payments for exports

In 2012-13 Iran enjoyed a “rupee” trade surplus of about $8.3 billion with India. This cash pile may have further gone up during last seven months. Excessive credit balance needs to be liquidated by Indian exports, which can be positive for both sides. Iran may be willing to relax the import restrictions, including the maximum tolerance placed on import price for rice (even to $1400-1500 pmt or more) for faster utilization of massive credit balance with UCO bank. The benefit of this “anticipated” relaxation has gone to the Basmati paddy producing community.

Iran has the option of importing inexpensive Thai Hom mali fragrant rice at $1100 fob/mt but that requires payments in hard currency. Due to US sanctions, Pakistan has yet to conclude special payment arrangements with Iran.  Possibility of business with these competing origins by Iran is very remote.

 Implications & Challenges

1      Banks may have to substantially hike credit limits to the millers for acquisition of Paddy, exposing their finances to high risk trade that relies upon a single buyer.

2      Paddy or rice cannot be hedged in future exchanges for mitigation of risk. 

3      Iran may rely on four or five big privates for mega sourcing who have cornered 1121 paddy; that will be of severe disadvantage to the trade in general.

4      The challenge is to what extent millers/traders/exporters will be able to complement profitability on sustained basis if Iran limits its imports, value- wise and tonnage- wise. An unfavourable decision by Iran can hit the Basmati millers and trade—though farmers remain perfectly insulated.

5      Privates who have already transacted business with Iran around $1100-$1200 basis about 3-4 months back, how are they to execute contracts due to disparity of $300-400/mt? Options are --either by maximising blends of Non-Basmati or by reneging contract to minimise  losses.

6      It will also be wrong to place any regulatory or interventionist mechanism mid-way when paddy has already been procured.

7      APEDA which registers all contracts of Basmati rice may not be able to interfere or intervene when blended consignments are shipped as part of the contractual understanding.

Success of free market policy

Despite the above pros and cons, Basmati bonanza can be cited as a test book case of success of free market policies because

a)    Farmers can get better remuneration in the open market than through fixed administered price regulated by the Government.

b)    Next year there could be more shifts to Basmati production in preference to Non-basmati which is less water/power intensive.

c)     Higher realization from exports is feasible when the trade is allowed freely. 

d)    Any losses /lack of profitability of the past get compensated by the market mechanism rather than the government intervention.