Tuesday, February 11, 2014


This is an article from Business Line, appeared on 11th February, 2014

Please click on the following link to read :

Tejinder Narang
Implication of Government’s pronouncement that Indian wheat output of 2014-15 will be around 100 million tons (mt) are analysed here. This official projection presumes that going forward growing conditions will stay normal, though weather and politics are unreliable allies anyway. Is this a reliable estimation? Will the farmer be getting “market premium” over and above MSP? How much FCI /agencies will acquire for PDS? Will it tame wheat inflation? Whether it will stimulate exports? Whether exports are WTO compliant?  
Estimates right or wrong?
A declaration of 100 mt, implies that last year output of 93 million stands surpassed by 7 mt. Supply will exceed “annual” demand escalation of about 2%-3%. For 2013-14, USDA maintained wheat output at 87 mt, though Government has retained it at 93 mt.   Against expectation of 44 mt, only 25 mt were sourced by FCI and agencies in 2013-14, while 38 mt were procured in 2012-13. Market values jumped by 13% at harvest time of 2013, which is quite unusual. 
Previous year output remains suspect and therefore extending same logic may not be appropriate.  Wheat futures for April 2014 are Rs 15300/mt ($249) vs MSP of Rs 14000/mt or( $228). Farmers thus are poised for a “market determined premium” of Rs 1300/mt (9.5%), despite higher tonnages.  Apparently, futures prices do not support what Government is saying. But some speculation in futures cannot be ruled out.
Food Security Act (FSA) is currently in abeyance but proposal for upward revision of buffer norms of wheat and rice to max 61 million tons vs 32 million tons, as of now, is already made by the Food Ministry to Cabinet. Madhya Pradesh (MP) is expecting 19 mt production (about 2 mt more than Punjab) and also offering bonus of Rs. 150/qtl.  Procurement from MP has been 60-70% of the output in that state. FCI may end up procuring 38-40 million tons this year, raising the stocks to 58 mt(20mt carry-in and 38 mt procurement)  by end June 2013—that may starve the market and push the wheat inflation.
If the crop is somewhat of poor quality/higher moisture, farmers will offload more to the Government than in the open market. That too will be negative for curbing wheat inflation. Flour millers may thus expect higher wheat prices in the market despite a bigger crop. Exporters, who sold short basis speculative decline in open market values in April-May, may have to worry for retaining positive margins.
Total storage capacity of FCI and state agencies, as on 1st April, 2013, was 72 mt—53mt covered and balance under Cover and Plinth (CAP). MP government needs to be prepared for massive hygienic warehousing.
Considering about 58 mt in central pool by end June 2014, only 30 million is required by the Government for TPDS and flour millers. Thus disposable/exportable surplus will be minimum 28 mt. At economic cost of Rs 20000/mt, its worth is Rs.56000 crores ($9.0 billion). The paradox is that Government cannot afford to procure less specially in the election year and yet cannot sell in the domestic market or export at a loss. Net result will be of excessive inventories as usual and colossal deployment of funds in the next fiscal.
Bearish for export
100 mt output has sent a signal of bearishness in open market. That prompted Indian exporters  contracting at $270/mt fob ( or Rs 15700pmt-ex Gujarat)  for April shipments. This is bound to lower value realization of FCI/CPSUs (STC/MMTC/PEC).  Black Sea wheat prices are down too by $20 pmt in January 2014 due to depreciation of Rouble. Since November 2013, FCI/CPSUs (STC/MMTC/PEC) have contracted about 1.1 million tons at about average value of $285 fob which may not be maintainable in the near term. Realizing price closer to $270-275 fob by CPSUs will be a challenge in coming months, unless appropriate marketing strategy is applied. Once reserve price of $260 is breached—there may be pressure to review the value below this parity.  
Controversy at WTO that Indian wheat export from FCI is below domestic price is factually incorrect. At $285 fob, rupee eq (1$=62) is 17670/mt while open market for flour millers is Rs 15000/mt (OMSS price—open market sale scheme) plus logistics of Rs 2000 ($32) or eq to Rs17000/mt=$274. Even OMSS accounts for local taxations, while taxes are refundable for exports. Minimum support price is Rs 13500 ($218) for 2013-14 and adding $32 as logistics, price up to $250 fob is WTO compliant. 
Comparisons of Indian grain with soft or feed wheat for justifying lower prices are unjustified. Indian wheat is comparable to 11.5% protein with max 12% moisture—better than 13-14% moisture generally traded internationally.   Poor reputation of Indian export shipments is consigned to history of last decade.  There has been a significant improvement in overall quality parameters of Indian cargos.  Contractual implementations are efficient with guaranteed performance. Geographically India has advantage for realizing better prices in Mid-East and South-Asia. This year-- shipments to Far-Eastern markets may not be lucrative as buyers are importing cheaper corn than wheat as feed.
Better dollar value realization has been the policy perspective for the last two years. Despite excessive stocks, Food ministry is not targeting any large volume business except only about 4-5 mt annually which is about 3% of world trade of wheat of 140mt. Volume business up to 10-15 million tons can be achieved by market friendly approach.
Incredibly, highest ever wheat production of 100 mt still means higher inflation, more wastages due to poor storages, poor liquidation of stocks due to slow pace of exports, though some better earnings for farmers.  

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