Pakistan, Afghanistan, Srilanka can be offered better prices in line with policy of regional leadership of new Government. Poor qulaity wheat can be disposed off as feed wheat.
12 mill. tons surplus wheat with Government needs disposal
Wheat procurement by Government in current rabi season is 27.5 million tons. FCI carries about 42 million tons of wheat (Rs 84000 crores at economic cost of Rs 20000/mt) on 1st June 2014 (FCI website). After accounting for all domestic needs, buffer norms and even assuming threat of El-Niño (as an abundant precaution) there is a surplus of 12 million of wheat ( Rs 25200 crores) as configured in the graphic below. Logically, wheat being a rabi crop, may not have any direct connectivity with weaker monsoons –but indirectly, yes –if there is lack of moisture in soil in November/December due to poor precipitation there could be some marginal effect, with a big if.
Food Ministry dithered on continuation of wheat exports from FCI owing to uncertainty on good crop affected by extended rains; waiting for formation of new Government and for supporting higher market prices to prompt farmers to offload grains to exporters, rather than to FCI/official agencies. Government did miss an excellent opportunity for evacuation of its own stocks at better prices in the first quarter of FY2015 in the international market, especially when Ukraine/Russian/Crimea conflict was at its peak. Private trade did take advantage of this niche window in a limited way by contracting about 1.5 million tons, while FCI/PSUs exports could have easily doubled this volume at an average price of $280-285/mt fob (Rs 17000/m apprx.t) in March –June 2014.
Black sea (Russia/Ukraine/Kazakhstan) new crop of about 90 million tons will hit in July/August. Anticipated supply pressure has already bottomed out their values to $245-250/mt fob. Subsequent price ascension internationally cannot be ruled out due to impact of El-Nino, if any, from August/September on the Australian crop (harvested in December /January). Escalation of Russia/Ukraine conflict and imposition of trade sanctions on Russia and in turn Russia squeezing Ukrainian economy can be bullish for world wheat values.
From Indian perspective, it may be difficult to offload wheat at $240-250 fob at this point of time. But can we afford to be absent from domestic and international market with 12 million tons surplus? If files are to be processed electronically on line—as suggested by the new Government- encashing the crop which would be otherwise be lost to dust and destruction in unhygienic storages cannot carry lower priority. Matrix of disposal can be configured in three parts--
First, sell to roller flour millers (RFMs) by aligning OMSS (open market sale price) with market price. Disposal at market price to RFMs will reduce wheat inflation.
Second, the current minimum export price (MEP) of Indian wheat of $260/mt fob will not work ---both due to declining quotes hovering even below $240 fob. Traders also presume that as Black Sea currencies depreciate, there could be further downside.
This is the right time for India to strategize wheat evacuation of diminished quality and quantity lying in open or CAP storages (kuccha or Pucca) muddled with higher foreign matter (FM) beyond 1%. Milling wheat is traded with max 1% FM. Old crop say FY13 or FY14 with FM beyond 2% can be sold at discounted price as feed wheat in far -east and middle- east markets for poultry and livestock industry. Generally there is price differential of $20-$25 between milling and feed wheat values. India may have to reset MEP of low quality wheat at $240. Precedent of similar policy initiative by NDA in 2000-04 by allowing export of lustre loss wheat of lesser worth can be relied upon. Three million tons of quantity—eq to CAP capacity of the Government-- can be considered as feed wheat export at MEP of $240, subject to tender procedure.
Third, should El-Niño and Black sea crisis deteriorate grain supplies world-wide and prices rise again to $290-$300 or beyond, Indian Government can revisit the MEP on the higher side for maintaining sustained tempo of exports of good quality milling wheat as well.
Bangladesh needs about 3 million tons—one million ton on official account and 2 million ton by privates and they would prefer to source it from India due to apparent freight advantage and uncertainty in dealing with Black sea countries, provided it is priced competitively. Pakistan too may need some cheaper imports. Selling to SAARC countries can be incentivized and that could be in line with the policy of this government for regional leadership.
Why wait and waste huge volume of wheat simply by inaction—which is certainly unwarranted under the current leadership.