NORTH -SOUTH DIVIDE IN WHEAT PRICES
BUSINESS LINE--5TH AUGUST 2014
BUSINESS LINE--5TH AUGUST 2014
NORTH- SOUTH DIVIDE IN INDIAN WHEAT PRICES
(Government needs to consider “south-centric policy” for wheat)
The wholesale prices of wheat of 1st August 2014, as seen in the official website of Ministry of Consumer Affairs show a gnawing gap between values in North and South of India. In Punjab/Haryana cities wheat is at Rs 1400/1600 per qtl while in Chennai/Hyderabad/ Bengaluru it is between Rs 2300/2750. Wheat in South is 70-90% costly than in North. Is wheat indicative of a commercial divide with in a country that distinguishes forces of supply/demand in the North and the South? Apparent reason is that FCI/agencies wheat stocks in “North” are 28.3 million tons (mts) vs 0.83 mts in “South” as of 1st July 2014, while FCI overall holdings are 40 mts. However north-south difference in rice prices is within tolerable range 15-20%. FCI/Agencies Stocks of rice in south zone are 6.5 mts as against 10.6 mts in north zone
Converting above rupee prices of wheat into USD, they are $383/$460 in South India per metric ton (pmt) cif—while Black Sea wheat can be accessed $265-270 and Australian APW at $310 on cif for 25-30000 metric ton (mt) cargo. Pakistan has already contracted about 700000 mt at about $265-270 landed basis from Black sea for August/September 2014. Though the overall import tonnage may not exceed more than a one to two lakh tons by Indian importers/flour millers—but it shows that spread can be exploited if not compressed and values in south do not plunge down. World wheat market is bearish and may taper down further. Flour miller may be willing get such cargos financed from MNCs like Cargill, Louis Dreyfus, Concordia, Noble, Olam etc on 6 months usance or credit terms with nominal interest rates with guaranteed specified quality and delivery.
Regional offices of FCI have started notifying weekly tenders for disposal of 10 million tons wheat under OMSS (open market sales scheme) formula with old crop at Rs 15000/mt and current crop at Rs 15700/mt price ex –Ludhiana plus rail freight, local depot handling charges—called “Reserve Price”- and local taxes . Back of the envelope calculations show that e-auction landed price in southern state may be around Rs 19/20000 pmt or about $ 317-330 pmt for a flour miller with upfront payment and financing cost. Supply is on “as is where basis is” and tenders do not specify adherence to any quality/ specification and delivery period. The case for importing wheat becomes more logical.
At least FCI should have one uniform comprehensive “tender document” region wise. To what extent such e- tender disposal will be effective will be revealed within next 60 days. But the Government could have exercised the option of calibrating “Reserve Price” ex MP or ex Bihar for freight calculations for South Indian states even though load depot could have been ex- Ludhiana. The need to replenish wheat stocks with speed in warehouses of southern states also needs to be looked into.
Another implication under Food Security Act is that wheat/rice will be dispensed to PDS beneficiaries at Rs 2 and Rs 3 pkg—which lures illicit trade with a whopping premium of Rs 25 to Rs30/kg without batting an eye-lid, due to which India’s multilateral negotiations at WTO failed to make any head way because that is what distorts the market. The odd feature is the multiplicity of prices for wheat on per qtl basis—MSP Rs 1400; economic cost Rs 1993; OMSS Rs 1500/1570; APL Rs 610; BPL Rs 415 in addition those applicable under FSA.
At macro –policy level, does not Indian Government need to consider “south-centric policy” for wheat? It is worth pondering to bridge north-south divide.