Tuesday, August 19, 2014



 Diminishing ethanol demand will trigger fall in corn prices and pressure lower wheat- rice values. MSP has remained one way route going up always.
The “gale of shale” gas is hitting the USA and the world with surplus energy.  In 2000 shale was 2% of natural gas supply; in 2012 about 37% and will be about 65% within next two decades. USA is poised for shipping out shale gas in liquefied form as net exporter of energy.  According to some analysts, crude oil prices may be clipped by 30% (say from $100 to $70 per barrel) in the foreseeable future.  American motorists are consuming less gasoline, thereby limiting blend of biofuels like ethanol.  “Energy security” lobby of USA is no longer supportive of bio-fuels.
Ethanol is produced from corn in USA. (Brazil and India produce ethanol from sugarcane.) Apart from human consumption, corn is extensively consumed by livestock as animal feed. About 970 million tons (mts) of corn is produced worldwide—the largest single crop in the world. Wheat is around 700 mts; rice 470 mts and soybean about 300mts.
USA maize output, the highest amongst all countries, is about 360 million tons (mts). Out of this 36% or 130mts corn is consumed for ethanol. With sufficiency and viability of shale gas, future demand of ethanol will shrink, resulting into demand compression of corn especially in USA, and its price will move southward in coming years.  As of now, corn and wheat are trading respectively at $190/200 and $240 pmt fob—lesser by 20% from last year.
There exists an empirical equation of corn with other agro commodities. For easy understanding if corn is priced at $200 pmt in any future exchange, wheat will be around $250-$260 and soybean will be traded at $450-$500. Barring unforeseen conditions, trade tentatively assumes ratio of 1: 1.25 to 1.30 for corn vs wheat and 1: 2.25 to 2.5 for corn vs soybean.
Rice of Asian origins is not traded at future exchanges so corn vs rice ratios cannot be established directly but can be inferred from “price/demand” elasticity of 39 countries of Sub-Saharan Africa (SSA). This region imports about 11-12 million tons rice annually out of 35 million tons of non- Basmati traded worldwide. If rice becomes expensive say about $600 pmt  fob, as in 2008, there would be significant shift to corn till rice values drop to about $350-$400 levels.
Bearish corn means lower food and feed prices
Corn, wheat and soymeal are active ingredients of feed compound ingested by live stocks. In bearish corn market a feed miller applies more corn and curtails blend of high priced wheat or soymeal and thereby trims demand of wheat or soybeans.  Thus price movements of wheat and soybean are largely governed by corn prices.  Probability of corn price being higher than wheat is remote except in drought like conditions in USA in 2011-12.   
USA as an exporter of non-biofuel energy can make corn terribly bearish and may drag down world’s grain complex. GM crops can further discount grain values. With such an evolving situation, India cannot afford to hike MSP of wheat and paddy arbitrarily—as one way street going up always with no calibration to market. Apart from seed, fertilizer, electricity, diesel subsidies, farmers are doled out additional dose of subsidy by FCI through MSP with open ended procurement. Then the cereal is expected to be subsidised up to 90% of the cost under Food Security Act. Buy at the high of the highest and sell at the low of the lowest cannot be the governing principles of Indian food and agricultural reforms.
Policymakers must consider these “glocal factors” –otherwise Government will be saddled with unsold grains as usual. Exports from open market will also become unviable. Recent example is Thailand where 18 million tons of high priced paddy is lying partly damaged and unsold while pilfered tonnage is unknown.
Poverty is diminishing
Recent World Bank report demolishes Indian claim of rising poverty highlighted at WTO. World Bank puts Indian poor reduced to 100 million in 2011 from 400 million in 2005 based upon PPP of $1.25 per person per day. Even if this report is questionable, none can doubt improved standard of living of all sections of Indian society. For the last 10 years average GDP growth—adjusted with inflation deflator-- is about 6.5%. Can we still harp that poverty is not coming down?  GDP growth and rise in poverty do not gel. How can farmers owning land—even small holdings as an asset class –be classified as poor and whose income is exempted from tax. If poverty is diminishing then gifting larger subsidies are discordant policy signals.
Let us not follow policies of “Povertarianism as my birth right” as rightly highlighted by Mr. Shekhar Gupta, the former Editor of this paper, in July 2013.  The need is to anticipate winds of change in the energy environment and agro complex to eliminate trade distorting policies for efficiencies in local and international business. If WTO controversy can be resolved by cash transfers, let this be implemented by 2017 under the peace clause.

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