Friday, September 26, 2014



An interim solution with WTO now a necessity.

Tejinder Narang

World prices of all agro-commodities including sugar and wheat are dropping sharply.  Indian exports of these two items are utterly unviable while massive funds of Indian banks and the Government are blocked in their inventories.  Government is considering continuation raw sugar subsidy for exports while no stimulus is being thought of for wheat export (from FCI) where Rs 50000 crores is required by Food Ministry for clearing pending food subsidy bills. As corn prices are tumbling too, which have direct relationship with wheat and sugar/ethanol prices, medium term recovery is improbable. Had India complied with WTO’s Bali agreement and applied peace clause up to 2017, such subvention could have been settled easily. An interim solution with WTO on sugar and wheat subsidy also needs to be explored.


The supply side of sugar from Brazil, Thailand and India is surging. International consultancies are pegging raw sugar between 13cents/lb (about $300/mt) to 17c/lb (about $400/mt) in 2014-15—a wildly fluctuating range of $100/mt. (In October 2012, raw sugar was 22c/lb ($506/mt). At 25.5 million ton (mts) of Indian anticipated output plus 8 mill tons of carry-in vs 24 mts usage, there is a surplus of 9.5 mts.  High  local cost of sugar production ($450-460/mt) are deterrent to emerging export opportunities. Essentiality of extension of Raw sugar subsidy of Rs 3300/mt or $54/mt notified in February 2014 with some readjustments in 2014-15 to neutralize impact of irrational SAP(State Advisory Prices) is justified. Readjustment could be in the form of calibrating it with international price. 

Notwithstanding that subsidy is WTO non-compliant,   the aptness of decision will be defended on the grounds that it helps demand expansion via exports and also because reduction in large inventories of mills will enable clearance of cane arrears of farmers.

Indian raw sugar export climbed to about 1.1 million tons (mts) in 2013-14 from low of 0.19mts tons in previous year- an increase of 480% after accounting for subsidy supported component of 0.7 mts . Prominent buyers are located in Iran, Bangladesh, Sudan, UAE, Sri-Lanka and other countries of Middle East and Africa.  In 2014-15, exports of raws are estimated at one million tons. The debatable issue is why white sugar is ignored for subsidization and this too can be considered on equal footing so that total export (raw+white) of 3-4 million tons can be attained. It may have some impact on domestic inflation—but this has to be matched with priority of clearing cane arrears till such time SAP is rationalized.


 Wheat export

Now replace raw sugar by wheat; higher SAP of cane by MSP of wheat; private mills by FCI; large sugar inventory by wheat stocks of FCI; farmer’s arrears with Government funds.  Price wise world wheat has also plummeted by $ 80/mt since last year--- down by 27%. The concerns between sugar and wheat are similar.

In absolute terms, Indian wheat from open market costs around $285fob while grain of equivalent quality from black Sea is $230-235 fob/mt. Russia and Ukraine, because of their military conflict and western sanctions, have depreciating currencies which are also ensuring de-escalation in prices.  French crop is trading at historic lows at $210-215 with somewhat impaired quality. 

 Indian wheat export averaged around 6 mts per annum in last two years, both from FCI and private trade. Price realization varied between $275 to $310 fob/mt, devoid of any marketing subsidy.  Now, local market prices are no longer supportive even for private sector to match international competition while FCI is slush with stocks.  After exporting 1.7 mts in April-June 2014, overseas contracting has disappeared due to widening disparity. Even neighbouring Bangladesh prefers buying from far off Ukraine or Russia. Estimated projection for 2014-15 is “maximum” about 2 million—a drop of 66% from previous year.
 Is it not incumbent upon Government to reduce its debits/arrears by liquidating FCI’s overstocked wheat (35.5 mts as of 1st September 2014). Though Government has earmarked 10 mts wheat sale under OMSS( open market sales scheme), actual disposal may not exceed 5-6 million tons—the same as attained last year.

The moot point is--Will wheat export again be throttled “n-th” time by FCI inability to compete in the international market? Will India remain a wild –card entry with “off and on” billboard in global wheat trade? Do we not need to show some flexibility for being present in the market?


MSP and SAP are both administrative prices having random convergence or divergence with international values.  In raw sugar export this divergence is being taken care of for the benefit of private mills, their bankers and farmers because loss-prone concerns are raised with Government by mills’ associations/federations.   For wheat, Government’s own funds are involved.  Government/FCI has to introspect and strategize export parity (now about $235) like the way done for raw sugar to operate in market driven volatility.

It will be odd to apply price calibration for raw sugar export and ignore wheat by selective exclusion. If 10 mts wheat is marked for disposal—Food Ministry can assign 4 million tons for subsidized exports.  Absorbing inland transport costs/ ignoring local taxation and carrying expenses are the way out for subsidization. If it means reduction in OMSS wheat price—let that be so –for that will temper food inflation. If world market improves—as can be seen from future PSUs tenders-- such subvention can be eliminated or adjusted.

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