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WEST ASIAN CONFLICT MAY BENEFIT INDIA’S AGRO EXPORTS TO IRAN
A hypothesis on emerging situations—Rice exports to Turkey zooms too.
After imposition of international economic sanction on Iran in 2010, Indo-Iran rupee agreement of 2011-12 has been a blessing in disguise for export of Indian agro, iron/ steel items and electrical goods which were otherwise traded from Dubai. During 2011 -2014 Indian exports to Iran of all items have jumped from $2.5 billion to about $5 billion —an increase of 100% in three years. Import of crude oil from Iran has stabilized at $10-$11 billion per annum from high of about $14 billion.
Under rupee payment arrangements, India purchases Iranian crude in 45:55 ratios of rupees and euros respectively. Though there is no prohibition on Iran for importing food stuff/agro commodities and medicines in hard currency from anywhere in the world, yet it has preferred utilization of rupee funds credited with UCO bank by importing larger tonnages of Basmati rice, animal feed stock (soymeal/rapeseed/barley) and sugar (both raw and refined). Iran’s non- interest bearing rupee account with UCO bank is flush with rupee funds of about $4 billion and they should have interest in its faster usage.
Source—moc ; Apeda
IRAN-USA deal rocks
In November last year, USA and Iran signed an interim understanding that would facilitate comprehensive agreement for lifting sanction by November 2014. After making considerable progress on negotiations, both sides are dithering on the “deal” as envisaged. There are perhaps two major contentious issues. First, consensus on retention of centrifuge capacity by Iran is evading (for low enriched uranium –LEU- meant mostly for generation of electrical power). Second, pursuant to Iraq-Syria-ISIS confrontations, Iran demands “first” lifting of UN’s economic sanctions as a condition precedent for the nuclear deal. Pending resolutions on these ticklish points, sanctions may continue for extended period. But it might help furthering India’s agro trade in short term.
The chart below shows last three year trend of rising exports (undertaken by private trade) of Basmati rice (Pusa Basmati 1121), oil meals (mostly soy bean meal) and sugar. Projections for the current year are negative. But recent Sunni-Shia conflict can belie the anticipated trend. Here is the hypothesis to support that.
Despite India’s monopoly in Basmati rice export, trade circles are diffident in attaining last year target of 1.4 million tons (mts) at average price of $1260/mt fob to Iran. Apparent reasons offered are-- Iran is insisting on improved quality within tolerable heavy metals and mycotoxin (poisonous fungi) limits from “approved” sellers; has hiked import duty and delayed purchases so far.
Market matrix is different this year. After November 2014, Indian Pusa Basmati 1121 has surplus availability in Punjab and Haryana and prices may be much lower –by about 20%-- around $1000/mt fob. Demand contraction from Iran is not foreseen. In fact demand pull at low prices may be more intense.
Considering geopolitical turmoil in West Asia, where Iran is in league with Iraq and Syria, it is quite possible that rice import for the “region in conflict” may be “financially” routed via Iran. Iraqi Government over last 4-5 years has preferred to source Uruguay rice of certain specifications which cannot be met by Asian origins. Recent tenders for import of rice stand deferred. Supply of Uruguay rice may not be feasible in unsettled environment. Private imports of Basmati by Iraq will also slow down.
Predominantly Sunni influenced countries like Saudi Arabia, Kuwait, Jordan, Turkey, Qatar, Bahrain, UAE assisted by US are have created military, political, economic turbulence in Shia ruled nations. This might choke food supplies in Shia territories. Indian traders/millers can facilitate rice shipments to Iran against assured payments from UCO bank. Iranian traders or intermediaries can arrange movement via land routes to Iraq and Syria. These developments can catalyse Basmati export to Iran.
Simultaneously, Turkey’s import of Basmati/non-Basmati rice from India has risen from 16000mt in FY13 to 195000mt in FY14, Apr-Jun 185046 this year and trending to 740000mt in FY15 (2014-15)—an increase of 4400% in two years. One can easily infer where rice from Turkey could be destined. Surely to Sunni dominated areas!! Unconfirmed rumours of major Indian rice deal to Qatar are already circulating in the market.
Thailand & Vietnam are preoccupied with demand in Far East. The supply-demand gap in West Asia may widen sooner than expected to India’s advantage.
Soymeal and sugar
For animal feed ingredient like soymeal, Iran has the option of importing at lower prices from Brazil and Argentina. And they will do so. Last year Indian exports of oil meals of 1.2 million tons averaged about $550/mt fob. Latin American Soymeal’s prices are sinking and are currently at $440 delivered basis. Indian meal is traditionally traded at a discount of $20/mt to Argentina--that is for saleability buyers will accept Indian supply at $420 cif. Our exporters are thus grossly out priced at $470 cif Iran basis (by $50/mt with Argentina). Logically India will be seller of last resort unless there are comparable discounted values. Analysts expect Indian export to fall by 60% this year.
Indian sugar too is at huge disparity with Brazilian sweetener. Unless Indian sugar gets subsidized, last year’s export of 0.37 million tons to Iran are unachievable. But here is a word of caution --Will MNCs with or without the permission of OFAC (Organisation of Foreign Assets Controls of US) take an exposure with Iran for supplying soymeal and sugar without earning annoyance of Sunni group??? If MNCs are cautious then India gets a niche window. Hope of market reversal in uncertain conditions cannot be ruled out.
If this hypothesis emerges as a reality, Indo- Iran’s rupee payment and conflict in West Asia can be supportive of India’s agro exports. To quote J.K. Rowlings’ from Harry Potter—“Of course it is happening inside your (my) head, Harry, but why on earth should that mean that it is not real?” Markets, politics, governments and weather are all unpredictable. What is imagined can turn out to be real too.