Wednesday, December 31, 2014



Tejinder Narang
 Russian milling wheat— world’s most traded wheat of 11.5%-12.5% protein-- has suddenly disappeared from the trading kitty of international traders in last fifteen days. What is the export price of Russian “milling wheat” today? Trade reports are marked N/A—“Not Available” wherever column of Russian wheat appears.  Frankly, it carries no “price” in US dollar or any other hard currency except in roubles. There are neither buyers nor sellers for Russian origin cereal.  As of today, Russian wheat equals “confusion” of worst kind. CBOT futures –which reflect movements of US-SRW (soft red winter) wheat, also used as an index for price movements--have captured these developments by maximum upswing of $40 pmt or 16% in last one month.
                                                  RUSSIAN EXPORTS AND PRODUCTION

Pursuant to steep fall in crude oil prices and US/EU sanctions on Russia for forcible occupation of part of Ukraine’s land space, rouble has depreciated from 35 to 60 to a dollar since July 2014. Fifteen million tons of wheat export from July 2014, against estimated evacuation of 22 million tons this year is proving to be super inflationary by 82% for domestic users (see graphics). 



Analytically, price spike in USD is merely 8% for importing entity while exporter realization in Russia is plus 82% in fob terms (rouble 8400 in July2014 and about 15340 in December2014). Local authorities are concerned about high domestic prices/inflation and plan an inventory of additional 3.5 mill tons (existing stocks 1.5 mill tons) even at 11-12000 roubles/mt while in July 2014 the domestic price was 6-7000 roubles/ton. Given fragility of rouble, more exports may lead to more domestic inflation.  New crop to be harvested in July 2015 is under a threat from winter kill, which is also a matter of concern.
The statements to rein wheat shipments started emanating around early December 2014 from the Russia’s officialdom.  The first one was that Russia will issue Phytosanitary certificates only to four countries (Egypt, Turkey, India, and Armenia).  The rest of world stands excluded. (Phytosanitary documentation is issued by national plant protection organizations of each exporting country certifying that consignments meet plant health regulations of importing nation, otherwise no grain of foreign origin can enter any importing country).  Russia’s decision is discriminatory and violative of Trade Facilitation Agreement (TFA) of WTO concluded in November 2014. But when a country is under acrimonious sanctions, why bother??  Ships are stuck at Novorossiysk port for want of these certificates. Secondly, Russian exporters are also complaining of railcars not being made available for transportation to ports. Non availability of grain at the port “technically” implies shutting down exports. And the last straw on camel’s back notified on 26th December is the imposition of 15% duty plus Euro 7.5 pmt subject to minimum of 35 euro ($43) from 1st Feb to 30th June2015. This will first prompt escalation of prices of all origins and then de-escalation after four months thus injecting hyper speculation and volatility internationally. What will be duty component in July 2015 is another mystery.
 What these conditions mean to wheat trade? It is neither a formal prohibition on export nor restrictive or open export policy. But it is a message-- do not meddle with Russian wheat for the time being. All existing contractual commitments catapult to zone of confusion or shall remain unexecuted. Nor force majeure conditions can be enforced for defaults. Contractual commitments in Russia cannot be effectively litigated. The buyers will now be in a huddle either to enter into fresh commitments or negotiate with sellers for alternative origins with cheaper values or seek compensation from sellers for reneging from contracts. To what extent hedging in CBOT futures of buyers/sellers will mitigate losses can be guess-estimates.

Ukraine’s wheat shipments have touched about 8 million tons out of total 10 million tons. Russian developments have also rattled its values with high volatility from low of $235 fob in November 2014 to $260 last week. Ukraine prices could further flare up as they tend to converge with unpredictable Russian values.  Trade will touch Ukraine origin at great risk and peril.   For markets in West Asia, Africa and Far East two origins that will start competing more aggressively will be Australia and Argentina (see graphic). French wheat though cheapest has a problem with quality. Argentina and USA consignments have high freight component of about $40-45 pmt for handymax cargos—25-40000 metric tons.   
FCI from India can too chip in from Jan to April 2015. At this point, price of $275-$280 fob can be secured during January –April 2015 to ship out 3-4 million tons, provided speed of tendering and decision making is accelerated. This niche opportunity is WTO compliant at 1$=63.5 and translates to Rs 17476 fob against OMSS of Rs 15500 ($246) pmt plus freight Rs1000 ($16) from Madhya Pradesh to Kandla port. This is at par or better than current domestic realization. No subsidy issue is involved like raw sugar export proposal, where WTO’s compliance concern has cropped up.
Around April 2015, FCI will get busy with next year procurement. If export momentum and premium is sustained, private sector can take up wheat export at MSP of Rs 14500 pmt from April - July15 because Russian new crops will re-enter world markets with some “unknown conditions” around July 15 again.  This will also result into lesser procurement by FCI.  Indian price realization could well be near $300pmt fob with passage of time if Russian “conditional” exports continue.
The caveat is that these Russians measures are interim executive instructions which can be reversed anytime probably under pressure by exporter’s/farmer’s lobby groups on the plea of accessing hard currency.  To the extent this period of uncertainty remains, Indian Food and Commerce Ministries may formulate effective strategies to take advantage of this low hanging fruit.
Agro-exports of items like corn, cotton, sugar, soymeal are languishing for want of international parity. But here is a market opportunity knocking at our doors (call it “acche sitaarre” or “acche din”). It will be an utter disgrace if we miss this break when 10 million tons of wheat stocks at FCI are waiting to be liquidated with blocked funds and FCI continue to survive on high cost of borrowed capital.

Friday, December 19, 2014



Tejinder Narang
Government “fixes” MSP of 24 agro commodities (paddy, wheat, oilseed, pulses, coarse grains, cotton etc.) before the onset of Rabi or Kharif season based upon the recommendations of an expert committee called CACP(Commission for Agricultural Costs and Prices) constituted in 1965. (For example Rabi report FY 2015-16 of CACP   “recommends” the price of wheat in July 2014 about 10 months in advance—while the harvest and marketing will commence in April- May 2015. Thus recommending/ fixing irreversible value of grains, in anticipation, that takes 100-110 days to finally mature in stresses of hot, cold and rainy climate is a futile exercise. More so when market dynamics may be totally different after about 12 months. The logic given is that farmers have to take sowing decisions based on the offered price or the price discovered by the Government.
The determinants upon which CACP rely have a time lag up to 3 years, because data of previous year takes time to be updated. For example MSP of 2015-16 may be based upon inputs up to FY11 or FY12 collated from different states. Is it not an absurd state of affairs?
 The concept of MSP policy itself and the way it is calculated, both are fundamentally flawed.
Price or prices of commodities cannot be “fixed”.  Prices do fluctuate and have to fluctuate. When a commodity is treated and traded in the market, only then the price is discovered. The rest is all speculation. Pricing cannot be a bureaucratic exercise in the chambers of Krishi Bhawan or by discussion with farmers and state governments. The latter are “interested parties”. Announcement of MSP is thus a speculative view of the Government to manage the commodity markets.
 Values of a commodity “vary” at the “time of transaction” on “marked to market basis” depending upon multiple factors of supply- demand within and outside a country, competing origins, environmental factors, geopolitical situation and currency parities etc.
Furthermore, India’s MSP (Minimum Support Price) is always an ascending road model with no scope for downside correction –at least no so far. With lower crude prices of 40% as of today, declining land values, cheaper fertilizers, lower transportation cost and rapidly cooling rate of inflation, is it not logical that MSP of commodities be lowered than previous year. If not, then conceptually MSP is a sham.
At harvest time—say in April-July for wheat—there are abundant supplies in the market.  Logically prices should moderate or touch the bottom. But procurement of 90% of market arrivals by the Government at MSP in two months, firms up the market.  30 million tons of annual wheat purchases inject about Rs 43500 crores or $7 billion with farmers in 60 days. This sudden rush of liquidity with farmers creates inflationary pressure in the economy.
 Focussed procurement of paddy and wheat has de- incentivized output of other crops like oilseeds. More water guzzling crops, higher imports of edible oil and declining export of oil meals, disparity in export prices of corn and cotton are the visible outcome.
MSP becomes sacrosanct for state governments for indulging in profligacy of procurement for corn, barley or any other item at above the market price for rent seeking with no question asked. Formal procedure of purchases by tenders is dispensed.  Hiring of warehouses and then disposal at lower prices provide an avenue for milking the exchequer.
The commonly held view that farmers will be deprived of MSP (better values) if PDS model is disbanded is devoid of facts. Only 8% of the farmers are beneficiaries of this system. (Refer my earlier article in FE on 13.12.2014- If 92% of India’s farmers can operate open market what is the rationale of retention of such a discriminatory arrangement.
How can a Nation of 3.3 million sq km; with 90% land area and 10% water spread over 29 states can attain or have uniformity in cost of production parameters.  Factors of production --land labour, capital, fertilizer and other inputs-- shall have wide disparities in India’s colossal space but MSP is derived on average weighted basis (see graphic). This is defending the indefensible even if some correction factors are applied. The weighted average formula is an illusory mechanism. ( Discussion Paper No. 7 of CACP of June 2013 –“Pricing, Costs, Returns and Productivity in Indian Crop Sector during 2000s” by Ashok Vishandass with B. Lukka .


Though CACP may claim that it determines MSP after detailed analysis of  demand and supply, cost of production, International price trends,  inter-crop price parity etc. -- still the skewness prevails as referred in CAG report of 7th May 2013 (see the chart)  The skewness in 2006-2012 varies between 29 to 66% for wheat and 14 to 60% for paddy. Gross and net profits in wheat during 2006-12 have been significant (graphic).

 MSP of wheat of Rs 1450 qtlfor 2015-16 carries net margin of 22% ( comprehensive cost is Rs 1191-CACP Rabi report of 2015-16).For considering international price parity CACP’s reference point is US SRW wheat at Rs 1580/qtl—which is absolutely naive. It should be Black Sea wheat around Rs 1400/qtl.
Ideally CACP should have recommended reduction in MSP of wheat when excess stocks are stuck with FCI/agencies—while it followed ritualism of annual increase, though marginal. The blame game then shifts to the Food Ministry for its inability to liquidate 10 million tons of stocks as mandated by the PMO.
How to discover the price?
Imperativeness of dismantling MSP cannot be denied or evaded. However as first step, Indian futures/spot markets, even if they are imperfect can be used for estimated price discovery and can be supplemented by e-tendering for precision purpose on daily basis when the procurement is made on mega scale. Farmers can work directly or through arthiyas, brokers and commission agents for e-tendering for the physical sale to the Government agencies. Crop insurance scheme may be put in place for extreme exigencies.
 When the country is in full readiness for income support subsidization through Jan Dhan Yojna, Government may have to unwind itself from Public distribution System and let the private players take over and deal with farming community at all levels.