Wednesday, April 29, 2015




Tejinder Narang
INDIA’S SUGAR production is to touch 27 million tons with carry in stock of 9 million tons that indicates total availability of 36 million tons vs local demand of 23 million tons. Exports in the first six months of the sugar season are sluggish (not exceeding 0.2 million tons) despite subsidy of Rs 4000/mt and additional proposed subsidy of Rs 1000 by Maharashtra Government, market is bearish through some containerised business is reported. Supply and demand are grossly mismatched.  Mills’ arrears of sugarcane to farmers are about Rs 20000 crores on all India basis and the issue is how these can be squared up by official intervention.  
In mid- April 2015 after meeting all stake holders, Union Food Ministry agreed to refer a proposal for building a buffer of 3 million tons of sugar to PMO for consideration so that market values escalate that might assist the mills in recouping losses.  By shielding and denying the curative option of reforming the steep hike in SAP (State Advisory Price) of sugarcane and instead linking it to reasonable market determined price, the stocking of 3 million tons is akin to converting the infection into cancerous virus. The entire concept is unworkable ab-initio.
Finances of all 500 sugar mills are stressed and stretched. By acquiring pro-rata stocks of the mills the controversy of first charge by the banks on the movable assets will flare up.  Thus there is no surety that farmers arrears will be paid. The matter could be litigated as usual.
 Considering acquisition cost of Rs 30000 per ton for total of 3 million tons, it entails upfront investment of Rs 9000-10000 crores and carrying cost of Rs 1200-1300 crores per annum.  From where funding will be sourced? If SDF (sugar Development Fund) is the coffer, then it is the public money that is “not” meant for official hoarding. And SDF may not have the desired money anyway. Will the purchase price be calculated state wise or “one price fits all” formula applied? Can the Food Ministry afford to procure above the marked to market price or at a fixed price (of say at about Rs30000 per ton) which could be minimum cost of production?  Transparency will be missing if stocks are purchased above the market value.
 Where will this sugar be stored? Since double movement of commodity involves additional expenditure, the sweetener shall remain in the warehouses of the mills. For facilitating paperwork, these stocks may notionally be hypothecated to the Government with oversight of official inspectors or inspecting/excise agencies. But the possession remains with the millers. Single point accountability will be lacking. The state of affairs will be similar to the processed/custom milled rice of FCI that remains stacked with the rice mills on behalf of the Government.  Will the Food Ministry become an extension counter for managing surplus stores of the industry and the mess created by the State Governments?
Large scale leakages of sugar in the market cannot be ruled out which implies double payment to the processors. Market prices will slide down with greater pace. Next year it will be four million tons that Government may have to stock in, again in an arbitrary manner because consumption is artificially articulated and production of sugarcane is incentivized.
 It is fry cry from the decontrolled regime that was made effective in April 2013 and from which the industry unshackled itself after many years of lobbying and campaigning. When BJP has been championing less of Government and more of governance, the idea of buffer militates against that principle.
The alternative is to export 3 million tons of raw and white sugar by aligning prices with world market. But the dilemma is that  subsidy on raw sugar has not been fully effective due to depressing and fluctuation prices (see chart). Low Crude prices and therefore low ethanol values; and depreciation in Brazilian Real are the inhibiting factors in aggressive export from India. Even if export of half a million tons are attained, the problem of surplus remains. In the absence of bulk exports, conversion of molasses to ethanol will also result in lower sugar production, provided this can be profitably absorbed by OMCs (oil marketing companies). But these two options –exports and ethanol- cannot give immediate and long term relief to the industry.
The agenda should be setting the SAP right. Central Government is unable to do it because the decision to fix sugarcane price rests with States. Rangarajan report rests in peace and formula of 70: 30 ratios is also not being followed despite initial introduction in Karnataka. How can price of sugar cane be political when end product is driven by dynamics of domestic and international market?  In this milieu of utter confusion, judicial activism can help. Why not the industry hires a competent consultancy to bring thread bare the contradictions and file a PIL in Supreme Court? Why attempt to survive on the crutches of the Government every year?
Let the Supreme Court advice the principle of fixation of SAP or FRP, instead of conceiving short term quick fix solutions, which tie all stakeholders in intricate knots. It may take a little time but it could be a lasting resolution. 


Tuesday, April 14, 2015




 In February/March 2015 unseasonal rains poured in India’s wheat growing regions. The issue at hand is of “estimating” the quantity and quality of nation’s wheat crop that is due for harvest anytime now. In the process, truth has become a casualty while over speculation is swaying the sentiments.  This time conjecturing is done more by the concerned State governments rather than traders. 
The apparent logic is-- if open declaration of massive loss/damage is announced by the Chief Ministers, it strengthens their case for Central relief for vote banks politics—especially when farmers are involved. State governments of MP, Rajasthan, Haryana, Punjab and Gujarat are all affiliated to BJP and therefore irrespective of the ground realities, the case for central assistance for emergency relief on account of “wheat in rainy days” called “nature’s calamity” can be favourably considered. Waiver of any farm loans will be in addition to this relief. Even Congress party, led by Sonia Gandhi is ardently campaigning for funding farmers. Controversial land acquisition bill is another compulsion for the BJP to demonstrate pro-farmer leanings and payment of such compensation will be helpful in this respect.
The recent assessment of Agriculture ministry (FE 4TH April2015) of wheat crop damage to 6.3 million hectare or about 18-19 million tons of wheat (average yield of 3 metric ton/ha), out of total expected output of 95 million tons or about 20% damage is at variance with 4-5% damage indicated by the Agriculture Minister himself.   The grain has matured prior to untimely showers and thus loss /damage/ quantity mitigation should be minimal after a delayed harvest. The concept of damage—total loss or lower quality parameters –remains unclear.   On the contrary, the surplus like situation of wheat is reflected by the NCDEX futures on 10th April 2014 at about Rs. 1424/qtl versus MSP of Rs 1450/qtl. Prices traded at future exchange are lower than MSP which suggests abundance availability of good quality wheat in open market. Future prices can slide down further when new crop hits the marketing yards (Mandis). The government estimation of damage to crop is incorrigible as this is not verifiable by dynamics of the market. Why make trade nervous for political bargaining between the Centre and the States in the name of farmers.

Assuming (without admitting) that crop is badly hit, the chart below gives the upsurge in wheat production in 2013-14 in some states since 2010-11 when output was around 87 million tons. The continued hike in MSP (Minimum Support Price) supplemented by bonuses given by some States has also shifted acreage to wheat. In MP and Rajasthan, acreages which could have been better utilized for oilseeds and pulses may have gone for wheat too due to open ended procurement and ever increasing MSP. MP that harvested around 14 million tons in 2013-14, is likely to produce about 15-16 million tons of wheat. If there is some shortfall in some States, this can be compensated by other areas thereby keeping the national output unaltered.

The next question is what happens to the procurement.  Even though FCI may prune down direct purchases, State Government Agencies (SGAs) will ensure that maximum tonnage is procured on behalf of Central Government to take care of farmer’s interests. Mandi taxes are 14.5%, 10%, 8.5% and 8.2% in Punjab, Haryana, UP and MP respectively over and above the MSP. This revenue indeed has to be earned and therefore even somewhat compromised quality of wheat will also be procured by SGAs. Except keeping the moisture content unchanged to 14% maximum which is the right decision, Food Ministry has accepted procurement of Lustre loss wheat and relaxed shrivelled/shrunken/broken percentage.  Under such circumstances, 28-30 million tons of procurement is expected as in earlier years.
Lustre loss quality was procured ubiquitously in 2001-2004 and even exported by FCI. For the common man it hardly matters if the wheat is lustre loss (in outer appearance) or not, because he is concerned with quality of flour which can upgraded if required by appropriate blending with superior quality of wheat   
MP government has reacted in a manner as if entire wheat crop is of substandard quality which has unnerved flour millers especially in South of India.  In addition to their normal annual import of 50-60000 metric tons of Australian Premium White (APW) wheat in containers for specialised flour production, millers sensing uncertainty have reacted by covering about 100000 metric tons in bulk cargos of 25-30000 tons each. Price ranges $265-$270(C&F-cost and freight landed at Indian ports) ---or around Rs 16600-Rs 16800 per metric tons-- as against Indian wheat available in south at Rs 18000-18500 per metric ton. Commercially such imports are fully viable and thus justified. (This also indicates that South Indian market is more sensitive to crop quality of MP rather than Punjab/Haryana/UP). FCI prices are based upon outdated concept of MSP and cannot be paired with international values. Only if open market values drop to the level of competition, imports will taper down and finally halt.
World market is flush with about 900 millions of wheat. So long as corn prices are determined by lower crude prices and also because wheat/corn prices are intertwined, wheat values too will remain bearish. Temptation to import more grain, in falling market, shall remain-- though total quantum may not exceed 0.2 million tons which is minuscule to the total Indian availability of about 115 million tons including carry in stocks of FCI.
Apart from this political posturing on the current wheat crop between the Centre and States, Indian Government has to ponder what is to be done with excess of high priced wheat hoarded in open and unhygienic warehouses. The current policy of incentivizing more production, storing more and selling less defies common sense.

Monday, April 13, 2015


BUSINESS LINE 16.04.2015


Tejinder Narang

Iran -USA nuclear deal, expected to be concluded end June 2015, should pave the way for free trade. This will end relatively preferential treatment accorded to India under Indo-Iran rupee payment agreement.  Usage of this rupee account will be need based and will not remain a pressure point on Iran.  A way may also be found by Iran to repatriate the balance in rupee account in hard currency after sanctions are lifted.

Historically Indo- Iran trade has survived on innovative basis that goes through the metamorphosis after a few years leaving many issue unresolved. India has past experience with Iran of two earlier pacts which came to definite closure abruptly. First, Kudremukh Iron Ore Company Limited (KIOCL) barter of 1976, against which Iran invested $630 million in return of Iron ore. It was abandoned in 1980 due to changed political realities. Thereafter another bilateral trade and payment mechanism –Asian Clearing Union (ACU) was terminated by RBI in December 2010 under US pressure. Export of Non- Basmati rice and wheat in 1994 -95 was done under ACU.
Thereafter Dubai route emerged very strongly. In February 2012 India’s UCO bank is nominated to deal with four Iranian banks for payment in 55:45 ratios of hard currency and rupees respectively.
EXPORT $ bill
IMPORT $ bill

The above chart shows a very significant declining trend in major Indian commodities after US-Iran “interim” agreement was signed in Nov 2013. This is not a matter of conjecture but reflected by facts on ground.
Basmati export to Iran flourished during initial years (2012-13 and 20113-14) by relying upon three major buyers. But in last 18 months some of the suppliers have their deemed profits wiped out and got terrible drubbing in their balance sheets. The same is true with oil meal exports. Not only money made in some bargains was lost subsequently –India abondoned important traditional markets of meals due to value distortion created by high priced exports to Iran.
 Raw sugar export was somewhat workable at lower volumes in 2014 but no repeat business followed. GOI made persistence efforts for wheat export for relaxation of Karnal bunt for “negligible %” instead of “nil” but PPQ bureaucracy of Iran has not budged. Apparently the value added business of pharmas and rail lines/steel pipes appears to be doing well. Engineering business/oil exploration is also being supported at political level for India’s concerns with Pakistan, Afghanistan and Baluchistan.
Coming back to the commodity trade, trading experience even under rupee trade managed through UCO bank, has not been very rewarding for the Indian counterparties—not because the trade did not materialise but because of two vital factors. First Indian traders were competing with each other and sabotaging the on-going business by offering varied terms of trade and compromised specifications. Secondly, Iran knew that Indian side has made money and they levied custom duty or imposed rigid custom regulations that offered Iranian buyers opportunities to get hair cut from the contracted prices. In both these cases, Iran called the shots.

 Indian trade has no contractual recourse because Iranian law is incorrigible.  In Government business bid bonds and PGs are demanded with unlimited time frame. Letters of credits once issued by Iranians banks are very difficult to get amended.  Government departments are working in silos—for example—commerce department will have no say in agriculture—the type of working relationship we have in India. Iranian traders sight currency fluctuations or some government regulations for non- performance and Indians are totally at their mercy because factual position remains veiled.

GTC and other traders have very “intimate” contact with MNCs. Their “preference” for commodities lies elsewhere except Basmati rice. Even during sanctions food items were not under any prohibition, so Iran continued to exercise sourcing elsewhere despite surplus in UCO bank rupee account.
Iran works as per their priorities with patience—with utter disregard to any agreed provisions-- and it is not possible to extract a viable bargain because they are exposed to rough and tough trading environment.
On short term, India may find itself isolated from Iran in trade (except Basmati rice). Iran will court Western powers/China and other origins for trading and building up its other petrochemical capabilities. All nations (P5+1) are not signing the nuclear agreement for charity.  Trade, in preference to investment, will be foremost in their minds. Dubai will surely emerge as a vital trading hub. Indian trade will be best served by dealing with Dubai counterparties who may take exposure to Iran.
 Iran too will go through developmental phase. But surely it will rebuild its nuclear capabilities under one pretext or the other. That will again lead to some sort of disruptive environment in trade. The on-going Sunni –Shia discord can also go through expansionary phase which may compel western powers again for interventionist measures. Thus, on long term India will again be in the reckoning.

At this point of time India has to walk back in trade.





Under a tentative framework agreement reached between six major powers and Tehran in April, Iran agreed to

limit its nuclear activity in return for sanctions relief. A final deal could be reached by June 30.

That prospect appears to have emboldened Iran, said sources familiar with trade negotiations with India,

including in its handling of a sizeable deal to import railway tracks.

The $233 million contract, signed last October, was for India's State Trading Corp (STC) STCI.NS to facilitate exports of rail tracks from SAIL Ltd SAIL.NS and Jindal Steel and Power Ltd JNSP.NS to Iran's railways.

But Iran told Indian negotiators that it had offers from other countries, including Turkey, to supply the

equipment at a cheaper cost, the sources said.

Last month, New Delhi sent trade secretary Rajeev Kher to persuade Tehran to adhere to the original terms,but he came back "empty handed", according to one of the sources.

"They are no longer the same Iranians that came to us last year for signing the deal," the source said. "They

were polite this time, but had an upper hand in the negotiations."

India has cut the value of the deal by about 7 percent to $217 million, the sources said. They added that they worry the Iranians may seek further cuts, and could split the order with other countries.

STC chairman Rahim Khaleel declined to comment. Kher, Iran Rail, SAIL and Jindal Steel did not respond to requests for comment.

It was not immediately clear whether other countries that trade with Iran have seen a similar hardening in

Tehran's stance. Oil refinery sources in Japan said they had not seen any change yet.


Iran said it wanted to renegotiate the rail contract, because the euro had declined against the dollar and steel and iron ore prices had fallen significantly since the deal was first struck in 2014.

Indian negotiators said price and currency risks were incorporated into the original agreement, but they had to give in, the sources said.

It was a large order for the Indians and the spectre of competition from other suppliers loomed large, they


"Earlier they were standing in line to offer us deals," one source said. Now, they ask the Indians to "wait in line and wait your turn."