Monday, August 17, 2015


Tejinder Narang
If one mentally scans through agro policy profiles of various Governments across the globe, they are   generally irrational, full of rhetoric for political agenda and lack pragmatism. Thus trading entities fear “increased” risks from Governments than odd developments in the market triggered by supply-demand mismatch, weather, speculation, or going wrong on trading positions.
 A few illustrations support the above assertion in the foreign trade policies of some governments. Starting from India, Government is talking about four million tons of sugar exports via barter trade. Prime destinations of Indian sugar are Sudan, Somalia, Sri Lanka, Tanzania, UAE, Iran, Ethiopia etc. Barter with whom and in what time frame? Is it practical to structure barter in a highly volatile commodity and in such countries?
Sugar is largely traded amongst private parties based on criticality of international parities. Induction of two Governments, their official agencies, banks with escrow accounts etc. to facilitate barter in export process and additionally involving non-sugar related private /public entities—be it of pulses, edible oil, crude oil or any engineering project etc—is the best way to abort sugar export any way. The talk (that cannot be walked) definitely projects an illusion to public/farmers that Government is serious in remedying the glut of sugar stocks—though trade fully understands the passivity of the policy. The upgraded version of barter is called “counter trade”—which in this case implies “counter to the trade” and therefore a mere rhetoric.
Can the recent Indian action to impose 10% duty on wheat import is in public interest? Flour millers in South India are directly affected by destabilization of a steady duty free policy of last 7-8 years.  Government is attempting in vain to protect its own turf for disposing FCI owned low quality wheat at higher prices while restricting import of good quality cheaper grain from abroad thereby inducing inflationary pressures. The right way forward would have been to discount its official prices at which the low quality grain is tradable otherwise short life of this grain will render it inedible for human and feed consumption. All cost will be then sunk cost
Typically comparable with above stated Indian sordid saga is the Thailand paddy pledging scheme when Thai Government in 2011-12 and 2012-13, in order to generate political populism of farmers, introduced procurement of paddy at about $500/mt versus market price of $280-330/mt. Good and bad paddy was procured not only from Thailand but even through illegal entry from Cambodia/Myanmar/Vietnam. Thai traders lost their primacy in world’s rice market due to non-competitiveness. Today the new Thai regime is struggling to dispose of 18 million tons of accumulated rice of which 6 million tons is unfit for human consumption and 10 million tons require reprocessing. Estimate of unverified loss is about $16 billion.
Iran, though prohibited import of Indian Basmati rice in 2014-15, has imported about 0.9 million tons in the same year. The fact being that Basmati rice is banned officially but select parties are given quotas and licences to import from nominated Indian suppliers. This amounts to state sponsored canalised import via private importers.  Official ban is a camouflage and represents crony nexus between the powers that be.

China imports soy seed (74 million) and corn (4-5 million ton) is imported annually primarily from USA, Brazil, Argentina. Such cargos are exposed to rejections by citing phyto or GM related issues which rattle world markets. By such negative actions, Chinese buyers hammer down world prices or enter into renegotiated contracts at lower values.  Traders/foreign suppliers sustain losses silently. Indeed such actions would have the tacit support of Chinese Government. Traders fear to go legal for the fear of reprisal in future Chinese businesses.
China does not buy Indian non-basmati rice though it sources same from Pakistan. India is world’s largest exporter of rice. Denial by Chinese government is irrational and pro-Pakistan political signal. Right now annual rice import from Pakistan is very limited (0.5 mill tons), but considering appetite of Chinese market in coming years, India will be at disadvantage if this issue remains ignored. The ambiguity in China’s decision is inexplicable while it continues to acquire all shades of  rice from Cambodia, Myanmar, Vietnam and Thailand totalling up to 5-6 mill tons annually.
Nigeria is another example of distorted rice import policy for political patronage. Annual rice imports are 3-4 million tons. Indian exports to Nigeria are about 1-1.5 mill tons.  Nigerian importers who have stake in domestic production can import rice at 30% duty—while standalone/pure traders pay 70% import tax. Effectively, anyone having rice mill can import with 30% duty—while others are denied equitable treatment. Licensed tonnage depends upon proximity with ruling elite. Neighbouring Benin also imports huge volume of rice which is smuggled with connivance of the customs for sale in Nigeria. Flexibility of custom authorities depends upon the signals from political bosses. All rice traders—Indian or Thais or elsewhere have earned, and lost too, substantial money by applying Benin route to Nigeria. 
Russia exports about 20-25 mill tons of wheat annually against production of 53-60 mill tons. Its government is known for abrupt bans/export duties. None can decipher when an intervention will take place. Since Russian grains are one of the lowest priced commodities, the world has to live with the antics of the Russian Government.  
There are other factors like monthly “estimation” provided by various Governments of sowing/yields /production/ demand//exports/imports which influence the markets. Estimates are only “Guess- estimates” or at best some reasoned conclusion based upon assumptions and weather reports.  For example Indian official forecast of “monsoon” has gone wrong so far while there have been contrary privates forecasts. Monsoon news heightens speculation and volatility all the more.
The final word is that Governments are seldom right. Since they wield authority to act arbitrarily and without accountability, nations, people and the trade suffer mutely.


Saturday, August 8, 2015






India is expected to produce 28 mill tons of sugar in the sugar year(SY 2015-16) commencing October 2015 with carry in of about 10 mill tons. Against total consumption of 24 mill tons this amounts to excess of about 14 mill tons lying in warehouses with huge sums blocked. Idea of building a buffer of 3 million tons prompted by industry through Government/FCI is found impractical and thus abandoned. Under such circumstances millers’ liabilities to banks will become terribly toxic.  Farmers’ arrears of –about Rs.19000 crore-- will also escalate. 

 Government is not remedying the core issue of arbitrary fixation of sugar cane prices (FRP/SAP) and absence of its linkages to market realization due to adverse political fallout. Indian sugar is cheaper than the cost of sugarcane if the empirical rate of conversion is applied—a ridiculous case of an end product selling cheaper than the raw material.  (Even revenue from by-products Alcohol/ethanol/co-generation etc. does not compensate the gap in present day earnings of integrated mills.)  Before the sugar sector is sucked into vortex of doom, the Government appears to tackle this problem from the back end—that is, expanding the demand pull through sugar exports and thus anticipating better value realization in domestic market.

As per media reports GOI is contemplating export subsidy of Rs 5000 ($78)/metric ton (mt) for export of four million tons of refined/raw sugar during sugar year (SY) 2015-16 commencing October onwards. In value terms it means subsidy of Rs 2000 crores ($312 million) on projected exports of Rs 8960 crores ($1.4 billion) based upon current fob price of $350/mt of refined sugar.

Mills are currently realizing Rs 19000/mt ($297) for refined sugar export against production cost of Rs 31000/mt by debiting massive losses to company’s accounts and distributing distress to farmers. Net realization to mills with proposed export subsidy will go up by Rs 3000/mt—almost equivalent to prevailing domestic price of Rs 22000/mt. This may enable higher domestic accruals on pan India basis. Mills in UP are at a disadvantage in physical exports due to higher logistics costs than those in Maharashtra, Karnataka, Andhra and Tamilnadu. 

In the preceding two years the raw sugar subsidy authorised by the Government was Rs 3371 (2013-14) and Rs 4000(2014-15) per ton and this has been partially successful with export touching one mill tons of raw. Maharashtra government too has belatedly given Rs1000/mt as additional subsidy for mills in their states.  As in the past, the proposed subvention of Rs 5000/mt will be defrayed out of sugar development fund by increasing the excise duty. Full benefit of this support could not be availed by the Industry as notifications are delayed much beyond the start of sugar year which commences from October onwards.

To what extent this subsidy will be effective in evacuating stocks is the moot point, though such dispensations are violation of WTO.  Even if we forget WTO opposition for the time being, there is danger of further depression in the prices. Crude values will stay cheaper, especially with Iran’s entry in the world pool. The sentiment of bearishness may prevail with Indian announcement of shipping out at 4 mill tons at subsidized quotes. Further depreciation in Brazilian “Real” and some weakness in Thai “Bhat” cannot be ruled out. The silver lining for the bullishness is the virtual absence of end stocks with Brazil –the world’s largest exporter of 25-26 mill tons of sugar and lower carry in with Thailand.


Should the price realization (now $350 fob) goes up to $400/mt fob in coming months, will the government tinker with subsidy of Rs 5000/mt? Logically it should not, because millers will still be exporting at a loss. Government having decided to give subsidy should not act as a trader for fixing and re-fixing the quantum of subvention. The sense is to ship out the maximum tonnage up to 4 million tons than to calibrate subsidy with market volatility. If necessary pre-audit clearance be obtained so that ad-hoc interventions could be prevented—either due to internal or external pressures. Conversely if the fob cost drops to $300/mt, the industry will have to remain content at fixed support of Rs 5000/mt.

The conditions attached to such grants are the registration procedures insisted through DGFT which retard the speed of trading. The argument advanced is that Government needs an official feedback of the total tonnage exported which is baseless. Most of the major ports today are on EDI (Electronic Data Interchange) system and all details of quantity shipped out, prices, and destinations can be instantly accessed. For greater effectiveness DGFT involvement should be dispensed.

If the Government is serious in implementing this policy, its notification (and not pronouncement) should come out before the model code of conduct for Bihar elections is enforced. If the state of Maharashtra continues with its subvention of Rs 1000/mt, it will give a fillip to export. But surely WTO is going to cry wolf and hope the Government will have the guts to respond rightly to WTO that under disruptive global economic situation “terms and conditions” do not apply.

In the final analysis, this subvention is a patch work. If the Government continues to duck the primary issue of freeing the cane prices, banks will be gifted with higher NPAs of sugar mills. Banks will have to be recapitalised with large sums of printed /electronic money leading to erosion of purchasing power of the rupee—a case that fits best for the banana republics.