Tuesday, July 25, 2017


Will India remain a long term wheat importer? Is nation’s wheat security is exposed to risk? Will Government intervene to curb or stop import? Should government continue to increase MSP of wheat despite cheaper grains available abroad? Will India turn exporter again?
 Answers to these questions, based upon the data available are that-- yes India will remain a long term importer of wheat; wheat security is not compromised as government is allowing private trade to import to fill the gap created by supply demand mismatch and it itself is building official stocks from local procurement; import can be reduced or stopped by increasing custom duty from existing level of 10%—which is the sole prerogative of Government --and any such intervention will create upward swing in local wheat values. MSP should be raised to augment higher production without neglecting importance of higher yields while attending to vulnerabilities of cheaper imports. Difficult to say if India will be yet another exporter of wheat in near future!!
From an exporter of 6.8 million tons (mt) of wheat in 2012-13, exports trailed to paltry $0.4 million in 2016-17, while imports escalated to 6.3 mt in same year, and are likely to be around 3.5- 4 mts in 2017-18 (see Chart 1).  Global estimates of 2017-18 are - wheat output at 735mt; opening stock 240mts and annual trade 170mts; consumption also at 735 mt. Thus India’s demand is miniscule compared to surpluses available worldwide.
Imports are natural outcome of international prices being lower than local costs after adding sea freight and handling expenses. There could be diverse reasons for steep fall in wheat values abroad-- since 2014--but primarily due to higher output in Black Sea countries (comprising Russia, Ukraine and Kazakhstan) and exceptionally good Australian crop last year. Trend reflecting fall in values of US SRW wheat since 2014 is as per the chart below—from $300 fob /t to $220 fob/t –down by 27%  as of now—but touched bottom of $170 fob/t in Sep2016 or 43% decline. (See chart 2)  
However, Indian MSP climbed from Rs 1400/qtl in 2014 to Rs1625/qtl or 16% higher while import prices fell to  Rs 1275-1430/qtl against India’s wholesale market price in North Zone of about Rs1550 to Rs 1800/qtl. Since bulk of imports land in southern Indian ports for millers there-- whole sale traded values in south are Rs 2300/qtl -- while imported wheat with 10% duty is around 1800/qtl. OMSS price of Rs1790/qtl plus freight also incentivizes imports in preference to local deliveries from FCI. It makes perfect sense to blend cheap imported wheat from Black sea.
If Government hikes MSP in coming Rabi season, which it is likely to do, then cheaper imports will continue next year as well, unless custom duty is also raised to 25% or so.  Prices abroad will remain weak as Russia+Ukraine may continue to put downside pressure with their crops being 70+28=98 mts with aggressive pricing and weaker currencies.
Though Indian government has claimed wheat production of 93 mts and 97mts in 2016-17 and 2017-18 respectively, market assessment is of 84mt and 92 mt.  Indian wheat procurement was 23mts last year and 30mts this year –short of target by 7mts and 3mts in last two years. Firmer local prices, lower releases (4mt against demand of 8mt) by FCI in market through OMSS, official stocks touching near buffer norms on 1st April 2017 and rising imports are all indicative of tightness in availability of this grain which substantiates assessment of market.
 As per IGC London Indian domestic consumption in 2017-18 is projected at 98mt.  We are thus producing less than what we consume.  Ideas of cutting down wheat production in Panjab (which gives highest yield in the country of about 4.7t/ha vs 2.5-3 t/ha in rest of the country) and substituting with other crops will definitely jeopardize wheat security of the country.    
This year Uttar Pradesh (UP) procured 3 mt grains for the central pool, though in the past UP contribution has been marginal. This may have shored up official stocks—but it crowded out market players who normally source their needs from UP.  This also prompts imports because of limited availability nationally. Immediately after end of wheat procurement season in June 2017, local prices touched Rs1743/qtl against MSP of Rs1625/qtl. UP Farmers thus suffered notional loss of Rs 118/qtl.
Already 6 cargos of cheap—low protein- Ukrainian wheat—about 200000mt –are sailing for southern Indian ports contracted at $216-220 cif/t (Rs14300/t) for arrival in Aug-Sep 2017. Existing stocks of wheat at the ports is getting liquidated. Black Sea harvest season is July/August and prices might soften soon.  There would be a new round of purchases. Indian local prices start moving up between Nov-March. Indian buyers are bound to take fresh positions. Australian output is forecast to 25mt-- lower by 10mt-- from previous year. Thus Australia is priced out for Indian market at $275-280cif.
The only fear that trade carries is that of uncertainty of import duty and abrupt changes in Phytosanitary conditions. Considering that good wheat is facing scarcity locally with rising consumption pattern; MSP/OMSS/market prices are much higher than landed imported cargos; and also that India needs to build its official stocks—government has to tread path of any intervention cautiously so as to keep a balance between interests of farmers and consumers.

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