RUSSIAN WHEAT SUPREMACY & BEARISH VALUES CREATE A DILEMMA OF DUTY FOR INDIA
If there is one notable development that needs to be acknowledged in commodity markets, it is the supremacy of Russia in global wheat trade. Russian wheat production has scaled up from 38 million tons (mt) to about 81mt in last five years—an increase of 113%. Productivity in terms of yield is up from 1.8t/ha to 3 t/ha—about 67% in the same period (See chart).
Russian productivity is even higher than that of Australia; ruble is a weaker currency further weakened by US sanctions over Crimea; has limited storage silos space; inadequate holding capacity with farmers; consumes annually about 40mts (about 50% of production)—all these factors contribute to lower prices in US dollar. MNCs like Glencore, Cargill and Olam have built silos and export terminals, take positions on wheat trade on break bulk cargos of 30-50k.Just as India is the largest player in rice internationally and any restrictions/ban/export duty will fire world values of rice, any of such actions by President Putin can ignite wheat markets.
In global wheat trade price discovery is made at CBOT for US SRW wheat and then those values are applied with certain premium and discounts for determining sale/purchase quotes of other origins (e.g Australia, EU, Canada, Black Sea etc). But this process is changing fast and that is --Black Sea wheat prices of Russia/Ukraine have now bearing on CBOT quotes.
Soviet Union was once dependent upon wheat supplies from USA and elsewhere. IN 2017-18 Russia, alone, will again surpass USA in wheat exports. It is expected to ship out 32mt in 2017-18 versus 27mts by USA as per International Grain Council –London. In 2015-16 also Russian exports exceeded USA by 5mt. (see chart)
Egypt –an annual importer of 11-12 mt of wheat- has been buying bulk of its purchases from Russia and against competition from other major origins. Most of the Middle East also seeks Russian cargos. Indonesia buys most of its wheat from Australia due to logistical reasons but has switched to Russia for lower costs. FCI import of about 8 mt in 2006 to 2008 had a substantive component of Russian cereal.
Russian/Black sea wheat, also referred as red wheat, has four major varieties which include feed wheat (meant for poultry and livestock) and milling grain (for flour). Depending upon protein content and other parameters like Gluten (stretch ability) blending of feed wheat with milling wheat can reduce price of a cargo.
China by its efficient productivity in consumer goods has kept the lid on inflationary pressures worldwide. Russian grain too has traded within a limited range of $160-200 ex warehouse for acceptable quality Type 3 grain in last three years, thereby giving a tough competition to global traders including others in the Black Sea region. Though there may be specific quality issues with Russian wheat, but they do not justify much higher premium of other nations.
Indian flour millers blend imported wheat with local wheat for getting specified specifications of flour. Low priced imported wheat lowers wheat quotes and, wheat flour inflation. From India’s perspective surpluses of Russian wheat and its price around $190/ton landed/CIF, it costs about $234/ton or Rs 15000(10% duty paid plus expenses of Rs 1500/ton) which is lower than Indian local market prices of about Rs 16000-17000/ton or $250-$275/ton in Indian north zone (Deptt. of Consumer Affairs). Price in south zone of Indian wheat will be much higher. Thus it prompts imports from Black Sea and Australia.
Downward price pressure on Russian crop will continue in next three months and that is bound to exert corresponding bearish sentiment on Indian wheat. Import intensity can increase with another $10/ton fall in prices, making imported grain cheaper, lowering local values that will not be remunerative to Indian farmers.
Though some cargos earlier imported at $220 CIF/ton prices and old stocks stuck with importers may have slower lifting at a marginal loss, new contracts at $180-190CIF will make up the loss provided import duty is not hiked from the existing level of 10%. IGC expects India to import about 3 mt by March 2018 out of which 0.2 mt has arrived so far. Also higher duty will completely block any imports from Australia where production is down and prices averaging about $260 CIF.
Government also needs to beef up its stocks that bottomed to 8mt in April 2017. Fixation of high OMSS price of Rs 17900/ton is meant to ensure that FCI reserves get depleted to the minimum. Should import duty be fixed at 20-25%, it will discourage imports that would create demand pull from domestic market, including FCI.
With August WPI inflation rearing its head again to 3.2% in August 2017 from low of 1.9% in July 2017, can we afford not to give priority to consumer at the cost of farmer. That is a very challenging call. Russian bearish wheat values notwithstanding, Government has to do tough balancing act on wheat inflation and between farmers and consumers.