TARIFFS, TRADE AND WHEAT
Traders are a smarter lot. They speculate and exploit each and every opportunity. Traders cannot be more thankful when the government gives them a reason to cheer. Sometimes rumors of imposition of higher import tariffs, intended to protect domestic producers and restrict cheaper imports, can also help traders in some ways. At the same time higher MSP meant to help farmers, gives an immediate advantage to the trade because market prices move up right away even through new crop will arrive in next April.
Wheat is a case in a point, where policymakers have been frequently fiddling with custom duty to regulate imports to maintain supply-demand balance. To be precise import duty has been changed seven times since August 2015. Thus, such a rapid frequency of tariff treatments give rise market gossip that is treated with a spark of truth.
A steady flow of wheat import during last three years by the private trade/MNCs caters to private demand of country—mostly in southern states—while the central pool managed by FCI from annual local procurement of about 23-33 million tons (mts) is stored, and then used for Public Distribution System (PDS). FCI stocks declined to about 8 million tons (mts) on 1st April2017 when buffer requirement is 7.5 mts.
Recently media widely reported that authorities are considering yet another hike—eighth alteration- in import duty from existing level of 10% to 20%-25%. The very speculation in anticipated duty structure has lifted the price of imported wheat—sourced mostly from Russia/Ukraine-- from Rs 17500/ton to Rs 18500/ton ex Tuticorin. It made importers smile with money in their pockets, because before this rumor mill, they were unable to dispose of imported stocks for want of parity—that is their landed cost was marginally higher than local values or they were fearing losses. Importers who either diverted or cancelled their wheat cargos on the basis of this hearsay may have regretted. (Reports of about 0.3mt having been cancelled/diverted are circulating in the market) This surge by Rs 1000/mt will also assist local farmers, carrying old stocks, to sell grain at better values.
What gives further credence to this speculation is that Government needs to encourage more sowing of wheat by the farmers in this Rabi season on the ideas of realizing better market values for their crop next year (marketing tear 2018-19). Secondly wheat inflation is in the negative zone (see chart) for last four months—about minus 1.71 in September 2017-and thus additional duty will be virtually neutral to macro inflation.
New MSP of wheat has been notified at Rs 17350/ton—higher by Rs1100/ton from previous year. If Government now actually inflates duty by 10% -- scaling it to 20%-- trade will factor in the MSP, raised by about 7.2%, that will elevate local prices also. For importers, tariff increase of 10% would be substantially offset by higher MSP and make imports during December2017-February 2018 viable.
It is quite possible that by December 2017, Government may again reduce duty to nil or revert to 10%--the ninth time modification-- to once more facilitate import because trade is aware that maximum pressure on reduction in official stocks starts from December onwards because farmers are left with little grains with them. Though government maintains 2017-18 production at 97 mts, some section in the trade peg output at 92-93 mts. Proponents of the alternative view foresee another import wave of wheat after December 2017 of additional 1mt—making it total of 2.2 mt in 2017-18. However, International Grain Council, London estimates that India might import 4 mt in 2017-18 against 6 mt last year)based upon its projection of annual wheat consumption of 100mt.
The fluctuating pattern of duty determination is amply suitable for MNCs (Multinational Corporations) rather than local importers who are India centric. MNCs can take an advance position at the origins—Russia/Ukraine/Australia etc.—at cheaper cost for forward months. In the event of disparity in local market directly when delivery period is approaching or if there is a non-viability in sale price triggered by tariffs—they can divert the cargo to nearby destinations like Bangladesh, Sri-Lanka, UAE, and Oman etc. MNCs also have expertise in hedging their position in international future stock exchanges like CBOT to minimize losses.
Indian importers and flour millers lack both financial muscle and proficiency in hedging. In 2016-17 Indian wheat import was about $1.27 billion –Australia $525 mill; Ukraine$603mill, Russia$33mill; others 107mill. Trade expects much higher flows from Russia after December 2017 of 11.5% protein crop than from other countries.
OMSS price of Rs 17950/ton ex -Panjab costs more than Rs 20000/ton in southern states after accounting for freight and incidentals. Should international prices remain within $220 cif/mt or so, higher duties may not have the effect of blocking the exports. (see chart).
Government will do well not to release excessive stocks from the central pool in the market because FCI/agencies have to assure adequacy of reserves and buffer norms. There are reports of moisture stress in Rajasthan and MP in this Rabi season and attaining production of 100 mts in marketing year 2018-19 will be a challenge; and so will be the realizing procurement target of 33 mts next year.