FREE INDIAN WHEAT PRICES FROM MESS OF FIXING, UNFIXING AND REFIXING

This is an article from Business Line appeared on 4th November, 2013

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FREE WHEAT FROM FIXING, UNFIXING, REFIXING

Tejinder Narang

Three major events relating to Indian wheat transpired during last week of October 2013. First, Cabinet gave its consent to reduce minimum export price (MEP) of FCI wheat by 13%-- from $300 per ton fob to $ 260 fob ton for international parity. Second, Roller flour millers clamored for reduction in delivered prices in Southern India and are objecting for special treatment to exports at lower values. Third, Food Security Act stood deferred for another year for implementation.

Today FCI carries about 23 million tons of wheat ($8 billion or Rs 50000 crores) over and above buffer norms yet food inflation remains untamed.

Price fixing flaws

Price as an entity is inherently dynamic. Conceptually, it cannot be fixed. Fixing minimum value at $300, then unfixing it and re -fixing at $260 amounts to going round the circles. In the process vital export is business. Through MEP format, world trade is made aware in advance about the price band at which quotes can be submitted. That vitiates the tendering mechanism. Therefore, fetish for fixation is fundamentally flawed.

Is $260 the right datum? That cannot be endorsed with conviction. In fact world prices reacted down immediately after the Government announced this revision. Will Food Ministry pass over or ignore upcoming tenders if the price is $259 or below and repeat the long drawn-out process of seeking  fresh Cabinet approval for a revised lower value? Should the price quoted be $290 in subsequent tenders, will it resort to MEP hike again.

There are no absolute or real time coefficients of convergence and divergence with Black sea, US, EU, Australian quotes. Thus any suggestive ideas of value equivalence submitted to committee of secretaries or highest political level/CCEA may be erroneous. Cabinet chasing and fixing wheat values can get trapped in vortex of controversies because markets are not predictable.

Exports lost

Indecisiveness on MEP blocked FCI wheat exports for last nine months. CACP has been suggesting minimum export price basis MSP plus 5% or $228-230 fob/mt for shipping out 10 million tons in a year

Bids received by PSUs around $290 / $300 fob/mt were ignored in Feb-March2013. Shipments from FCI of 4-5 million tons are lost by now. Revenue foregone of minimum 4 million tons is estimated at Rs. 6500crores (including buffer carry cost of @21000/mt per annum) or about $1.04 billion when fiscal deficit and CAD are critical to the national economy. After nine months of dithering and indecisiveness $260 is found acceptable!!  Do direct losses and additional carrying costs suffered by the Government are not accountable?

Roller flour Millers

Domestically open market sale scheme (OMSS) price too is “fixed”. Currently, FCI offers wheat to bulk users under (OMSS) at Rs 18200 per ton ($294) in Karnataka and Kerala at the railway yard.  Fixed OMSS costs 13% higher than MEP of $260.

Objectively analyzing even MEP of $260 has nothing to do with export parity. It gives a realization of Rs 16120 per ton (1$=62) which equals OMSS price of Rs 16000 in many north and central states. Thus, overriding preference is for fixed OMSS criteria. Export parity is incidental. Thus flour millers have a case for even enhanced relief when compared to MEP.

 If BPL price can be around Rs 4000 per ton and under Food Security Act (FSA) release rate is Rs 2000  inclusive of freight of about Rs.1500-2000 supply to flour millers at MSP (Rs13500) plus freight (Rs 1500-2000) is more than justified. Thus “fixed” price formula continues to exert inflationary pressures domestically as well.  

Faster disposal needed as FSA deferred

In anticipation of Food Security Act, FCI has overburdened itself with grains for last five years. Procurement has hovered around 70-80 million tons while off take is about 53 million tons. Due to lack of readiness by States, Cabinet decided to defer implementation of FSA on 30th October by 365 days. But the Nation is stuck with massive hoarded stocks. Evacuation of this humongous inventory can be done only if Food Ministry stays away from centrality of “fixing” domestic and international prices. 

Recovery of investments

All that the Cabinet needs to do is to give firm guidelines to the Food Ministry for operational framework. These could be – officially declare stocks that are above buffer norms plus 5% as “surplus for disposal” for each crop year. These should be released/sold by transparent market mechanism for mitigation of losses within a specified time frame of six months to a year, because next crop comes up for procurement and storage.

Market value and investments made in “surplus grains” for each year must be reported every month on the FCI website. This will create awareness of extra inventory and investment stuck. Revenues generated by liquidation of surpluses be reported and acknowledged as recovery or credits from the sunk cost of grains.

Setting the policy and procedures right is the solution and not “fixing” the price irrelevant to the market requirements.