India: The right strategy for wheat exports
Wednesday, 04 July 2012 | 11:00
The Government is in a bind over subsidising export of Indian grain from the Central pool. The issues that come into play are: Extreme volatility in global wheat prices, progressive rupee depreciation, lower Indian quotes relative to other origins, weather-related issues, WTO subsidy-compatibility concerns and overflowing stocks.
As of July 1, 50 million tonnes (mt) of wheat is languishing in public godowns, against buffer/reserve norms of 20 mt. The enormity of the task of evacuating Government-held stocks via export has, therefore, multiplied.
There is no denying that in June, world prices rose due to extreme dry weather in Russia and the US, and projections of lower global output. Black Sea countries (India’s most potent competitors) have hiked quotes from $ 250 to $280 free on board (fob), while Indian contracts by private trade are being concluded at $250-$255 fob.
As of June 30, Chicago Board of Trade (CBOT) quotes have also escalated to $ 273/mt, from $243 at the time of STC’s tender opening on May 24. Will international prices remain well supported in the coming months, too?
No one can really tell. But harvest pressure in above-mentioned regions in July-August, weakening of the rouble, and India entering the world market with subsidised grain, are bearish signals for the coming months.
Will the Government now consider confirming the transaction to the highest bidder of STC tender at $228 fob/mt – inclusive of fobbing expenses of $40/mt and service charges of 2.5 per cent plus duty entitlement pass book scheme benefits of one per cent? An international trader will have to add additional 5 per cent on $228 as risk premium and profit - totalling $ 240 - for selling to a third party.
Confirming the business at $228 that was based upon quotes of May 24, 2012, while the world market is now up at $280 (after 45 days), can create a controversy for the government. Likewise, not taking a decision on the tender would convey a lack of faith in the formal bidding process.
Frankly, the Government cannot take any non-contentious decision on subtle and multiple variable parameters on which the daily prices of a commodity are discovered. Unless the export deal is settled immediately after tender opening, as Egypt and Bangladesh do for wheat import, decisions are likely to be frustrated by unpredictable price gyrations.
At the same time, the very idea of pursuing tendering route via three PSUs for exporting 4-5 mt of grains and then bids to be considered for acceptance or rejection by a high level committee is self-defeating.
PSUs lack functional autonomy and operational flexibility for undertaking negotiated business, i.e. without calling for tenders. Even the global tender of STC attracted two or three valid bids. This limited participation is an apparent rejection of the procedural format contemplated by authorities.
The other predicament is that wheat from the open market is currently exportable at $ 255/mt fob basis, assuming Rs 55 to the dollar and a reasonable trader's margin. At Rs 57-to-the-dollar, the same is reduced to $246 fob/mt.
But FCI’s wheat at economic cost is $320/mt or Rs 18,220/mt ex-depot, or around $350/mt fob. Compulsions of managing meagre marketable surplus can limit sourcing by private trade. At the same time, FCI values, beyond market rates, will not result in substantial reduction of its stocks, which is the primary objective of subsidisation.
ALTERNATIVES AT HAND
The Government under OMSS (Open Market Sales Scheme) has already declared price of Rs. 11700/mt for flour millers/actual users/States - where, too, there is only marginal lifting. This OMSS price is discounted/subsidised by Rs 6,520/mt from economic cost of Rs 18,220/mt and is closer to the open market price.
The Prime Minister’s Economic Advisory Council (PMEAC) has recommended a discount of Rs 8000/mt for 2 mt of grains (Rs 1,600 crore) from central pool and Rs 150 crore inland transport subsidy for one mt to private trade.
In the current situation, the Government may be well advised to opt for the following course of action:
Fix export target of five mt by March 2013 - pushing monthly exports to 0.6 mt as against current rate of 0.1 mt.
Decide subsidy from the central pool, by consenting to offer OMSS price to trade/exporters on “port delivered basis”. Offering the OMSS rate for export will be WTO compatible too, since the wheat is being exported at the same rate as that being offered to domestic mills.
Subsidy may be dynamically calibrated by linking it to movement in CBOT prices at quarterly intervals.
Dispose of old stocks of 3-4 years vintage (as feed wheat) that are rotting and burdening warehouses with carrying costs of Rs 5000/mt per annum at a discount of Rs 1100/mt over the price of normal wheat.
Abolish tender systems, because once subsidised price is fixed, based on a transparent CBOT-linked formula, it will enable both public and private sector exporters to participate with gusto.
Railways may be advised to move at least 15 rakes per day to port towns so as to plan haulage of approximately one mt per month.
Efforts to export wheat should neither be slow-paddled nor reversed, as overflowing stocks do not justify that course of action.
Source: The Hindu Business Line