The Hindu Business Line : High wheat prices: Mills go in for ‘risk management’

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Some mills bought and stored good quantities of wheat through a few multi-national companies.
For this, the mills had to pay storage charges and interest for the period the wheat was carried over.

M.R. Subramani

Chennai, March 14 Flour mills in the country imported nearly 20 lakh tonnes of wheat during 2006-07. During the current fiscal, imports by them were hardly 50,000 tonnes. These imports, too, were contracted during March 2007 from Pakistan much before the arrival of the crop last year at a price of around $230 a tonne. After that, the private trade did not contract even a single tonne of wheat for import.

The reason: Flour mills in the country went in for “risk management”. And until last month, some of them were worried that they had burnt their fingers going for the risk management. But today, with wheat (dara) prices rising to Rs 1,140-45 a quintal, they have reasons to heave a sigh of relief. Still, a section of the industry feels they have made a minor loss in opting for risk management, though another is of the view that they were, at least, assured of supplies.

“As part of a risk management plan, some of the mills bought good quantities of wheat through a few multi-national companies. These multi-nationals were to keep the wheat for the mills and were to charge interest for the period they carried over the wheat and storage charges,” said Mr M.K. Dattaraj, President of the Roller Flour Mills Association.

Cost structure

According to trade sources, a flour mill in Karnataka bought wheat from one of the multinationals under this at Rs 13,550 a tonne. “This is mill delivered price, whereas if you had to buy from the market and get it delivered at the mills, it would have cost only Rs 13,250 to get wheat of Uttar Pradesh origin. Thus, there was a small loss even until two weeks ago,” the sources said.

The mills had bought wheat early last year on fears of non-availability and sharp spike in prices. Both did not happen as farmers in Uttar Pradesh and Punjab held back stocks, while the Centre’s plan to import a little over 18 lakh tonnes tempered the rise in prices.

Solace?

Why does it cost Rs 13,550 for wheat procured by the multi-nationals much earlier? According to a South India-based miller, the wheat was bought sometime in April-May last year at Rs 9,930 a tonne. After buying, the mills would have to incur a storage charge of Rs 48 a tonne every month besides 13 per cent interest.

“There is one solace. If you were to buy from the farmers now, there will be some infestation, whereas if you had bought earlier and stored it, the quality would have better,” trade sources said.

“But the quality doesn’t make for loss,” the miller added.

Last year, private trade was believed to have procured around 20 lakh tonnes of wheat from the open market, double than in 2006. But the Centre told Parliament this week that private purchase was below 15 lakh tonnes.

Govt bonus

However, if the Centre announces the much-expected bonus to growers for procuring wheat for buffer stocks, then the mills could feel vindicated over their risk management plan.

“We expect the Centre to announce a bonus of Rs 50-100 a quintal for wheat procurement. Already, Madhya Pradesh has fixed the procurement price at Rs 1,100 a quintal. If prices are to rise, then given the stocks we have, we think our move is a well thought out one,” the sources said.

However, the sources concede that old stocks are discounted and, therefore, last year’s wheat, if available in market when new arrivals begin, would be offered at a discount.

Meanwhile, flour mills have adopted a wait-and-watch attitude this year with regard to procurement for their needs. With reports saying the crop and yield could be good, they could go in for a hand-to-mouth existence or buy after the Centre finishes procurement for the buffer stock on June 30.

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