The Hindu Business Line : Food procurement: Market price or MSP?

The Government’s decision to import wheat for the second year in a row to increase the buffer food stocks meant for the PDS (public distribution system) and other welfare programmes has raised the hackles of various farmers’ associations in major wheat-producing States.

They feel short-changed by the procurement policy of the Government not to procure the wheat arrivals in the domestic mandis at market prices, if above the minimum support price (MSP).

Paying more for imports

The Government imported 55 lakh tonnes of wheat during 2006-07 at an overall weighted price of $205.36 per tonne, when the domestic procurement was done at Rs 850 per quintal during the same period. This amounted to paying an excess of 6 per cent to global wheat traders.

However, there were plans to import 23 lakh tonnes of wheat this year by various State agencies of which 16 lakh tonnes have been contracted at around $400 per tonne, which is 60 per cent more than the MSP for wheat the Government has committed to pay to the domestic producers of wheat in the ensuing rabi harvest crop.

The balance procurement has been temporarily shelved because of very high prices quoted by international traders at over $500 per tonne due to thin trading volumes causing spurt in prices every time a tender is floated.

Food subsidy bill

Is this discrimination between domestic producers and international traders fair? The Government is concerned about the booming food subsidy bill, which it has to bear from the Budget in case the wheat for the buffer stocks is procured at market price, which is likely to result in higher domestic wheat prices due to higher demand for wheat.

Lower procurement

The National Food Security Mission started this year is supposed to increase the yield of three major staple crops — rice, wheat and pulses — by the end of the Eleventh Plan period. The production target for wheat this season is kept at an ambitious 75.5 million tonnes.

Despite increases in wheat production there has been a decrease in official procurements. The drop in wheat procurement by FCI (Food Corporation of India) has been almost 40 per cent last year, from 147.85 lakh tonnes during 2005-06 to 92.20 lakh tonnes during 2006-07.

Buffer dips

Against the minimum buffer norms of 82 lakh tonnes, the actual stock of wheat as on January 1, 2007 was only 57 lakh tonnes. The point to ponder here is whether the fall in official procurements is due to lower wheat arrivals in the mandis.

Are the grievances of the domestic producer farmers justified and what could be the optimum strategy to maintain buffer food stock norms to meet food requirements for various Government welfare programmes through the PDS?

In Haryana, the official procurement of wheat last year was less than 50 per cent of the mandi arrivals, with the majority of the arrivals being cornered by the private trade, particularly in those mandis that are closer to big towns at prices in excess of the MSP. The experience this year is not going to be better despite announcing of higher support prices well before the sowing season.

Global stocks low

As per FAO (Food and Agriculture Organisation) data, global wheat stocks are at the lowest level since 1980, corresponding to just 12 weeks of the world’s consumption, almost a third lower than the average levels of stock during 2000-05. FAO’s food price index has gone up by almost 40 per cent this year. International wheat prices are up 50 per cent as compared to last year.

Wheat futures prices have hit the $10 per bushel mark for the first time in the Chicago Board of Trade. The massive shift of acreage to corn for bio-fuels in the US is perceived to be the immediate cause of the fall in global output of wheat, further accentuated by adverse weather conditions in major wheat producing countries Ukraine, Argentina, Australia and Southern Russia.

MSP remunerative?

Does announcing a higher MSP of Rs 1,000 during rabi 2007-08 season act as a fair balance between the competing interests of the domestic producers and the consumers? Should farmers be denied right remunerative prices to protect the interests of the consumers and the PDS? What are remunerative prices and are MSP remunerative prices?

Minimum support price by definition is determined on the basis of actual costs of production to the producer farmers. Does payment to the farmers at the MSP be said to be remunerative when market prices, both domestic and international, are ruling much higher. While MSP and remunerative prices were synonymous when MP were ruling lower than the MSP or the actual cost of production to the farmer at the time the surplus produce is brought to the mandis.

The Government protected the interests of the farmers by stepping in and committing to purchase the produce at the MSP. The MSP loses its significance when the market price is ruling higher than MSP at a time when global food prices are in the upswing of the business cycle.

Should producer farmers be denied their right of remunerative market prices in “consumer interest”? What is the adverse fallout of the policy of Government not entering the mandis as a taker of market prices and insisting to procure foodgrains for the PDS at not above MSP levels?

PDS to be hit

The Government’s share of procurement would fall as a percentage of the total arrivals affecting the availability of supply for the PDS, leaving the field open to the private trade to corner the wheat arrivals at prices over and above the MSP but less than fair value to the farmer had the Government entered as a buyer at the market price.

The Government’s buffer stocks fell below the norms as happened recently, thereby setting an unnecessary panic reaction of importing wheat from international traders at much above even the domestic market price (let alone the MSP). The gainer is the private trade, both domestic and international, at the cost of both the national exchequer and the domestic producer.

Transparency needed

An analogous situation in industry is if the Government refuses to buy domestic production at the market price in “consumer interest”, but instead imports the same at much higher rates from international traders at nil import duty under the guise of stabilising domestic prices. The game is unfair to the domestic players as they are even barred from participating in the international tender.

All this has to be obviously funded by the taxpayer. On the reverse there is a fair case for price preference to the domestic producers as compared to international imports by way of imposing appropriate import duties. A well-thought-out and transparent policy is thus needed to procure wheat for the PDS supply and domestic producers deserve a level-playing field with international trade in this upswing cycle of global wheat trade.

The right policy

The actual price of procurement during wheat arrivals in the mandis is not equivalent to procurement at the MSP. The actual procurement prices by the Government should be market price-driven and not MSP-driven. Actual procurement prices should be totally delinked from the MSP, other than that the procurement price should never fall below the MSP. Any difference between the actual procurement costs based on market price (or MSP, if market price falls below MSP) and the actual rates of supply through the PDS as per policy should be met by way of budgetary support form the public exchequer. As estimated in a recent NCAER survey, real savings of national money would accrue if the siphoning of 50 per cent PDS supplies to non-eligible beneficiaries is stopped completely.

There is no justification either to incur additional charges on account of fees being paid to the commission agents when procurement is done at the MSP due to market prices falling below the MSP, since in such a situation the agent plays no role in arranging a buyer for the produce.

(The author is an IAS officer. Views are personal. ashok.khemka@gmail.com)

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