Not allowing private exporters to access FCI stocks can prove to be inflationary.

Three central PSUs (STC/PEC/MMTC) have simultaneously notified identical global tenders on July 13, collectively seeking export of approximately 0.25 million tonnes of wheat from the Central pool of Food Corporation of India.

This was after the Cabinet Committee on Economic Affairs decided to allow export of two million tonnes of wheat on July 3.

The tenders sought submission of bids on a single date, August 3, which would be valid till August 13. Each bid document incorporates perfectly matching agro-commercial terms with the “highest degree” of precision.

The only difference between them lies in spelling out three different West coast ports of loading — Mundra, Kandla and Pipav — for the respective PSUs. These ports offer a freight advantage for serving Middle East markets.

No ports on the east coast for serving Far-Eastern markets have been identified so far.

The premium grade specifications of “Indian milling wheat” for the 2012-13 crop are well-defined: 11 per cent protein, 26 per cent gluten, 12 per cent moisture, 0.75 per cent foreign matter and 78 kg/hl test weight.

They are superior to the ‘uniform specifications’ that FCI otherwise mentions on its Web site.

Since June 15, 2012, world’s wheat prices mirrored through Chicago Board of Trade have risen aggressively — almost by $87/tonne. The market appears to be globally bullish due to rapid scaling down of US/Russian/Ukraine grain crops and higher corn prices, which stimulate “demand transfer” towards wheat.

Archaic procedure

The Indian tenders are well-timed. The Government is hopeful of enhanced price realisation for premium quality grain, well above $228 fob/tonne (offered in STC’s tender of May 2012) which was apparently unacceptable.

But a gap of three weeks for bidding, when tenders are available on real-time basis on Web sites, implies that commercial expediency is subservient to diktats of audit and vigilance. Valuable opportunities of market exploitation could be lost.

Urea import tenders of PSUs carry a bidding time of eight to 10 days. Egypt, the world’s largest wheat importer, gives less than 48 hours for tenders. Egypt and Bangladesh decide bids the same day. The ten days’ time required by the Indian High Powered Committee (HPC) for decision-making on urgent exports can also be compressed.

Canalised cartel

However, the recent procedure is also a non-legislated cartelisation of wheat export by three central PSUs, akin to the vanishing era of the “single desk” model of Australian Wheat Board (AWB) or Canadian Wheat Board (CWB), both of which have faced attrition in their respective countries in 2000-11.

“Wheat Boards” originated in the 1930s. Bulk shipments were made by them, while smaller containerised consignments were assigned to private players. The Indian method also represents a sort of “Indian Wheat Board” (IWB) — of three PSUs backed by procurement, storage and supply (railways) chain arrangements of FCI. The private trade can export from the open market.

In June 2012, the Competition Commission of India (CCI) imposed a Rs 6,307-crore ($1.15-billion) fine on 11 leading cement makers for price cartelisation.

Wheat cartelisation speaks of double standards — one for the Government machinery and other for private players.

Quick decision-making

The preferred option would have been to stagger, rather than synchronise the tendering of three PSUs by a few days or a week, to fully benefit from the escalating market.

The AWB or CWB never adopted a tender-centric policy of exports, but dynamically aligned their quotes based on the trend, competition and logistical benefits.

Their trading outfits were decision-makers on a day-to-day basis (rather than through a 12-member HPC for Indian exports.)

domestic inflation

Canalised and cartelised export in a rising international market has compelled private exporters to step up buying from domestic trade, as they are denied access to FCI/Central pool even at the Open Market Sale Scheme price (Rs 11,700/tonne or $208/tonne), or at the floor price of $228/mt less fob cost of $20/mt.

Higher international values are pulling up the open market, which has climbed by Rs 1,600/tonne ($30/tonne) with an upward bias, in the second week of July. This benefits farmers but hurts consumers. Availability of wheat from central pool to private trade will be deflationary.

With 82 million tonnes of grains stuck with Government, private players can be considered on equal footing to exploit this “window of opportunity” for wheat exports. This very approach was formalised in 2001-06 when FCI stocks exceeded 50 million tonnes, and can be pursued now.

Twenty million tonnes of Central stocks are lying in open storage and can be offered to interested parties. This will soften prices for consumers.

Decanalise, decartelise

Under the prevailing monopoly regime, FCI has assigned export operations to PSUs and PSUs will be guided by the decision of a High Powered Committee.

FCI will be paid after realisation of foreign exchange by PSUs, though private trade could have paid FCI upfront.

There are issues of accountability as well, where so many parties are involved. For instance, quality issues, if any, may be “considered” by FCI, and not by PSUs who are the contracting party. Delay in cargo availability at ports will be the Railways’ responsibility and not of FCI/PSUs.

Cartels operate with explicit collusion at the highest inefficiencies. Had PSUs been put in competition with private exporters, it would have evolved efficiencies both in monetary and quantity terms.

They could have earned market-determined profits in a bullish scenario, rather than fixed margins.

This cartelised and canalised mechanism may be revisited by the policymakers at the earliest, for mitigating inflationary burden on domestic economy.

(The author is a grains trade analyst.

(This article was published on July 16, 2012)
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