Wheat exports can offset gold imports

If the Government is worried about excessive gold imports, it should be equally concerned about the rising stockpile of wheat, which will cross more than 60 million tonnes (economic cost of about $21 billion or Rs 1,15,000 crore) by June 2013, or 300 per cent of the mandated reserves.

Foreign exchange requirements of rising gold imports and increased dollar realisations from wheat exports can substantially offset each other. Liquidating stocks of golden grain will also save on fiscal deficit, as it will cut the food subsidy bill.

WRONG STRATEGY

In case policy makers increase the efficiency of wheat export and target it to 10 million tonnes, as recently recommended by the Commission of Agricultural Costs and Prices (CACP) in its meeting with the Finance Minister, this will generate export of approximately $3 billion (Rs 16,500 crore), equivalent to a 7.5 per cent reduction on provisional gold imports of $40 billion anticipated this year. There is always apprehension that higher duties on gold imports may create a parallel ‘hawala’ market that will defeat the purpose of duty.

Are wheat exports of 10 million tonnes in 2013-14 logistically feasible? Yes they are, provided the private sector is also allowed to partake in FCI stocks, in addition to the existing canalised route of three PSUs. Exclusion of private trade from exporting Government’s glut of grain is a highly restrictive policy framework, acting as a deterrent in swift evacuation of grains.

During August-December 2012, PSUs contracted two million tonnes and shipped 1.2 million tonnes (or an average of 400,000 tonnes per month) with proactive back-up operations of FCI. PSUs can achieve the limited objective of exporting a maximum of five million tonnes annually through a staggered tender-centric mechanism. This leaves the effort required to ship additional five million tonnes by private players to achieve 10 million tonnes of export.

The timing of export is critical for better value realisation. As of now, average realisation of two million tonnes is $315/tonne fob while the minimum and maximum range has varied between $296 and $328.

If port handling and fobbing expenses of $25/tonne are excluded, net realisation to FCI is $(315-25) = $290/mt, which is close to today’s CBOT (Chicago Board of Trade) March futures. All transit/port handling shortages and demurrages are to the account of FCI — which may work out to a minimum of 2 per cent — reducing the net accrual to FCI by another $6/tonne or $284/tonne as of today.

Generally wheat prices retreat by June-July every year, when Northern hemisphere crop (the US, EU, Black Sea, Canada) is harvested. Tenders formalised during December 2012–early January 2013 through three PSUs point to a declining pattern. Egypt, the world’s biggest wheat buyer, is staying on the sidelines both due to its internal compulsions and expects prices to plunge.

EXCESS STOCKS

Indian wheat export needs to attain maximum momentum in the next six months — January to June 2013. And from April 2013, wheat will start flooding Indian mandis, creating a crisis of plenty with no safe storage space.

The monsoon in July-September can damage poorly stored grains in kuchcha CAP arrangements. If Government agencies don’t move quickly, they will be saddled with huge stocks, rising fiscal deficit, and high degree of wastages.

The world is not waiting for India to sell wheat at its own speed — but surely awaiting and anticipating a fall in prices. Recall that in July 2012, highest bids for Indian wheat were received at $228 fob and other bids ranged $200-$225. Should that situation re-emerge internationally, Indian wheat will have to be traded around Rs 12540/tonne — below MSP of Rs 12,850/tonne of 2012-13 and almost Rs 7,000 below economic cost, with massive subsidisation.

Wheat of 2010-11, 11-12, 12-13 — that is old grains and new grains — be offered at differential pricing both to private and public sector. Private sector can make upfront pre-shipment payments at district HQs of FCI v/s post shipment payments remitted by PSUs with a lag of two-three months.

The entire performance risk, including transit and handling shortages of 2-2.5 per cent, will be on the private trade, rather than that of FCI. Simultaneously, domestic traders can blend old/new grains at the port and price them intelligently for greater penetration in the markets directly or in formal association with PSUs.

FCI disposes old/damaged wheat through domestic tenders in three types of feed categories in price range of Rs 5,000-7,000/tonne and for industrial use (distillery) at Rs 3,850/tonne. Export realisation can be much better than these values even for older wheat.

The Government should have no hesitation in acknowledging lower prices for old wheat as a pragmatic solution to create much-needed storage space.

There could be a question in the coming years on prioritising shipments of the best quality wheat of Madhya Pradesh and Punjab, while burdening the exchequer with old wheat, which bears a carrying cost of Rs 5,000 per tonne for two years. There is a great demand for general purpose/feed wheat, where shipments of old crops will be appropriate.

The net effect of reframing the export guidelines would be (a) exchange earnings can reduce pressure on restricting gold imports which may create a parallel market; (b) higher volume of wheat export can be attained by the immediate involvement of private sector for warehousing bumper wheat crop of 2013-14 (c) money blocked in old inventories can be encashed and fiscal and current account deficits reduced and (d) will save the Government from adverse criticism of not disposing of stocks faster.

(The author is a freelance commodity analyst. >blfeedback@thehindu.co.in )

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