Right time to clear old wheat stocks

The Government’s (GoI) initiative to bring down burgeoning wheat stocks in the central pool through exports, is in its first stage of implementation.

Three tenders for the export of approximately 0.25 million tonnes of “milling wheat”-- opened last week (August 3) by public sector undertakings, PEC/STC/MMTC -- met with an excellent response.

There was expression of open interest of 1.27 million tonnes from international buyers, with quotes around $300/ tonne (f.o.b) — Rs 16,800 — for “2012-13 crop”, from the west coast of India. This price is on a par with Russian wheat.

Significant volume of open interest indicates foreign buyers’ keenness to trade Indian wheat. Hopefully, tenders will be awarded soon. Additional bidding is also notified for approximately 0.14 million tonnes of “milling wheat” of “2012-13 crop” from the east coast in the third week of August.

However, the “old crop” has not been offered for evacuation. There is a problem here: Two or three years later, the CAG or Parliament committees may comment adversely on why GoI exported “only” good milling wheat of the latest crop, and wonder why the old crop stocks of 2008-09-10-11-12 were held back, or extended for local distribution in PDS.

This old crop has greater chances of deteriorating vis-à-vis the newer lot. It would be a travesty of truth, if authorities were to claim that there was no decline in quality of the older cereals, stored unscientifically.

Estimates of old crops with central pool vary between 12-14 million tonnes.

FIRST-IN-FIRST-OUT

After discovery of a favourable f.o.b price for the 2012-13 crop, policymakers should offer old wheat for export to realise optimum value, rather than depend upon outright disposal locally for feed, industrial usage and country liquor, at throwaway prices.

Feed I category can be easily sold at $250-260 f.o.b or around Rs 14500/tonne —twice the reserve price (see table). Feed wheat (for livestock) commands a market share of 35-40 million tonnes, out of annual global shipments of 135-140 million tonnes, and is deemed to be a cheaper substitute, when corn or soymeal is expensive.

Russia/Ukraine export both good and average quality wheat, the latter being disposed of as feed wheat. Trade in various blends of Black Sea wheat is common. Australia offers its Australian Premium White Wheat (APW) for milling. ASW, or Australian Soft Wheat, the cheaper and average quality variety, can be consumed both for food and feed.

The Indian system lacks such quality-based identification. The alternative then, is to relate quality of grains to crop years.

The FCI’s guidelines are “first-in, first-out (old crop to be distributed first)”, modified for export evacuation to “last in, first out” (new crop to be exported first), so that Indian wheat remains globally credible and grains lying in open storage are moved out fast.

The world wheat market has seen a remarkable upside since the last two months. On May 24, the highest bid received in Indian global tender was $228/tonne f.o.b. Now at around $300/tonne (on August 3), there has been a 32 per cent surge. In 2001-06, maximum realisation for “milling wheat” varied between $102 and 180/tonne f.o.b and $80-90/tonne for about 4 million tonnes of “lustre loss” wheat of “average” specifications. Both were offered from the central pool.

MOVE OUT THE OLD

Now ‘the trend is the friend’ — indicating even higher wheat prices in October/November 2012, primarily triggered by hostile weather.

The factors at work are: Almost 33 per cent loss of corn production in US due to severe drought; bad news on Black Sea wheat; Russia considering options of export tax or outright ban on wheat exports; soybean quantity coming down in US/South America by 5-7 million tonnes; Australian wheat crop being threatened by 40 per cent or more due to emerging El-Niño; voracious demand of soybean and corn from China; Iran securing itself for food by additional grains procurement of 4-5 million tonnes; Egypt yet to commence its wheat import of 8-10 million tonnes after change of regime.

This is an opportune moment to offer Indian “old wheat” for export, as unprecedented hike in corn/soybean values will intensify replacement for feed wheat.

Central pool stocks of 2008-11 can be renamed as “Indian general purpose” or “IGP” wheat.

In addition to “milling wheat”, 50 per cent IGP wheat may also be offered for exports. Optimum value of IGP wheat can be assessed simultaneously as they should be lower by $20-25/tonne vis-à-vis milling wheat.

The preferred alternative would be to declare 2008-09-10-11-12 crop as “general purpose” for export at MSP/OMSS of Rs 12,850/tonne ($230) on port-delivered basis that will translate to an fob value of $250-260/tonne.

In 2001-06, Far Eastern buyers procured a large tonnage of Indian “lustre loss” or average quality wheat both for milling and feed. Mid-Eastern flour millers prefer milling wheat.

Shipments of new and old crops can be balanced concurrently. This would obviate any audit or political controversy.

(The author is a freelance commodity analyst.)

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