FCI’s flop show on wheat disposal

The Food Corporation of India’s two tenders for sale of wheat to bulk users which opened end-July 2013 to push market prices downward, have witnessed dismal participation. A mere 7,000 tonnes were quoted against the offered tonnage of 2,65,000 tonnes of Punjab/Haryana grain. The government authorised the release of 8.5 million tonnes for depressing food inflation. Haryana’s crop was of 2011-12 vintage, while Punjab’s 2013-14 harvest was made available.

The reasons for the dull response are overpriced /poorly stored new wheat and three-year-old grain in CAP (covered and plinth) storage tendered for sale on an “as is where is basis” at depots with “no rail connectivity”. “Floor price” is fixed at a minimum of Rs 15,000/tonne; taxes are extra; and payment is upfront as usual.

That makes wheat from Punjab and Haryana’s depots Rs 15,800/tonne. Add another Rs 200/mt for rail connectivity and it totals Rs 16,000/tonne (excluding the extra cost of dealing with Government agencies for compliance with a maze of regulations). Good quality new crop wheat is trading at Rs 15,500/mt from Uttar Pradesh. Besides, the latter comes with “one month credit” and negotiable terms.

In fact, the message underlying the tenders appears to be: “Mr Private Sector, you may bid for old grain of questionable quality or even new crop stocked in ‘unhygienic’ conditions in ‘remote areas’ at a ‘premium’ to market price and much higher than the minimum support price (MSP) of the respective years.” This is akin to expecting the value of a new car for an old one with heavy maintenance expenses.

Frustrated objective

The very objective of softening higher prices by additional supplies stands frustrated. When the open market is ruling at Rs 15,500/tonne, how can sale of grains at Rs 16,000/tonne cool the market? Fixing Rs 15,000/tonne as the floor price is patently irrational, when the MSP in 2011-12 was Rs 11,700 including bonus, and in 2013-14 it is Rs 13,500. The inflation in cereals is 17 per cent even as Government has hoarded 77 million tonnes! About 11 million tonnes of wheat recently procured in Punjab and Haryana are lying in CAP or open-air warehouses! Food itself is exposed to grave “insecurity”.

Prudence demands that wheat be sold at a price not exceeding “MSP of the year of procurement or by averaging the MSP of old and new crop” — Rs 12,600/tonne. No lessons have been learnt from two previous experiences in framing market-centric commercial terms for the evacuation of grains. The first was when the Government demonstrated its inflexibility in accepting export prices offered to PSUs below $300 f.o.b. in February-March 2013 in a declining price scenario. Approximately 2 million tonnes could have been shipped out additionally, if the Food Ministry had agreed to $280-290 f.o.b. Realisation in rupee equivalent would have improved to Rs 17,000/tonne because of about 10 per cent currency depreciation in the last three months. Now, the international value has slumped by $80/tonne to $220 f.o.b./tonne or Rs 13,200/tonne for comparable quality.

Lost opportunity

India’s wheat export has come to a halt. The possibility of export revival is remote. The lost opportunity means loss of exports of $566 million or Rs 3,400 crore. Carrying the cost of 2 million tonnes for two years — $400 million, Rs 2,400 crore — will be an additional liability (Rs 6,120/tonne per year or $100/tonne per year, according to the FCI website). The total imputed loss is $966 million / Rs 5,800 crore.

The second time was in March-April 2013. The Government offered one million tonnes from Punjab and Haryana (“old crop”, 2011-12) for export to private players at the OMMS (open market sale scheme) price of Rs14,840/tonne.

This translated into an f.o.b. costing of $ 320 when marked to market price was $290 f.o.b. FCI got no response for these tenders. This, despite the Commission for Agricultural Costs and Prices suggesting Rs 13,500/tonne as MSP of 2012-13.

Now, in the third instance, offering wheat on an “as is where is basis” implies that quality and specifications cannot be guaranteed because stocks in CAP storage are bound to deteriorate owing to heat, dust, humidity and rain. How can such a crop be offered without adequate discounting and marketable parity? Erroneous pricing and timing have repeatedly undermined the policy prescription for disposal of old stock.

Illogical policies

When good wheat can be supplied at Rs 2/kg against a cost of Rs 20/kg as a gesture of “compassion”, then old or damaged tonnage too, can be prudently “considered for clearance” at Rs 10-12/kg for domestic or export markets for feed/filler requirements. The cost of procurement and storage of an extra 22 million tonnes at Rs 20,000/tonne is Rs 44,000 crore ($7.5 billion). India simply cannot afford this dead investment.

Formulating fundamentally flawed policies, getting them approved by the Cabinet Committee on Economic Affairs for intervention, initiating their implementation, and finally letting them fail reflects incompetence on the part of the authorities.

The net result, as of August 2013, is that FCI still carries 42 million tonnes of wheat, which is 22 million tonnes in excess of the buffer norm, while 8.5 million tonnes “sanctioned” for domestic disposal has no takers. Similarly, 35 million tonnes of rice lies untouched and yet another rice crop will be vying for storage space in October 2013.

Even the Finance Minister has sought the advice of the Competition Commission of India to address the menace and monopoly of the procure-store-waste-rot cycle. The Food Ministry needs professional advice in order to target interventionist goals. Perhaps it can consider involving the CACP for appropriate recommendations to the Cabinet.

(The author is a grains trade analyst.)

COMMENT NOW