The gold in our backyard

There’s gold — in the form of grain — lying in humongous quantities in our backyard. Market conditions are supportive. This golden opportunity must be exploited. Here’s how we need to go about it.

Wheat export on Government account (with FCI and State agencies) remains a non-starter despite the Cabinet Committee on Economic Affairs (CCEA’s) clearance of an additional 2 million tonnes on August 9 to kick-start stock depletion of 38-40 million tonnes. There is a surplus of 24 million tonnes of wheat with all official agencies, after accounting for buffer/security reserves of 14 million tonnes (September 30, 2013).

Lost revenue chance

Parity in international pricing with an open market sale scheme (OMSS) price of Rs 15,000/tonne or more can give a fillip to export of about 20 million tonnes in the next 18-20 months to earn $5 billion (Rs 32,000 crore) in hard currency at 1$=Rs 64.

Saving in carrying cost of $2 billion (Rs 12,800 crore) can be achieved. About Rs 45,000 crore may be credited to fiscal deficit. Domestic inflation due to cross border export will cool down.

Yes, there would be 20 million tonnes surplus for export after accounting for the Food Security Act. The reason? A good monsoon this year has replenished excellent moisture in North, West and Central India. Barring any unseen developments, next year (2014-15), rabi wheat crop may be more than adequate. Moreover, there is a year’s time for the Food Security Act to become operational. When Indian banks are doubling dollar borrowing abroad under “swap melas,” sustained wheat export can be helpful in mitigation of “borrowed liabilities”. In February-April 2013, potential contracting of about 2 million tonnes was ignored by the High-Level Committee of PSUs even at $290-295 due to anticipation of minimum export price (MEP) of $300/mt fob and Rs 4,000 crore ($625 million) of exports was lost.

Calculating a carrying cost of $100/tonnes per annum, revenue lost to the exchequer balloons to Rs 5,200 crore ($812 million). The net effect — higher wheat inflation at the time of harvest of new crop because grains for exports were sourced from Uttar Pradesh, Bihar, Madhya Pradesh markets by the trade. The price paid was about Rs 14,500/tonne against minimum support price (MSP) of Rs 13,500/tonne, though 45-46 million tonnes were stashed away with FCI.

Erroneous export policy

What is the sanctity of $300 fob? It is marginally above the OMSS price of Rs 15,000/tonne. When the rupee was 53 to a dollar from August 2012 onwards, the realisation was “Rs 15,900/tonne”. Assuming Rs 15,900/tonne as some sort of official compulsion or irrationality, the current rate of exchanges corrects that abnormality to (15,900/64) = $248/mt fob.

The erroneous approach on export policy has been that, firstly, wheat/commodity prices cannot be “fixed”. They move up and down with market movements. Secondly, what is the intention? Just to notify a paper price with nil exports or to export at a performing price that may generate revenue of Rs 45,000 crore and enable stock clearance of 20 million? Certainly the latter!

If preservation of impaired inventory is the objective, then the rationale of open-ended procurement is also questionable on the ground of mismanagement of public funds.

Recent rupee deprecation is an enabling instrument to keep the budgeted food subsidy unchanged. The Food Ministry’s intent to maintain $300 (Rs 19,200) at Rs 64 to a dollar as MEP is illogical and counter-productive, both officially and commercially.

An adjusted value of $248 is enough to attain the same rupee realisation. Marginal higher values may be possible at the time of bidding. If markets firm up, price/rupee realisations will be higher in any case.

Other origins — US (SRW) grain at $270 fob, Russia/Ukraine at $235-240, French at $250-255 and Black sea feed wheat at $225-230 — are all actively trading world over.

There is nothing exceptionally remarkable that Indian wheat should trade $60 above the market while it has foreign matter of about 4-5 per cent that needs extra cost of cleaning before end use. There are no takers for Indian wheat except Bangladesh across the border via road/rail route at the rate of $260 for Bangladesh from open market in Bihar and UP, including local transportation in small lots of about 2,000-3,000 tonnes per day.

AVOID DAMAGE

The Agriculture Minister has gone on record in Parliament that Rs 40,000 crores of grains is wasted annually.

“Eleven” million tonnes is of new crop wheat stocked in plastic covered sacks in kuchha and pucca CAP storages in Punjab/Haryana. This is exposed to monsoon rains, open weather conditions and may be unfit for human consumption. It too can be shipped out by downgrading specifications/protein/moisture/foreign matter for poultry consumption in Far East even above OMSS value.

The US has announced its “intention” to taper quantitative easing (QE). This led to rupee depreciation by 24 per cent, Russian rouble by11 per cent and Australian dollar by 14 per cent in the last nine months.

These are three major competing currencies for wheat exports. When quantitative easing is finally effective and dollar further strengthens, US wheat in dollars will be priced lower. Other rival origins can face more uncertainties. The world knows this and surely the Food Ministry and others cannot be oblivious of this fact. The latest International Grain Council London (IGC) report of August 30 mentions world production of 2013-14 up by 6 per cent and consumption growth by 2 per cent — more supply, less demand — and therefore overall bearishness in the market.

The next kharif crop is also around the corner and FCI has to find storage space for 34.5 million tonnes. Currently, paddy is in the premises of the rice millers. The CAG has cautioned Government against this practice of losing control on official stocks. Swift evacuation will facilitate this objective.

Six objectives will be immediately achieved if the decision to export at market price (currently around $245 fob) is taken without delay. These are — cereal inflation can be contained; realisation of rupee price above OMSS is attained — for which no question can be asked by WTO or CAG; mitigation of current account deficit and fiscal deficit is enabled; availability of storage space for the new paddy crop and getting rid of recurring carrying cost $100 per tonne per annum.

(The author is a grains trade analyst)

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