Opinion

The mess caused by fixing wheat prices

TEJINDER NARANG | Updated on November 03, 2013

Clear those huge stocks at the earliest.

Predetermined prices for exports and release of food stocks have hurt stakeholders.

Three major events relating to Indian wheat unfolded during last week of October 2013. First, the Cabinet gave its consent to reduce the minimum export price (MEP) of FCI (Food Corporation of India) wheat by 13 per cent — from $300 per tonne f.o.b. to $260 for international parity.

Second, roller flour millers clamoured for a reduction in delivered prices in southern States and are objecting to special treatment for exports at lower values. Third, the implementation of the Food Security Act has been deferred by a year.

Today, the FCI carries about 23 million tonnes of wheat ($8 billion or Rs 50,000 crore) over and above the buffer norms; yet food inflation remains untamed.

All these events have a common factor: price fixing that is out of sync with market reality. Therefore, fixing a minimum export value at $300, then unfixing it and re-fixing at $260 makes little sense.

Price fixing flaws

Through the MEP format, world trade knows in advance the price band within which quotes can be submitted. That vitiates the tendering mechanism. Therefore, the urge to fix prices is fundamentally flawed.

Is $260 the right peg? That cannot be endorsed with conviction. In fact, world prices reacted by moving downwards immediately after this revision. Will the Food Ministry pass over or ignore upcoming tenders if the price is $259 or below and repeat the long drawn-out process of seeking fresh Cabinet approval for a revised lower value? Should the price quoted be $290 in subsequent tenders; will it again resort to an MEP hike?

It is hard to keep track of Black Sea, the US or Australian quotes. Suggestions to this end, submitted to the Committee of Secretaries or the Cabinet Committee on Economic Affairs, could be misleading. The Cabinet may end up courting controversies, if it tries to peg its values on the basis of markets that are essentially unpredictable.

Indecisiveness on MEP blocked the FCI wheat exports for last nine months. The Commission of Agriculture Costs and Prices has been suggesting an MEP based on MSP plus 5 per cent, or $228-230 f.o.b/tonne, for shipping out 10 million tonnes in a year.

Exports lost

Bids received by PSUs at around $290-300 f.o.b/tonne were ignored in February-March 2013. Four million tonnes could have been shipped out from FCI stocks. The revenue foregone is estimated at Rs 6,500 crore (including buffer carry-cost at Rs 21,000/tonne per annum) or about $1.04 billion — at a time when fiscal and current account deficit are critical to the economy. After nine months of dithering, $260 is found acceptable! What about direct losses and additional carrying costs suffered by the Government?

Domestically, open market sale scheme (OMSS) price too is “fixed”. Currently, the FCI offers wheat to bulk users under OMSS at Rs 18,200 per tonne ($294) in Karnataka and Kerala at the railway yard. Fixed OMSS costs 13 per cent more than the MEP of $260.

Actually, even an MEP of $260 has nothing to do with export parity. It gives a realisation of Rs 16,120 per tonne (1$=62) which equals an OMSS price of Rs 16,000 in many north and central States.

Flour millers have a case for enhanced relief when compared to MEP.

Faster disposal needed

In anticipation of Food Security Act, the FCI has overburdened itself with grains for the last five years. Procurement has hovered around 70-80 million tonnes, while offtake is about 53 million tonnes. Due to lack of readiness on the part of States, the Cabinet, on October 30, decided to defer implementation of FSA by 365 days. But the nation is stuck with massive hoarded stocks. This humongous inventory can be cleared only if the Food Ministry stays away from “fixing” domestic and international prices.

Recovery of investments

All that the Cabinet needs to do is give firm guidelines to the Food Ministry. It could officially declare stocks that are above buffer norms plus 5 per cent as “surplus for disposal” for each crop year.

These should be sold transparently, at market rates, within a specified time frame of six months to a year, before the next crop comes up for procurement and storage.

The market value and investments made in “surplus grains” must be reported every month on the FCI website.

This will create awareness of extra inventory and investment stuck. Revenues generated by liquidation of surpluses should be reported as recovery or credits from the sunk cost of grains.

Addressing the policy and procedures is the right approach, and not “fixing” a price that is irrelevant to market requirements.

(The author is a grains trade analyst.)

Published on November 03, 2013

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