The price of populism and hoarding grain

There are amazing similarities in the grains procurement and disposal policies of Thailand and India. Both nations are sitting on mountains of cereals, penalising their respective economies and caught in awkward predicaments of their own making.

THAILAND’s POLICY

In October 2011, Thai 5 per cent broken rice was trading at $600 fob and Vietnam at $575. The Thai Government, in the garb of “flood relief”, introduced a welfare programme for farmers under which the “state will stock different varieties of paddy” (mortgaging of paddy by farmers to the Government) at an average value of $450 (against $330 earlier) till October 2012.

That translated into conversion of rice ex-mill at $700 or $ 850-900 fob, which till date has remained more a “paper value” than a “tradable price”. The Thais also presumed that by hoarding high-priced paddy they could internationally throttle and choke the supply side.

With private rice trade crowded out, world’s rice values would rise and the Thai government would wear the mantle of the world’s largest trader of high-priced rice.

But buyers had other cheaper options. Thailand’s regressive and isolated policy prescription failed.

India’s exports

India (in September 2011) lifted a four-year-old export embargo on private stocks of non-basmati rice (non-fragrant variety) with abundant availability at $410-430 fob (at 1$=Rs 48), while MSP (minimum support price) of Indian paddy was about $225/tonne.

World prices plummeted by $190/tonne, and barring Thailand, all other origins — India, Vietnam, Thailand, Myanmar, Cambodia, South American regions (Brazil, Uruguay, Peru and Paraguay, etc) — found a soft entry into markets earlier controlled by Thailand. Vietnam abandoned all price linkages with Thailand. The international rice trade of Thailand nosedived.

Rice importers of Asia and Africa, fearing a potential prohibition “any time” on India’s low-cost rice, exceeded coverage of their immediate demand; Vietnam and Pakistan lowered their bids to match India’s price aggression; Thai exporters covered part shipments from these cheaper origins including Cambodia — while the Thai Government continued to amass inventory of paddy, estimated currently at around 17 million tonnes, or worth $11 billion.

Even Vietnamese and Cambodian paddy is now filtering into Thailand — going either for exports, or for being sucked in by the mortgage programme for better profitability.

Indian rice export is expected to more than double to 6 million tonnes in 2012, while Thai shipments are forecast down from 11 to 7 million tonnes. Authorities in Thailand kept a close watch on India’s drought developments with an intent to push prices to $1000/t fob, if India were to ban rice exports.

Since monsoons have considerably improved with a significant impact on output, Thais are feeling the pressure of liquidating their stocks even at a loss. They recently tendered 7,50,000 tonnes of rice/paddy for disposal and bids submitted are reportedly at a loss of about $200 million. The estimated deficit on 17 million tonnes of inventory may be around $4.6 billion at current market prices.

INDIA’s leakages

At the same time last year, India aggressively pursued the concept of National Food Security Bill (NFSB) to ensure 25 kg grains to poorest households that would cost ($4.6 billion) an additional Rs 25,000 crore per annum (in addition to the food subsidy) on account of higher MSP, warehousing and labour costs.

FCI procurement is set to rise from an average of 50-55 million tonnes ($20 billion) to 75-80 million tonnes ($29 billion).

The average economic cost has been taken at Rs 20/kg. The muted but intense economic opposition within all sections of Government to NFSB is due to almost 50 per cent leakages in the distribution mechanism. “Last kilometre delivery” to intended recipients cannot be ensured in India.

Resale of low priced (virtually free grains at Rs 1/2/3 per kg for maize/wheat/rice, respectively) in the grey market is well acknowledged. Surprisingly, opposition parties are not opposing the Bill for fear of being labelled anti-poor.

The introduction of the Bill in Parliament in December 2011 was meant to secure political gains for the Congress party before elections in Uttar Pradesh in February/March 2012; nevertheless, the Congress suffered a humiliating defeat. Grossly subsidised cereals and pulses in South India have never given ruling parties a winning edge, nor has poverty been wiped out.

In anticipation of the NFSB being legislated, the FCI, as of July 1, 2012, hoarded 82 million tonnes of wheat and rice equivalent to $30 billion (Rs 1,65,000 crore), though the officially covered storage space is 52 million tonnes, including 26 million tonnes in CAP storages. This is four times the mandate for food security. NFSB has filled government warehouses with stale grain that awaits immediate evacuation by export or any other means.

POPULISM BACKFIRES

Both Thailand and India have erroneously assumed that populist policies work, in the process ignoring fundamentals of human behaviour and elementary economics.

India is now anxious to export five to seven million tonnes of wheat at a loss to economic cost to make space for the kharif crop and reduce the financial burden.

Thais cannot export rice unless they retreat from a position of being obsessed with elevated paddy prices. Exports are hit because both Governments need to subsidise and have to justify losses to auditors who are now thrashing policymaking and political governance with greater force.

What was the basis for Thais discovering a price of $450/t for paddy, and now underselling it? What are the criteria for overstocking by India much more than the required food security reserves?

How do Governments continue to release funds to their ministries by book adjustments, without any accountability?

Both Thailand and India are wrong in pursuit of their so called “pious policies”. The dichotomy is that now tenders are being notified for the “purpose of transparency of loss”, with a sugar-coated term of “price discovery” thrown in. Where was the transparency, when these policies were conceived with opacity and impunity?

(The author is a grains trade analyst blfeedback@thehindu.co.in )

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