Better times for basmati?

India has produced over 100 million tonnes of rice annually for the last six years. Kharif is the major season for paddy, accounting for 88 per cent of the annual output. India produced record rice output during 2011-12, at 104.26 million tonnes. Since then, surplus production for five consecutive years has buoyed up rice stocks in the open market. As a result of this glut, premium rice varieties have seen their prices fall throughout this season. Some varieties of rice have seen prices decline by as much as 25 per cent, never to revive. Stockists who held these varieties have notched up huge losses.  

Basmati glut

The Basmati rice complex has been the worst hit among rice varieties. Merchants and millers had bought paddy at around ₹2,700 a quintal in November-December 2014, but prices traded at around ₹2,400 for the rest of the season. The major reason for this price drop is excess production as well as import restrictions by Iran. The production part first. Basmati rice production in 2014-15 was up 33 per cent at 5.88 million tonnes. The higher planting of Basmati varieties was due to the handsome prices realised by farmers at around ₹5,600/quintal in November-December of 2013.

At the same time, a new short duration variety 1509 was also introduced, which allowed farmers to reap three crops in a year. This also earned them two-three times higher realisations than non-Basmati paddy which is a longer duration crop.

However, millers have resisted buying the new 1509 variety due to its poor recovery rates and lack of acceptance in the export market. Continued plantings of this 1509 variety have contributed to the Basmati glut too.

Given this backdrop, what’s ahead for this season? The Basmati complex (1121, 1509 varieties and others) will see record production for the second year in a row in 2015-16, at 5.91 million tonnes. Opening stocks with millers and merchants are already at around 0.85 million tonnes, which is more than double the levels of season.

A variety-wise break-up shows that production of the 1121 variety could be around 4.38 million tonnes (+0.4 per cent), the 1509 variety at about 0.74 million (+1.4 per cent) and production of the traditional varieties at 0.39 million tonnes (+0.7 per cent). As a result, prices have already declined sharply.

Farm realisations (after excluding direct and indirect costs) for Basmati have been sharply lower year-on-year and even negative, for the farmers cultivating rented land. Interestingly, the farm realisations for non-Basmati rice have improved year-on-year for all farmers. The rents are lower for non-Basmati and the downside to the price is also limited due to the strong MSP-based government buying.

Export prospects

But while there is excess supply, domestic consumption of Basmati is expected to increase by a sharp 10 per cent to 1.55 million tonnes this year. Growth in domestic demand has been helped by lower prices and the increased use of branded products. Low prices last year also stimulated export demand. India’s Basmati exports increased 17 per cent to a record 4.05 million tonnes.

While the largest buyer, Iran, has been reducing its imports for the last couple of years (imports in 2014-15 were 0.86 million tonnes), with depleting stocks and lower prices, Iranian demand is expected to revive in the current season. As a result, Indian Basmati exports are expected to reach a new record of around 4.4 million tonnes in 2015-16. The new crop arrivals are expected to pick up in the first week of November.

In the near term, prices of Basmati (1121) could head lower from ₹2,000/quintal levels due to higher stocks, record crop and arrival pressures, to below ₹1,800. However farmers’ resistance to any prices below the cost of production will provide a floor to prices at those levels.

Over the next three to four months, prices could recover on higher demand to around ₹2,400/quintal. Sharper rallies are, however, unlikely due to record availability of Basmati. Overall, this season may be better compared with the previous one as prices have already corrected. Downside in prices from here is limited and lower prices will stimulate only demand.

(The writer is VP, Agri Value Chain, Edelweiss Financial)