News Analysis

MSP hikes leave FCI with mountains of grains

Rajalakshmi Nirmal BL Research Bureau | Updated on January 06, 2020

Government data show that in in each of the past three years, there has been an excess procurement of grains by the FCI. File Photo   -  BusinessLine

Short of storage space as more farmers bring in their produce, the organisation may have to go for open market sales at a lower price

An August 27 report in BusinessLine, ‘With stocks piling up, FCI is in deep trouble’, said the Food Corporation of India was sitting on a mountain of grains.

Since then, though some stock has been cleared through the Open Market Sale Scheme (OMSS) and some quantities have been routed to food security schemes, rice procurement since October (after the kharif harvest) has renewed the pressure on the FCI.

Currently, it holds 56.45 million tonnes (mt) of grains (21.2 mt of rice and 35.17 mt of wheat) as also 25.9 mt of un-milled paddy (that will come to 16-17 mt of rice).

The FCI’s total storage capacity is 84.3 mt, including capacities available with State agencies, and the corporation is under pressure to clear its stock in many States.


Procurement surge

From the beginning of the October 2019 rice procurement season till January 1, 2020, the FCI has procured 26 mt of rice. This is higher than last year’s procurement in the same period thanks to the higher minimum support price (MSP). And, by the time the procurement season ends, the stock with the FCI is expected to climb even higher. This could impact the food subsidy bill and hit government coffers.

By April, the FCI will also need space to store the wheat that will procured under the MSP programme. It looks like the organisation will be forced to sell a significant amount of the rice stock in the open market in the coming months.

Government data show that in in each of the past three years, there has been an excess procurement of grains by the FCI. In 2017-18, while the required quantity for food security schemes was 61 mt, the total procurement was 69 mt, and in 2018-19, 80 mt was procured against a requirement of 61 mt. In 2019-20, again, the procurement is likely to be in excess of what is required (see table).

Rise and rise of MSP

It is the continued increase in the MSP that is resulting in more farmers selling their paddy to the government, and the FCI procuring more and more rice every year.

Sample this data: In 2016-17, the MSP for the common grade paddy was ₹1,470/100 kg. This was increased to ₹1,550 in 2017-18 and ₹1,750 in 2018-19. For 2019-20, it was increased further to ₹1,815/100 kg.

As the MSP is increased, the FCI should ideally be disposing of its stock at a higher price. But market conditions have not been favourable. With poor interest from private purchasers, the FCI now actually wants to reduce the price at which it sells rice in the open market.

In the open market, there is not much demand from millers and other user-industries for the rice that the FCI is selling. This could be attributed to the sober demand in the global market, especially from African buyers.

For 2019-20, the government had set a target of selling 5 mt of rice through the OMSS. But this may not happen as trader interest has been tepid so far. In the e-auctions conducted by the FCI since May, only around 6 lakh tonnes of rice has been sold, mainly to State governments.

Now, market reports indicate that the Centre may approve a cut in the base price for rice for the OMSS. According to media reports, the FCI has recommended a 20 per cent cut in the auction price of rice under the OMSS to ₹2,250/100 kg to liquidate the excess stock in the central pool. The government is currently offering rice at ₹2,785/100 kg.

Published on January 06, 2020

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