Procurement of wheat in the central pool — estimated earlier at 44 million tonnes (mt) by the Government — is reportedly in the range of 30-33 mt, down by about 30 per cent. The Agriculture Ministry has not revised its production estimates below 93 mt, despite indications of lower yields in some areas, which, however, might have been made up by better productivity elsewhere.

Private estimates (after reports of lesser procurement) are 85-90 mt and declining on a daily basis on reports of lower yields. A reduction in FCI procurement by 14 mt will instantly provide a “budgeted” financial relief of Rs 28,000 crore ($5billion) to the Centre.

Considering that FCI is obliged to procure almost all arrivals in the market, FCI and its agencies cannot be faulted. Procurement from Uttar Pradesh (UP) till date is insignificant compared to last year’s 5 million tonnes. UP is the largest producer State with an output of 32-33 mt of wheat per annum.

The reasons for this unexpected shortfall of 14 mt remain hazy. The central pool will still have much in excess stock — about 48 to 51 mt, against the mandate of 20 mt by end-June 2013. Since the Government is also saddled with compulsions under the Food Security Bill, the overriding priority for export from the central pool under FCI may be downgraded. Wheat export by FCI and CPSUs could be considerably reduced.

PRICING ABOVE MSP

The market price at the time of harvest has risen to Rs 14,500-15,000/tonne ($266-272), against an MSP of Rs. 13,500 ($245). In April-May 2013, FCI and CPSUs virtually exited the “export market” by deferring tenders, forcing exporters to cover their contracted businesses (short sales of about 0.5-0.6 mt) from UP, MP, Rajasthan and Bihar for shipments in May-June 2013 priced around $290-305 fob.

At an average export price of $300 fob (Rs 16,500) per tonne and MSP of $245 (Rs 13,500) per tonne, there is a spread of $55 (Rs 3,000) per tonne, which can be shared by all intermediaries right from the farmer, broker, railways/truckers, port handling agent, financiers (banks) and exporters.

Some exporters may also be taking a hit of $5-$10 per tonne, just to honour contractual commitments for May-June deliveries. Exports by the land route to Bangladesh across the border are about 100,000 tonnes per month. Small purchases of 100-200 tonnes/day for Bangladesh keep prices firm in Bihar and MP.

This year, farmers are “net beneficiaries” of “export bonus” above the MSP of Rs 13500/tonne ($245) — at a time when the harvest pressure is in full swing. (Local wheat prices should not be more than MSP at this time of the year).

Though official procurement is down, open market operations are active in Punjab, Haryana, Uttar Pradesh, Madhya Pradesh, Rajasthan and Bihar, both due to export demand and demand from flour millers, who are also covering their part requirements in anticipation of rise in wheat values after the harvest season. In 2012-13 millers suffered due to lack of open market releases and higher prices (of Rs 17500/tonne) offered by FCI. They are in correction mode now.

Farmers are “speculating” an upward price bias in coming months. They have held back or stocked substantial produce on the basis of their firmer market perception for future profits. Many growers believe that if they can afford to “speculate” on weather, why not on price as well. Farmers are feeling “financially empowered”— in the subtle changing socio-economic milieu.

Lower procurement is the result of these factors working concurrently, which was not the case last year. Had wheat exports been banned, the Government would have lapped up all the market arrivals of around 44 mt, starved the market, built wheat stock above 60 mt in unhygienic storages and then had to heavily discount them in export markets. Liberal policies are naturally rewarding.

OPEN POLICY EFFECT

The continuation of uninterrupted wheat export for the last 20 months has helped farmers and FCI realise better prices, especially due to drought in the Black Sea countries in July 2012.

This is a reflection of immediate benefit from India’s integration in global agri markets. However, any fall in market quotes during coming months due to lower Black Sea values — around $260 fob — will deprive farmers or FCI of this accrued advantage by reducing the value of unsold stocks.

There is a possibility of strong domestic demand emerging from flour millers in later months. The additional responsibilities of the Government under the Food Security Bill will also exert market pressure.

Some farmers, traders and arthiyas perceive a bearish picture after August 2013. In that case, they should immediately exercise the option to offload their retained output to FCI. 

(The author is a commodity trade analyst.)

Related Topics