There are three macro-models of wheat export approved by the Government. But none of these is supportive of accelerating shipments to accomplish export of 8-10 million tonnes (MT) in 2013-14 due to shifting market conditions.
These policies are as follows: The first entails export of 4.5 MT of FCI stocks of the 2012-13 crop through three PSUs, namely, PEC, STC, MMTC against international tenders, operationalised in August 2012. The second, declared on March 7, 2013, says private traders can export 5.0 MT of FCI wheat shipments of the oldest crop of 2011-12. The third, notified in September 2011, says that an unspecified quantity can be exported by the private/public sector from the open market.Indian wheat is competing against itself in the international market under these three schemes. But beyond May-June 2013, all three alternatives will substantially outprice the world’s falling prices. India needs to rework its pricing strategy.
PSU TENDERS
Tenders of 4.1 MT have been issued since August 2012, and 3 MT approved in the price range of $296–328.00 fob/ tonne (average $310). An amount of 2.3 MT has been shipped and the balance 0.7 MT is pending for shipment, as of mid-March 2013.
But now a stalemate has been reached in an otherwise efficient implementation through PSUs. The internal guidelines of the Government advise a minimum export price (MEP) of $300/tonne (net realisation to FCI is approximately Rs 14,025 (or $255) after deducting rail freight and shipping cost/PSUs expenses from $300).
The Government, for the last six months, was comfortable in deciding tenders so long as “export” market was stable and “rising”, or relatively bullish. When the trend reversed in the second half of February 2013 to “falling” mode, uneasiness set in. The Government is “long” with 30 MT of wheat and 44 MT is to come in the next three months.
Normally, traders go “short” in descending trade. Risk is hedged in futures exchanges. But that is not the case with the FCI or Government. If it has opted to trade in commodities, it has to take an immediate call and be astute in bearish conditions, to salvage some realisation from sunk investment.
In end February and early March 2013, bids of 400,000 tonnes were rejected by authorities, either because the offers were below $300; even if some bids were above $ 300, they were below their expectations and thus ignored. Price discovery through a tendered process — that is marked to the market — is negated. Now 4,00,000 tonnes is re-tendered, which may again attract lower values in bearish market with shipments deferred till end-April or early May 2013. Lower price realisation can be explained, but explaining rejection of offers made at the best market prices and then re-contracting them at lower prices can be a more difficult task.
On March 8-9 soft red winter (SRW) wheat of US — the cheapest origin today — for April-May delivery was $283 fob/tonne — almost $20/tonne down in one month. The US Department of Agriculture report of March 8, 2013, projects exports from Russia, Ukraine and Kazakhstan at 28 MT in July 2013-June 2014.
Black sea cargoes for “August” delivery (new crop) are traded at $250 fob/tonne. It is therefore incumbent on authorities to accept bids below $300 /MT even if it means revisiting earlier policy decision.
PRIVATE EXPORT OF FCI STOCKS
This scheme envisages 5 MT exports of 2011-12 in the next three months. With harvesting of 2013-14 commencing April 2013, wheat of 2011-12 will be three years old. This is also an admission/confirmation that three-year-old stocks are available in the country.
Though it is a prudent initiative to liquidate the oldest (2011-12) stock, its price needs to be attuned downwards and cannot be equated to 2012-13 and 2013-14 grains.
Normally, old crop is discounted by $20-30 per tonne per year. Five million tonnes cannot be shipped out in three months due to the logistical constraints of rail cars and berthing and loading facilities at the ports.
The minimum release price announced by the Centre of Rs 14,800 per tonne ex-Punjab includes 14.5 per cent local tax, which translates into $315-320/tonne fob depending upon the dollar/rupee rate. Tradable fob value “abroad” till “end March” is $280 (Rs 15,400 per tonne) and subsequently $260 (Rs 14,300) or even lower. The existing floor price is not a workable option.
No country today, not even China, can dictate or define global supply or demand conditions, weather variations, speculative positions, currency movements and local politics, but it is up to trading nations to take advantage of this matrix mix. The world market does not permit recovery of unreasonable taxes imposed by the Punjab Government. A revenue of Rs 7,500 crore ($1.4 billion) can be generated by dispatching 5 MT at a market-friendly release price.
OPEN MARKET EXPORTS
An export of 2 MT has been achieved under this route since September 2011. From April onwards, private players are monitoring developments in Uttar Pradesh, Madhya Pradesh, and Rajasthan to economise on freight cost and work on an MSP of Rs 13,500 per tonne.
This translates into an fob of $290.00 for delivery in April-May shipments. Deals of 1-1.5 MT may take place under this policy. If a steep decline in world wheat prices continues, open market operations will be unviable after May-June 2013.
The annual supply of wheat is 92-93 MT against domestic use of 76-78 MT. The Commission of Agriculture Costs and Prices has suggested Rs 13,500/tonne ex-Punjab as floor price for export and that efficiency of farmers should not blunted by the irrational tax structure in Punjab.
A carrying cost of $50/tonne per annum and “presumptive losses” for maintaining huge inventory should all be considered to redefine “flexible pricing” linked with international market movements.
A sum of Rs 15,000 crore ($2.8 billion) can be generated by exporting 10 MT from FCI’s stocks to reduce current and fiscal deficits. If domestic and international values remain misaligned, the US, Australia or Black Sea countries will gain the upper hand.
All policy pronouncements might remain on paper. The FCI will continue to be saddled with old perishable stocks with lack of storage for the new crop.
(The author is a grains trade analyst.)