Wednesday, August 16, 2017


A broad analysis of the sugar market from 2009 onwards till July 2017 reveals that mega trend of the sugar prices has remained bullish.  
“Retail” sugar prices ascended from Rs 29/kg in 2009 to Rs 32-35/kg in 2014—higher by 20%. In the recent past, sugar climbed up from Rs 31/kg in 2015 to Rs 39/kg in 2016 –an uptick of 24% and then to Rs 43/kg in 2017, another upside of 10 %. (Data -Price Monitoring Cell, Deptt of Consumer Affairs).   Sugar is retailed at Rs50/kg in Srinagar.
 On pan India basis sweetener’s price climbed north by 34% in last two years. This is when international market is down by about 40% in a year –from 22c/lb to 13.50 c/lb (raw values). (See chart). If import is made now, refined sugar will cost Rs 27/kg without any duty. After provisioning for margin of whole sale and retail, imported sugar may not cost more than Rs32/kg to consumer at zero duty.  India is thus exposed to a counter reality where sugar is sold at Rs42-43/kg when Sugar cane cost is Rs230/qtl.( According to CACP net return on sugarcane is highest at 52% on all India basis with crop duration of 12months.)
Press  release issued by GOI on 14th July 2017 states that “The annual rate of inflation, based on monthly “wholesale” price index (WPI), stood at 0.90% (provisional) for the month of June, 2017 (over June,2016) as compared to 2.17% (provisional) for the previous month”. Thus   whole sale inflation in India is less than 1%. But sugar has bucked the trend with WPI as 30% for 2016-17 and 11% for 2017-18. Retail inflation (mentioned above)and wholesale inflation are thus well synchronised!!!
Sensing the current scenario, stocks/shares of sugar mills are well supported. Most of the major mills shares have crossed 50% upside and some others have breached 140% rise in a year (see Chart) , indicating super profits. Mills in UP have done exceptionally well as compared to those in West and South of India. This is good time for the mills to have an in house stabilization fund to act as buffer for adverse market conditions.
In 2009-14, whenever retail values exceeded Rs40/kg, counter measures were initiated to drag down price to Rs 35/kg or so. Recently too Government initiated three step intervention to manage sugar prices –first by authorizing quota of duty free import of 0.5 million tons (mt) between April –June 2017. Second, in early July2017 it hiked import duty from 40% to 50% to keep prices firmer and stable, by preventing cheap imports. This second step is in contradiction to the first step of allowing 0.5mt imports to soften local prices.
Now in August2017, the same Ministry is reportedly contemplating third step of allowing another import tranche of about 0.25-0.3mt (originally thought to be of 0.5 mt). The third step negates the action of raising the duty done in the second step.
 Thus authorities lack clarity on policy—whether prices should remain firm or whether they are to be pulled down. Net result of this flip flop and pull-push policies is that sugar prices are bound to remain in the region of Rs43-45/kg at retail level at major centers Delhi, Mumbai, Kolkata, Chennai, Guwahati  (see chart)
During festive season of Sep-October 2017, demand pressure will ensure that sugar touches a new high. Sugar balance sheet indicates opening stock of 4 mt as on 1st October 2017—which is tight in any case. Had Government desisted from hiking duty to 50% in July 2017, some imports with lower global prices would have landed to keep local values in check.  
Operational procedure for registering imports via DGFT and subsequently ensuring timely shipments is very challenging.  Raw sugar imports from Brazil—if allowed under Advance Licensing Scheme cannot land at Indian ports before October 2017. Refined sugar shipments from Thailand appear to be the only possibility provided total tonnage and conditions of imports including custom duty if any is notified yesterday.
Sugar availability in North-East and South of India is a cause of concern and any shortage on immediate basis has to be made good through UP millers. Next year too, unless imports of 1 mt are made—we may see even higher sugar prices-may be Rs 50/kg, from existing Rs 44/45 pkg in the major Indian cities.
It will be thus expedient to affect more imports immediately to restrain further spike in prices. Sugar prices above Rs 36-37/kg give super profitability to Indian mills. Time has come to protect the consumer and somehow narrow the gap between rate of sugar inflation and general inflation which is less than 1%.

Wednesday, August 9, 2017


Bangladesh is experiencing severe scarcity of rice this year. Government of Bangladesh (GOB) initially determined “import demand” of 1.2 million tons (mt) of rice which later escalated to 1.5mt due to crop losses, caused by heavy floods in the country.  75% requirement of Bangladesh is of parboiled (PB) rice while balance 25% is of white rice (WR).
After 2011, it is the first time in May 2017 that GOB is seeking supplies from Vietnam, Thailand and Cambodia on G to G (government to government) basis by dispatching official delegations and simultaneously issuing import tenders of 50000 mt each.  Five tenders have so far been opened. No serious attempt appears to have been made by GOB with Indian Government to cover their requirements from India on G to G basis. Some shipments of Indian rice- about 1.5 lakh mt - have been made through land/sea routes by private trade. Meanwhile rice prices in Dacca—have risen from 28taka/kg to 45 taka/kg—higher by 61% in last three months. (See chart)
India is, not only, the world’s largest exporter of rice of about 11-12 mt annually (both basmati and non-basmati) it also enjoys supremacy in global PB rice trade which is the major demand component of Bangladesh. Logistically too India is a neighboring country; much closer than Vietnam, Thailand and Cambodia; cargo can reach same day to Bangladesh via land route or less than 3-4 days through sea. India can thus offer prices on delivered (CIF) basis which other bidders may not be able to match for same quality. It seems that GOB has not done serious recce and thus they are contracting rice on customized and elevated prices, rather than market prices, under G to G deal done so far.   
Graphic below indicates that G to G deal with Vietnam (annual rice export 5-6 mt) concluded in May 2017 of 0.2mt for 5% broken PB rice is priced at $470/t CIF which is much higher than the PB rice sourced by GOB against their 1st tender of May 2017 at $427.85 /t CIF— cheaper by about $43/t.  It is well known that Vietnam is an inefficient producer of PB rice of limited scales.
 Likewise 50000 t, 15% brokens WR contracted at $430/t CIF from Vietnam under the official deal is higher by $23/t or $406.48/t CIF. G to G deal is expensive—while tendered supplies are substantially cheaper.  Has Vietnam been able to make deliveries faster than those awarded against tenders is unclear. Five tenders amply reveal that PB rice for Bangladesh ranges around $ 420-$440/t CIF.
GOB also had extensive negotiations with Thai counterparts twice but no conclusion could be arrived at.  According to trade sources, Thais want to do business on FOB basis –that is-- Thai suppliers do not want to undertake obligations of hiring vessels and for being held liable for claims of quality and quantity at discharge port. GOB perhaps cannot deviate from the established procedure of CIF contracting and thus discussions remained inconclusive. Thais too indicated exorbitant values-- even higher than Vietnam.
Another MOU is reportedly signed by GOB with Cambodia (around end July-early August2017) to import one million tons rice within five years. Pricing of rice, if any, is not in public domain.  Long term understanding in commodity trade seldom materializes.  Cambodia’s official export is about 0.5 mt, while balance 0.6mt is cross border unofficial trade with Vietnam and Thailand.  Cambodia is not adept in shipping break bulk cargos and makes shipments through containers. It will be na├»ve to seek 0.2 mt rice in a year from Cambodia on break bulk basis
It is true that while GOB approached GOI in the past (during UPA rule) to augment their supplies through FCI but FCI adopted an inflexible stance of delivering rice on as is where is basis and that too at Indian ports only. This perhaps discouraged GOB from taking any proactive approach for Indian rice under G to G business.  Also FCI’s rice export through PSUs is not feasible as this entails additional operations like re-bagging, printing on bags, cleaning, up- grading (from 15% brokens to 5% for PB rice and to 15% from 25% for WR), transit losses etc. which PSUs cannot undertake. 
The only way a commercial transaction through PSUs can be structured is by having private partnership with rice millers/traders who have demonstrated past performance of undertaking exports in past 3-4 years. The PSU too should have exported rice commercially. GOB should be able to approach through diplomatic channels for such a deal through Indian PSUs.  Market players indicate that some discussions of GOB with Indian PSUs have taken place but then abandoned.
It is also feasible that if private trade from India is willing to match tendered price in the current bidding then such a bidder could also be considered for additional 50000mt or more.
It is not sufficient to have paper contracts or low/high prices but such contracts and prices should be able to translate into physical deliveries of rice for the people of Bangladesh. Rice prices in India are likely to soften in next 60days when new paddy arrives. Estimates of Indian rice production are 108-110mt. GOB may ponder if Indian grain/agencies can meet their requirements as it is doing for 1.25 billion population of this subcontinent and other countries of Asia, Africa, Europe and USA. 



Thursday, August 3, 2017


Three agro-commodities namely— edible oils, sugar and wheat-- are engaging immediate attention of the government with respect to custom/import duties. Reasons-- their prices abroad are much lower than in India. Domestic production of edible oil by oilseed crushing / refining units and sugar by sugar mills will stand to lose if duty free import is permitted or insufficient duty is applied while farmers will suffer if duty free import of wheat is authorized. (Why prices abroad are lower and higher in India, is not the narrative of this article)
Thus government provides stakeholders (including farmers) protection by making imports expensive.  Current duty on crude/refined oil varies 7.5% to 20%; sugar is 50%; wheat import at 10%. “Import demand” for edible oil varies between 65%-70% (see chart) of annual consumption, imported sugar requirement is about 2% of local production this year and wheat import is about 4-6% of domestic output. 
At the same time, government is obliged to shield consumers by discouraging inefficient production and processing.

Edible oil industry has represented that import duty may be increased to 20% on crude oil-  specially crude palm oil(CPO)-(from current 7.5%) and 35% on refined oil ( from current max 20%)  to support crush parity so that local prices of oils may rise while oil meal exports become viable. Prices of palm and soy oil are interlinked or to say the spread between the two has a relationship –that is if CPO values go up domestically or abroad, a definitive upswing takes place in soy oil and others soft oils as well. 
 A chart of declining trend in the local crude palm oil prices in rupees/10kg is show cased, which implies that realization of oil seed farmers could drift down.  Currently oilseeds prices fetch 10-15% below MSP for soybean, rapeseed and ground nut while last year market prices were higher by 20-25% than MSP.
Industry also espouses case of farmers for future growth of oilseed production. However when there is 65%-70% “import dependency” on edible oil, then a very large section of consumers, including farmers, are exposed to oil inflation with elevated duty. Authorities will have to rationalize whether hike in duty will be justified so far as consumers are concerned.
About 2 million tons of oil is transiting either at ports/custom bonding or in the pipeline.  It will be bonanza for those who are positioned for these stocks. But that is how market operates.

Government raised duty on sugar from 40 to 50% on 9th July 2017 to isolate local prices from possibility of cheaper imports. Domestic prices naturally soared. But around third week of July Government has written to industry as to why prices of sugar have flared up!!  When the raison d'etre of hiking duty was to keep local prices firmer, then officialdom needs introspection of their own actions.  Moreover August/September period is tail end of sugar season and prices shall spike anyway. 
Range of the duty varies from 0% to 50% as pictured below. In last 6 years, duty is modified 6 times!!  Incorrigibility/ sensitivity of sugar market is such that, in April 2017 “duty free” import of 0.5 mts of sugar was authorized, but in July2017  duty was enhanced from “40% to 50% to curb imports”.

Accompanying graphic displays flip-flop on wheat duty. In a span of less than three years, duty is notified seven times. It demonstrates predicament of policymakers in deciding quantum of duty and applicability of its duration. Importers of wheat remain nervous of any abrupt change in duty structure.  With rising demand wheat import is likely to be a long term proposition.

Above illustrations indicate that duty determination is a very challenging exercise. Market volatility and pressure groups can create arbitrariness in fixing the percentage of import duty and the duration of applicability.

At a time when PSD(production supply and demand) data, duties/tariffs and price movements are known internationally and nationally, Government may create an algorithmic application (ALGO) that can give transparent guidance-- to Government and the industry-- to trigger duty changes, up or down,—so that objectivity is maintained.

ALGO programming is wide spread in commodity and other stock exchanges.  ALGO can perform calculationsdata processing and automated reasoning tasks including decidability through computers at electronic speed based on input and output requirements. Why not apply ALGO for import/export duties also? Any well-known IT company can come up with computational process—if authorities take a call.

International and domestic prices can be tracked through commodity exchanges while each price tick signifies mutations in supply/demand including weather related issues. Government can predefine its target of high and low prices in domestic market or align them with MSP to regulate imports by duty or prohibition of imports by analyzing overseas prices through speed of ALGO. Each commodity will have well configured ALGO and that will remain in public domain. Inputs and outputs of such an ALGO would be available on real time basis to all and sundry on the website.

Lobbying by association or groups will then be minimal. Even farmers will have satisfaction of rational decision making process.  Though no system may be perfect but algorithmic guidance will have less imperfections.  Of course government may have final word on percentage of duty to be levied but then basis of duty determination/ any deviations thereof or discretions applied to the guidance of ALGO, will be known to one and all.   

Tuesday, July 25, 2017


Will India remain a long term wheat importer? Is nation’s wheat security is exposed to risk? Will Government intervene to curb or stop import? Should government continue to increase MSP of wheat despite cheaper grains available abroad? Will India turn exporter again?
 Answers to these questions, based upon the data available are that-- yes India will remain a long term importer of wheat; wheat security is not compromised as government is allowing private trade to import to fill the gap created by supply demand mismatch and it itself is building official stocks from local procurement; import can be reduced or stopped by increasing custom duty from existing level of 10%—which is the sole prerogative of Government --and any such intervention will create upward swing in local wheat values. MSP should be raised to augment higher production without neglecting importance of higher yields while attending to vulnerabilities of cheaper imports. Difficult to say if India will be yet another exporter of wheat in near future!!
From an exporter of 6.8 million tons (mt) of wheat in 2012-13, exports trailed to paltry $0.4 million in 2016-17, while imports escalated to 6.3 mt in same year, and are likely to be around 3.5- 4 mts in 2017-18 (see Chart 1).  Global estimates of 2017-18 are - wheat output at 735mt; opening stock 240mts and annual trade 170mts; consumption also at 735 mt. Thus India’s demand is miniscule compared to surpluses available worldwide.
Imports are natural outcome of international prices being lower than local costs after adding sea freight and handling expenses. There could be diverse reasons for steep fall in wheat values abroad-- since 2014--but primarily due to higher output in Black Sea countries (comprising Russia, Ukraine and Kazakhstan) and exceptionally good Australian crop last year. Trend reflecting fall in values of US SRW wheat since 2014 is as per the chart below—from $300 fob /t to $220 fob/t –down by 27%  as of now—but touched bottom of $170 fob/t in Sep2016 or 43% decline. (See chart 2)  
However, Indian MSP climbed from Rs 1400/qtl in 2014 to Rs1625/qtl or 16% higher while import prices fell to  Rs 1275-1430/qtl against India’s wholesale market price in North Zone of about Rs1550 to Rs 1800/qtl. Since bulk of imports land in southern Indian ports for millers there-- whole sale traded values in south are Rs 2300/qtl -- while imported wheat with 10% duty is around 1800/qtl. OMSS price of Rs1790/qtl plus freight also incentivizes imports in preference to local deliveries from FCI. It makes perfect sense to blend cheap imported wheat from Black sea.
If Government hikes MSP in coming Rabi season, which it is likely to do, then cheaper imports will continue next year as well, unless custom duty is also raised to 25% or so.  Prices abroad will remain weak as Russia+Ukraine may continue to put downside pressure with their crops being 70+28=98 mts with aggressive pricing and weaker currencies.
Though Indian government has claimed wheat production of 93 mts and 97mts in 2016-17 and 2017-18 respectively, market assessment is of 84mt and 92 mt.  Indian wheat procurement was 23mts last year and 30mts this year –short of target by 7mts and 3mts in last two years. Firmer local prices, lower releases (4mt against demand of 8mt) by FCI in market through OMSS, official stocks touching near buffer norms on 1st April 2017 and rising imports are all indicative of tightness in availability of this grain which substantiates assessment of market.
 As per IGC London Indian domestic consumption in 2017-18 is projected at 98mt.  We are thus producing less than what we consume.  Ideas of cutting down wheat production in Panjab (which gives highest yield in the country of about 4.7t/ha vs 2.5-3 t/ha in rest of the country) and substituting with other crops will definitely jeopardize wheat security of the country.    
This year Uttar Pradesh (UP) procured 3 mt grains for the central pool, though in the past UP contribution has been marginal. This may have shored up official stocks—but it crowded out market players who normally source their needs from UP.  This also prompts imports because of limited availability nationally. Immediately after end of wheat procurement season in June 2017, local prices touched Rs1743/qtl against MSP of Rs1625/qtl. UP Farmers thus suffered notional loss of Rs 118/qtl.
Already 6 cargos of cheap—low protein- Ukrainian wheat—about 200000mt –are sailing for southern Indian ports contracted at $216-220 cif/t (Rs14300/t) for arrival in Aug-Sep 2017. Existing stocks of wheat at the ports is getting liquidated. Black Sea harvest season is July/August and prices might soften soon.  There would be a new round of purchases. Indian local prices start moving up between Nov-March. Indian buyers are bound to take fresh positions. Australian output is forecast to 25mt-- lower by 10mt-- from previous year. Thus Australia is priced out for Indian market at $275-280cif.
The only fear that trade carries is that of uncertainty of import duty and abrupt changes in Phytosanitary conditions. Considering that good wheat is facing scarcity locally with rising consumption pattern; MSP/OMSS/market prices are much higher than landed imported cargos; and also that India needs to build its official stocks—government has to tread path of any intervention cautiously so as to keep a balance between interests of farmers and consumers.

Monday, July 17, 2017


RICE (Basmati+Non-Basmati) export of 75 million tons (mts) in a decade of 2007-17 with forex earnings of Rs 276000 crores—which as per current $/rupee parity equals $42.5 billion, is one of the most notable features of India’s trade thrust. This would be even more in dollar terms if lower rupee- dollar is factored for previous years. Thailand stands at number one with export of 90 mts rice in the same period while India at number two (see charts) and Vietnam with 62 mts at number three.
India would have surpassed Thai’s highest figure--but for three year ban (from 2008 to 2011), imposed by the then Government on export of Non-Basmati rice.  India suffered “export loss” of atleast 16-17 mts of rice during prohibited period while there was no scarcity of cereal in that triennium. India has never imported rice on government account for last 25years or so and thus has a record of self-sufficiency. All rice exports are from private stocks—thus keeping food security fully insured through FCI and its agencies.
If last five years data is analyzed, then India shipped out @10.9 mts each year-- 54.5 mts vs 47.5mts of Thailand-- because no ad-hoc tweaking in export policy is done by GOI. That is how it should be. Exports require unrestricted access to markets and any ban or change in policies entails handing over clients abroad to competition. Thailand, due to its Government’s irrational paddy pricing policy of 2011, outpriced itself from African/ Asian markets. Its rice quality suffers due to processing from old damaged paddy.
 In 2017-18 too, India is likely to maintain annual shipments of 11-12 mts of rice in a world trade of 42 mts. This sustained success should be highlighted in all international fora to build India’s brand image as a quality and quantity exporter of rice.
Government’s program to “Bring the Green Revolution to Eastern India (BGREI)” through improved technologies launched in 2010 has realized significant productivity gains in Bihar, Chhattisgarh, Jharkhand, eastern Uttar Pradesh, West Bengal, and Odisha.
 India’s annual production is about 110mts of milled rice; opening stocks of 19mts; total availability is 129mt vs local consumption of 100mts+exports of 11mts, thereby leaving surplus of 18mts as of now.
India lacks presence in South East Asian market of Indonesia, Philippines and China where Thailand/ Vietnam dominate because of logistics and historic continuity. China too is turned regular importer of 4mts annually where our presence is negligible.
Total annual production of Basmati is about 10 mts. Saudi Arabia, Iran, Iraq UAE, Kuwait remain prominent markets of 3-4 mts of Basmati rice annually. Basmati Pusa 1121and 1509  varieties released respectively in 2003 and 2013 by IARI in  parboiled form has proved to be a boon for the farmers/millers and buyers in Iran/ Saudi Arabia as it is 40% cheaper than traditional Basmati with grain length of 20mm after cooking. It is currently trading at $1150 fob vs $900fob last year. Thai fragrant rice competition is subdued with Pusa 1121. Sortexed capacities involving optical and electronic sorting machines have been upgraded by rice millers for uniformity in color/ quality. Prominent rice exporters are also targeting USA and EU—though they keep raising issues of Minimum Residue Levels of fungicide which adversely affects volume and velocity of exports.
Nigeria and Francophone countries of West Africa (Benin Liberia, Mali, Guinea, Senegal, and Ivory Coast) South Africa, UAE are some of the major destinations of Indian Non-Basmati rice of 6-7mts per annum. Trade with African nations is preferably done through intermediaries in France/Switzerland/UAE to ensure payment. In addition to 25% broken white rice, India is prime player in 5% parboiled and 100% broken white silky Sortexed rice. Multiple varieties of rice like—Pant 4, IR64, IR36, IR8, 1001, Sona Masoori--offer choices for right pricing.
Nigerian/Benin market is of 2 mts per annum where Thai and Indian parboiled rice sell at par in equal ratio; Entire Liberian market of 0.5mts needs Indian parboiled variety only; Ivory Coast has annual demand of 1.3 mts with 50% market share of Indian parboiled/ white rice. Senegal demands 1.2 mts annually 100% broken white silky Sortexed rice where Indian share is 60%--rest goes to Thai and Uruguay.   
This year Bangladesh needs to import 1.5mts of Non-Basmati rice-that could go up to 2mts. Import duty is reduced by Government of Bangladesh (GOB), to 10% from 28%--thus confirming desperation of demand. (GOB) has issued five tenders of 50000mt each where 0.1mts Indian 5%parboiled rice is contracted at $430 and $445 C&F while local wholesale price in Bangladesh is taka 45/kg or about $560/mt. GOB also bought 0.2 mts of Vietnamese parboiled rice at $470/mt C&F.
Indian private traders are daily making truck dispatches from West Bengal/ Bihar to Bangladesh and have dried up market surpluses in these two states. Additional demand will be catered from Jharkhand/ Chhattisgarh by land route or from Kakinada via sea.  Price of 5% parboiled rice which was $400 C&F Chittagong in May 2017 is higher by 10% now. Indian values are under tremendous pressure due to demand pull from Bangladesh that will make rice expensive for African markets as well.
India’s farm produce is private; mills are private; traders are self-employed who arrange financing privately; market risk of profit and loss is private; buyers/importers too are largely private. Rice inflation is under control. The lesson is that the less the government the better the trade. Momentum of rice export can be maintained if Government avoids tinkering with current policy profile. Rice is the only agro-commodity that has weathered test of time in national and international markets.    

Monday, July 10, 2017


Indian sugar business has four prime stakeholders—farmers, sugar mills, consumers and the government.  Despite deregulation of sugar industry in 2013 Government commands the most dominant force of intervention amongst other three stakeholders. The only policy of sugar is to have “policy of change” triggered by market volatility and pressures exerted by other constituents. The fear of hurting sugarcane farmers remains politically alive.
On pan India basis India has an “installed crushing capacity” of 33 million tons(mts) from  716  mills in private/public and co-operative sector as on 31.01.2016 while actual output this year is 20.3mts. There are only six surplus sugar states in India –namely Haryana, UP, Uttrakhand, Maharashtra, Tamilnadu, and Karnataka—out of total 27 states. Massive movement of the commodity has to take place through length and breadth of the country.
 Sugar Mills nurse a grievance that farmers get preferential treatment from government for cane pricing. Mills claim that they are also exposed to market risk on account of price volatility. The answer is -- All businesses have inherent market risks—of profit and loss. However oddity of this business is whether sugar is sold at Rs40/kg or Rs30/kg—sugarcane price must be increased annually.  
Internationally India is the most “expensive” producer of cane at Rs 3/kg Vs Thailand and Brazil at Rs 2/kg—higher by about 33%. At the same time Government has given umbrella protection to mills with 40% import duty. Refineries are also permitted duty free raw sugar import with export commitment. Surprisingly numbers of sugar factories are growing and sugarcane production is also well sustained except when weather related issues arise. Thus the current business model appears to be viable.
Mills complaint that annual increase of FRP (Fair Remunerative Price) of sugarcane by the government is more than the MSP of wheat/ paddy.MSP of wheat/paddy is hiked by 47% in eight years; sugarcane price is raised by 97% in nine years.  Sugar farmers are thus beneficiary of better return of 50-60% than grain growers..
 Comparison of MSP of grain crops with FRP is incoherent because wheat/ paddy are 5-6 months crops-- sown each year one in rabi and kharif seasons, while sugarcane is harvested after 12-18 months and is sown once in three years. FRP is fixed basis recovery of 9.5% sucrose but with special varieties of cane, sucrose recovery is now improved to 11.5% or more. Additionally revenue accrued from disposal of molasses, bagasse, power generation etc. also provides cost compensation to mills against FRP/SAP. However fixation of SAP (State Advisory Price) arbitrarily by states like-- UP, Uttrakhand, Panjab, Haryana and Tamilnadu-- higher than FRP is devoid of any rationale except vote bank politics.
Sugar industry rightly maintains that FRP is not linked to local market prices.  A study of the FRP vs average mills price reveals that from 2009-10 to 2012-13, cost of production was below the market price—thus profitable. During 2013-14 to 2014-15, mills suffered losses due to poor realization from the market. But after 2015-16 onwards, mills have operated profitably due to scarcity of cane in Maharashtra/Karnataka that depressed Indian sugar output to 20.3 mts against demand of 24 mts. Payment of 75% of sugar revenues to farmers and balance 25% to mills is deemed an acceptable mechanism (Rangarajan committee formula) which requires full transparency in accounting systems and procedures. Some states (Maharashtra and Karnataka) have agreed for 75/25 formula—but it needs a central legislation.
Higher cost of sugarcane may in some cases compel mills to understate recoveries and for making short or delayed payments to farmers without interest whatsoever . There are still outstanding payments of more than Rs 12000 crores to farmers though industry has seen substantial profits in last two years. Farmers remain at the mercy of millers and cannot agitate because farmers have to sell cane grown in the reserved area to select mills.
 Another positive feature-- Government is responsive to pressures of the sugar industry on imports and exports. Import duty is adjusted or waived to fill the supply gap. Duty is hiked if there is surplus to prevent cheaper imports. When the supply exceeds demand –that is excess availability --Government is not averse to subsidizing exports to assist millers and farmers irrespective of WTO obligations.
In sugar season 2008-09/09-10, 6.5 mts of duty free imports were authorised. In April 2017 duty free import of 0.5 mts raw sugar is permitted. That helped refineries to mitigate shortages.  Now a proposal to increase duty from 40% to 60%--the bound rate—is under consideration due to sharp descent in sugar prices overseas to 13c/lb ($300/mt) from 22c/lb ($505/mt), thus threatening cheaper imports with 40% duty, which may pare local prices. This will assist stability in local prices. This decision may be anti-consumer but certainly pro farmer and pro industry though 4 mt of opening balance on 1st October2017 is a very below  three month norm of annual consumption of 24 mt.   
When sugar production + opening balance escalated in sugar seasons pf 12-13/13-14/14-15/15-16 government “incentivised” sugar export by offering subsidy of Rs 3300 to Rs 4000/mt, pushing exports of 5mt in these four years.  Another example of industry getting ample support from Government!!
Conclusion-- Indian Government has been very dynamic in pursuing policies consistent with the requirements of the sugar market to avoid shocks to the millers and farmers. Industry is also expected to respond in equal measure and with promptness to clear arrears of farmers.

Thursday, July 6, 2017



5TH JULY 2017

There is a rise of 30% in value of imports of three essential agro items, namely wheat, pulses, vegetable/edible oils, -- indicative of substantive demand pull in the country (See charts below).
Data analysis of India’s seven select but vital agro related items of exports reveals that there is a sharp slump—40% in their overall value-- during last four years. Commodities are wheat, rice, sugar, cotton, soymeal, guar gum and beef+fish .
Exports falter when goods are not competitive, lack of local production and/ or poor demand overseas. Edible items are of daily use. Thus with rising population, probability of lower demand abroad is not logical. Two successive draughts in 2014-15-16 may justify drop in production but lack of adoption of new technologies and efficient farm practices is the root cause.
Pulse’s import jumped from $2.3 billion in 2013-14 to $4 billion--an increase of 74%. Out of 5.4 million tons (mts) of pulses shipped to India 50% or about 2.7 mts are peas/yellow peas from Canada/USA. Kharif acreage of pulses is down by 33% which give ideas of lower output, compelling higher imports of Tur, Urad Moong. News of possible decline in production will make imports costlier.
Government has been fronting state agencies for import through bulk tendering. PSUs tenders escalate world prices, thereby pushing up values for private import as well. When state agencies dispose pulses in domestic market at subsidized prices—that is at a loss-- this again disturbs the parity of private imports because they cannot discount their costs. This may discourage trade to import thereby creating more scarcity in the country.
From exporter of wheat of about 14 million tons (Approx. $4billion in 2012-13 to 2014-15), India has turned structural importer of $ 1.5 billion of grain in last three years. Spike in wheat import in 2016-17 over previous year is 840% by value.
 In 2014-15 and 2015-16 market estimates of production each year varied 84-87 million tons (mts) (though Government claimed 93-95 mts). FCI stocks depleted to 8 mts (buffer norm 7.5mts) on 1st April2017 and imports ballooned to about 4 mts in 2016-17 thus validating market’s view.
Wheat procurement pf 30mts this year vs targets of 33 mts implies that OMSS supply to flour millers will be restricted. This necessitates private imports of 5-6 mts in 2017-18.Already importers are looking for cargos from September 2017 onwards from Australia and Black sea at landed values of $240 and $205 respectively which will be cheaper than domestic wheat after 10% duty paid.
 Government has rightly stayed away from importing wheat directly for FCI and let privates fill the gap. This prudence has kept world wheat prices range bound and non-inflationary, because trade imports in economical lots with spread of time, instead of bulk tendering by Public sector Undertakings (PSUs) which results in inflated import values.
Vegetable oils
Import of palm/soy/sunflower oils has remained steady-- value wise between $8-9 billion per annum. There are strong pressures from oil seed crushing industry to raise import tariff to create a disparity by having high landed cost of overseas product so that locally produced oil could be cheaper. Government has done well in levying moderate duties on oil to protect consumers –60% of which are based in rural areas including farmers and not to promote inefficient production and processing.
Unless high yielding oilseed varieties are available in the country –the value and volume of vegetable oils import is bound to ascend.
In 2014-15 basmati/ non-basmati rice exports were $7.8 billion that has slipped to $5.8 billion in 2016-17—though India remains world’s largest exporter of rice of 10mts. Poor demand in Africa, especially in Nigeria of non-basmati rice, and slow down of basmati shipments to Iran and Saudi Arabia could be possible reasons. Iran shipments declined from 1.44 million tons in 2013-14 to 0.7 million tons in 2016-17—down by 50%.
Outlook of Non-Basmati rice for 2017-18 appears positive as strong demand for Nigeria via neighboring Benin is supportive; Bangladesh requires more than one million tons of rice desperately and trade is focused on this demand. Indian non-Basmati rice prices are lower than competition from Thailand, Vietnam, Pakistan.
The success of Rice export business is attributed to minimal interference by Government, diversity of paddy varieties, superior capability for par-boiled rice, logistical advantage for Africa, botched up past policies of Thai government in paddy pricing and poor performance of Pakistan. Indian rice export is negligible to South East Asia and China.   
Cotton exports tapered down from $3.8 billion to $1.4 billion during 2013-14 and 2016-17---lower by 63%. Exports to China and Pakistan suffered, while Bangladesh remained a consistent market. India’s share of exports to China has dropped from almost 80 percent in 2011 to 10 percent in 2015. Indian trade is diversifying to newer markets of Indonesia, Taiwan, Turkey and Thailand to gain the momentum.
Soymeal /Guar gum /Beef and Fish
Drastic fall (86%) in Soymeal exports from $2.8 billion to $0.38 billion ; likewise 75% lower guargum exports and 48%decline in Beef and Fish  in 2016-17 from their peak performance of $10 billion in 2014-15. Beef exports are not likely to pick up because of current confusion. GST complexities is another factor that is bound to affect the trade.    
 We are becoming a high cost economy in agro related items. If we continue to dither in our export earnings by lack of quality/procedures/ poor yields/price parities, resultant suffering will be transmitted via trade to the farmers and another undesirable cycle of joblessness and loan waivers will commence.

Wednesday, June 28, 2017




Tejinder Narang

(The very concept of comparing profits of farmers through MSP is irrelevant because 92% of the produce is dispensed at market determined values.)

Highly analytical opinions have been ascribed to the current agitation of farmers for cereals, oilseeds, vegetables. Lower hike in MSP (Minimum Support Price)during last 3-4 years, has been cited as one of the major causes and the general public also believes it so. Then the reasoning of stocks limits, poor warehousing facilities, export bans, lack of food processing industry and free trading in commodity exchanges is given. The logic that higher production has led to price crash, is also endorsed as a reason for farmer’s woes. And last is the rationale of squeeze of cash for the acquisition of the produce.
Government of the day is being held liable for failure in “suitable” increase in MSP thus diminishing the profits of the farmers. This does not exemplify correct picture.. Except for wheat and paddy (of rice) -- MSP is a notional value for all other commodities. For wheat and paddy too, approximately 30% is the official procurement and the rest is traded in the market. There is no MSP for onions, potatoes and tomatoes. In short only 8% of the total agriculture produce (including horticulture) is supported by public procurement –the rest 92% sells at a market determined prices. That is why MP government futilely and wrongly attempted to suggest that all traders should buy agro commodities at MSP. After realizing its irrationality, the proposal now appears to be discarded.
For whatever reasons, draught or otherwise, India’s reliance on import of agro-commodities is rising every year. For example- import of wheat per annum is 3-5 million tons (mts), pulses 5-6(mts), edible oil 14 mts-- have become a new norm. Recently 0.5mts duty free raw sugar import are authorized and last year 0.5 mts of corn import was permitted.
 Import prices thus also have bearing on domestic values and volumes that are traded.
·         Market price of wheat may depend upon landed cost of Australian/Ukraine/Russian wheat .
·         Pulses will be dictated of Tur/Urad price of Myanmar/ Ethiopia/Tanzania; Chana values of Australia; Yellow Peas of Canada.
·         Soybean prices by quotes of CBOT or Brazil or Argentina ; Palm Oil offered in Indonesia/ Malaysia.
·         Sugar values by contracts in New York and London exchanges. Raw sugar which was 22 c/pound in November has today dropped to 13c/pound in New York exchange –or down by about $235/mt.
International volatility cannot be visualized and built into MSP or FRP( for sugar), especially when  imports are rendered imperative. Though the merits of fixation of MSP itself are debatable, the very concept of comparing profits of farmers through MSP is irrelevant because 92% of the produce is dispensed at market determined values.
Should we raise the tariffs to such a high value so that imports may be blocked!! No. Instead India needs to educate itself as to how exporting nations are able to produce cheaper and sell with a landed cost (including freight and handling expenses) + reasonable custom duty, still remain competitive with international volatility.
Realistically this means that we have macro (including infrastructural) and micro economic inefficiencies of production.  If the case is to raise the tariff –then it also implies that domestic inefficiencies are also being encouraged. To get out of the rut of vicious cycle of ascending imports, domestic output has to go up by technology induction both at the level of seeds and farming practices.
Other factors that are mentioned-- stocks limits, poor warehousing facilities, export bans, lack of food processing industry and free trading in commodity exchanges-- have all pressured prices downward. But these factors have always prevailed during last 60 years. All governments took decisions by knee jerk reaction to tame rising prices to control inflation. All governments targeted intermediaries/middle men directly or indirectly, but farmers seldom agitated.
Each government of the day claimed sufficiency of agro production and undertaken ad-hoc imports or allowed imports for the privates to narrow down supply-demand gap. The paradoxical situation is that though this government has been stating rising production of wheat and pulses but it simultaneously facilitated imports thus negating ideas of higher production by their own actions. Imports though filled the demand and kept inflation in check, acted contrary to the aspirations of the farmers of realization of promised 50% profit above the cost of production.
The only factor that is now emerging is the lack of informal financing. Dr Ashok Gulati in his article in this paper on 19th June2017 has given the ratio of institutional and non- institutional finance of the rural household of 2013 in the ratio of 56%to 44%.  It would not be wrong to conceive that about 50% is the component of informal financing in Indian farm economy. Pursuant to demonetization the cash crunch of the trade stands transferred to the farmers, implying that the farmer’s ability to sell to the middlemen dried up. This is the mega cause of the current farmer’s fatigue. As and when that cash comes back in circulation through the trade,  normalcy in the fatigue of funds will be restored.
All other actions of this Government have been consistent with past practices.