What is really helping wheat trade in India

31.10.2017

Unbelievable, but true, it is rumours! See why

But the frequently-changed import duty will help MNC traders more than local traders as they can take advantageous positions at the origins themselves.

Traders are a smart lot. They speculate, and exploit every opportunity. They, however, can’t be more thankful than when the government gives them a reason to cheer. Sometimes rumours of imposition of higher import tariffs—intended to protect domestic producers and restrict cheaper imports—can also help traders. At the same time, higher MSP, meant to help farmers, gives an immediate advantage to trade because market prices move up right away even through the new crop will arrive next April. Wheat is a case in point—policymakers have been frequently fiddling with custom duty to regulate its import to maintain the supply-demand balance. Import duty has been changed seven times since August 2015. Thus, such rapid frequency of tariff treatment gives rise market gossip that is treated as containing perhaps a spark of truth. A steady flow of wheat import in the last three years by the private trade/MNCs has catered to private demand—mostly in southern states—while the FCI-managed central pool of 23-33 million tonnes (mt) is used for PDS. FCI stocks were at 8 mt on April 1, 2017 while the buffer requirement is of 7.5 mt. Recently, there were reports in the media that authorities are considering yet another hike—the eighth such alteration—in import duty; it was to be hiked from the existing 10% to 20-25%.

Speculation relating to the duty structure has lifted the price of imported wheat—sourced mostly from Russia, Ukraine—from Rs 17,500 per tonne to Rs 18,500/tonne ex-Tuticorin. It made importers smile, because before this rumour, they were unable to dispose of imported stocks for want of parity—that is their landed cost was marginally higher than local values or they were fearing losses. Importers who either diverted or cancelled their wheat cargoes on the basis of this hearsay may have had to deal with regret (reports of about 0.3mt having been cancelled/diverted are circulating in the market). This Rs 1,000/mt surge will assist farmers carrying old stocks in selling grains at better values.

What gives further credence to this speculation is that the government wants to encourage more sowing of wheat by the farmers this rabi season for realising better values next year (marketing year 2018-19). Second, wheat inflation is in the negative zone for the last four months—about -1.71 in September 2017—and thus additional duty will be virtually neutral for macro-inflation. New MSP of wheat has been notified at Rs 17,350/tonne—higher by Rs 1,100/tonne from the previous year. If the government now actually inflates duty by 10%, scaling it to 20%, trade will factor in the MSP, raised by about 7.2%, to elevate local prices also. For importers, a tariff increase of 10% would be substantially offset by the higher MSP and make imports during December 2017-February 2018 viable.

It is quite possible that by December 2017, the government may again reduce duty to nil, or revert to 10%—the ninth modification—to once more facilitate import because trade is aware that the maximum pressure on reduction in official stocks starts from December onwards because farmers are left with little grains. Though the government maintains 2017-18 production at 97 mt, some sections in the trade peg output at 92-93 mt. Proponents of the alternative view foresee another import wave of wheat after December 2017 of additional 1 mt—making the total in 2017-18 reach 2.2 mt. However, the International Grain Council, London, estimates that India might import 4 mt in 2017-18 (against 6 mt last year) based upon its projection of annual wheat consumption of 100 mt.

The fluctuating pattern of duty determination is suitable for MNCs rather than local importers who are India-centric. MNCs can take an advance position at the origins—Russia, Ukraine, Australia, etc—at a cheaper cost. In the event of disparity in the local market when delivery period is approaching, or if there is non-viability triggered by tariffs, they can divert the cargo to nearby destinations like Bangladesh, Sri Lanka, UAE, and Oman, etc. MNCs also have expertise in hedging their position in international future stock exchanges like CBOT to minimise losses. Indian importers and flour millers lack both the financial muscle and the proficiency in hedging.

In 2016-17, Indian wheat import was about $1.27 billion. This year, trade expects much higher flows from Russia after December 2017 of the 11.5% protein crop than from other countries. The Open Market Sale Scheme price of Rs 17,950/tonne ex-Punjab costs more than Rs 20,000/ton in southern states after accounting for freight and incidentals. Should international prices remain within $220 cif/mt or so, higher duties may not have the effect of blocking/restricting imports. The government will do well not to release excessive stocks from the central pool in the open market because FCI/agencies have to assure adequacy of reserves and buffer norms. There are reports of moisture stress in Rajasthan and MP in this rabi season, and attaining production of 100 mt in marketing year 2018-19 will be a challenge, and so will be realising the procurement target of 33 mt next year.


financialexpress

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