Bonanza for wheat exports

For the first time, India is well-placed to catch the current global boom in wheat prices. At a time when India’s granaries are full to bursting, bad weather has ravaged wheat crops across the world and sent prices soaring. In the USA, the biggest producer, the price of soft red wheat (probably the most comparable with Indian export varieties) has touched $ 4.15 per bushel, or roughly $ 160 per tonne. This is more than double the price at the bottom of the wheat price cycle in 2000.

Inclusive of freight and insurance, this could translate into as much as $ 200 a tonne in Asian markets. India, which has been exporting wheat at distress prices, now has a great opportunity to export profitably and, in the bargain, reduce its enormous surplus stocks, This in turn will cut storage and interest costs, and lower the  economic cost of wheat held by the Food Corporation of India.

The economic cost —which covers the cost of procurement, incidentals, transport, storage and interest–was Rs 839 per quintal in 2001-02. Distress exports are reported to have taken place at almost half this price. But if indeed wheat for delivery in nearby Asian areas goes up to $ 200 per tonne, or almost Rs 1000 per quintal, exports will become profitable and reduce the food subsidy. If the export price rises by Rs 500 per quintal and we export 20 million tonnes, the fiscal deficit will fall by Rs 10,000 crore.

Price booms in the world wheat market are notoriously fickle and usually short lived. Sometimes a boom lasts two years, but more often it collapses within a year. The futures quotation for wheat for delivery in December 2003 is  $ 3.40 per bushel, almost 20 per cent lower than the spot quotation. We need to act immediately.

Historically, India has been a wheat importer. It has always exported some basmati rice and, in the last 15 years, some quantities of non-basmati rice too. But only in the new millennium, after food stocks soared,   has it started exporting wheat.

In past decades, India typically increased wheat imports precisely when world prices boomed. Indian shortages seemed, eerily, to co-incide with global shortages. We now know this is because climate is less local that once believed, and global phenomena like El Nino affect agriculture across the world.

This year is no exception. India has just suffered the worst drought for a decade. But many other countries have been even worse hit. Worst hit of all is Australia, whose wheat crop will probably fall from 24 million tones last year to just 11 million tones this year.  The USA and Canada expect the smallest wheat crop since the early 1970s.

Canada, traditionally one of the biggest exporters, has been so badly hit that the Canadian Wheat Board announced in September that it was withdrawing from the export market. Indeed, some wheat has actually moved into Canada from the USA.

Last year’s global wheat crop was none too good, and so global stocks started to fall. Today, global stocks are down to their lowest level for three decades. This has fed speculation, and driven US prices through the roof.

European weather has been better and wheat prices there are much less affected. European exports may moderate the price rise threatened by bad weather in Australia and North America. Even so, wheat for delivery in India’s Asian neighbourhood should go up significantly, since this area has traditionally been served mainly by Australia and North America.

However, India will not be able to seize the opportunity to export  20 million tones of wheat in coming months, for a variety of reasons. First, much of the FCI’s wheat is sub-standard, with rotten and rain-damaged grain that affects both its price and global acceptability. Second, our ports do not have the infrastructure for really large-scale mechanical grain loading (grain handling capacity is actually higher for imports than for exports, because India has historically been a grain importer).  Third,  Indian wheat contains an unacceptably high proportion of dirt and stones, and so consignments have   past been rejected by Indonesia and even Iraq. Exporters are now cleaning wheat to improve acceptability, but whether we can upgrade anything like 20 million tonnes seems doubtful.

In sum, we are ill-prepared for the great global opportunity that has just arisen. Many expert committees have been aware of the potential, and have urged measures needed to make India a major wheat exporter, but little has been done. Ideally, we need modern grain silos in the surplus north-west, high-quality cleaning, express trains directly loading wheat from silos and taking it to Kandla for bulk loading in deep-water vessels. The Gulf region is a major wheat importer, and freight costs for wheat exports can be brought down dramatically if the tankers that bring oil from the Gulf take back wheat. The world over, tankers are used to carry wheat too: the holds are cleaned out after oil is delivered, and wheat is pumped in pneumatically. In the old days of PL 480 wheat imports, US tankers used to bring grain from US ports to India, and then go to the Gulf to load up oil for the return journey.

Will Indian wheat be competitive in anything but a global shortage?  Our politicians keep raising procurement prices so rapidly that Indian wheat prices, which were once below world prices, have for some years reigned much higher. However, this reflects not just Indian politicking but global protectionism and farm subsidies, which have induced over-production and caused an artificial global glut in most years. If the next WTO round succeeds in halving government support to agriculture globally, world prices should settle at levels that Indian farmers will find profitable. So we should view wheat exports as a viable long-term proposition, and create infrastructure accordingly.

What do you think?