RAMESH CHAND

W

this year when the government is short of procurement by about 4 mt and international prices have increased by more than 20 per cent within one month. There are more important long-term concerns (i) to reorient government intervention in food markets to make them more effective; (ii) to strike a balance between demand and supply and interest of producers and consumers;

(iii) to guard food security; and (iv) to ensure fair play for market forces.

Procurement and Imports

The government had fixed a procurement target of 15.15 mt of wheat for 2007. It was feared that against the background of a sharp increase in wheat prices during 2006-07, procuring 15 mt of wheat would not be an easy task. The minimum support price (MSP) for wheat recommended by the Commission for Agricultural Costs and Prices (CACP) was found to be totally irrelevant in the given situation. Because of this, the government announced a bonus of Rs 100 per quintal over and above the MSP of Rs 750 for wheat that would be sold by government agencies during the rabi marketing season in 2007-08.

The procurement initially remained slow and lower than that of last year but picked up in Haryana and Punjab, which have been the main contributors of wheat to the central pool. However, wheat was unavailable in ‘mandis’ in Uttar Pradesh, the largest wheat producing state, which is estimated to have a marketable surplus of more than 12 mt. Reports indicated that private traders were buying directly from farmers, which fetched the latter a much higher net price compared to purchases by the official agencies. On April 30, 2007, the STC issued a tender for the import of 10 lakh tonnes of wheat, presumably to signal to private trade that the government would not allow prices to go out of hand during vate trade. On the contrary, resorting to import (when international prices were much higher than the previous year’s and the official procurement price) was taken as a sure indicator of high prices in future. In the second week of May 2007, farmers in Punjab started holding back stocks. Under the present system of procuring at a fixed price, the government could not offer more to entice farmers to sell more wheat to official agencies.

Events relating to wheat import are summarised in the table. By the end of May 2007, it became clear that procurement would fall short of the target of 15 mt. This shortage in procurement was not due to low levels of production but due to private trade purchases. For the country as a whole, total demand was estimated to exceed domestic production by about 0.8 mt [Chand 2007]. This implied that India needed around 1 mt import of wheat to maintain a balance between demand and supply in the current year. On April 30, 2007, the STC issued a tender to import 10 lakh tonnes of wheat for the Food Corporation of India (FCI). A total of seven bids were received by May 21, 2007, which was the last date for receiving the bid and also the date when tenders were opened. In the meantime, the government declared that it would import up to 5 mt during the year 2007-08 and this was conveyed to the international market as well.

US wheat was excluded from these bids as it did not meet sanitary and phyto sanitary (SPS) norms and other quarantine requirements for import to India. Because of the grain testing procedure of the US not meeting India’s requirements, the option to exploit global supply is restricted, as the US is the biggest exporter of wheat and it alone supplies close to one fourth of world wheat exports.

STC had almost finalised the deal for the supply of 3.06 lakh tonnes of wheat at a negotiated price (including cost and freight etc) of $ 263/tonne. But then suddenly, the import order was scrapped on May 29, 2007. This had a very strong effect on domestic prices, which started jumping upward (see the figure). The wholesale price of wheat ‘dara’ in the Delhi market was quoted at Rs 910 per quintal on May 30, 2007. By June 7, the price increased to Rs 946 per quintal and continued to

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850 800 750 700

Table: Events Relating to Wheat Import, April-July 2007

Event Date and Details

1 Floating of tender for import of 10 lakh tonnes of wheat by STC

2 Response to the tender

3 Processing the tender

4 Tender scrapped

5 Procurement during the season towards the end of June 2007

6 Approx PDS requirement for wheat

7 Fresh tender floated for import of 10 lakh tonnes by STC

8 Processing the tender

9 Tender awarded

Source: Newspaper reports and official sites.

could help decide appropriate quantity, price and timings of imports was undertaken. For instance, an analysis of monthly prices in the international market in relation to anticipated production could provide some broad guidelines to decide whether it was the right thing to import wheat in May 2007 or to do so at a later stage. This underscores the need for India to have its own strong system of market intelligence as there are high risks involved in using information provided by external sources. The information provided by the USDA in its monthly wheat outlook changes so frequently that it is hardly useful in taking trade decisions. Even when it is very close to harvest (July-August for most of the wheat) the reports keep varying their projections. The USDA projected global wheat output was at 617 mt for May, 610 mt for June and 612 mt for July. It will not be a surprise if the estimate is 615 mt for August. These projections of the USDA indicate the risk involved in using their information for trade decisions for a country like India.

April 30, 2007. Closing date May 21,2007. For supply during June to August 15, 2007. Seven bidders quoted prices between $ 265.50 and $ 296/tonne. Toepfer (Germany) and Glencore (Switzerland) agreed to supply equal quantities totalling 3.7 lakh tonnes at $263.5/tonne. May 29, 2007 11 mt

12 mt for the targeted public distribution system June 29, 2007. For supply during August -September/ October-November 2007. Last date July 4, 2007. Seven bidders quoted prices between $ 313 and $ 330/tonne. Cargill, Toepfer of Germany and Riaz selected to supply 5.11 lakh tonnes of wheat at a landed price of $ 313/tonne. July 10, 2007.

Economic and Political Weekly August 4, 2007

Cause and Remedy

The main reasons for the present imbroglio are that little attention was paid to the imbalance (shortfall) between domestic production and demand for wheat that emerged in 2001-02 because such imbalances were easily met by liquidating stocks accumulated in the past [Chand 2007]. While total demand for wheat has been rising on account of population growth, production fluctuated around a flat trend. These shifts in demand turned out to be larger than shifts in supply after 2004-05 when supply could not be augmented to the same extent by liquidating stock or reducing exports. The net result has been that the real price of wheat moved to a new equilibrium in 2006-07 and unless the growth in supply is higher than the growth in demand, the real price of wheat will not move to a new equilibrium.

The second factor related to uncertainty about wheat prices is that food management policy and government intervention in wheat and rice markets have not changed according to changes in markets. During the last five years, significant market reforms have been undertaken to increase the participation of the private sector in foodgrain trade. As a result, a number of big companies are now operating in foodgrain trade. This has improved competition in agricultural markets and it is not possible (in this type of environment) that the wholesale price of a commodity would stick to one level during a given season. This has important implications for government intervention in the market and the system of procurement. However, the government continues with the same system of price intervention as before the entry of private traders. Every year, the MSP is announced and then the government declares to procure commodities like wheat and rice either at the MSP or by adding a bonus to the MSP. In any case, the price at which the government procures these crops remains fixed for the whole season. This comes into conflict with the open market in several ways and also creates difficulties for the government in procuring the required quantity of produce. The procurement either fall short or exceeds what is needed to be purchased by the government. Second, it also lets the private sector outdo official agencies by offering a peanut more than the procurement price. The government, in such a situation, becomes a helpless witness as the procurement officer cannot pay even a pie more than what is already fixed. It also deprives official agencies from buying produce where it is available at a low price and from meeting the targeted procurement. This is the sole reason for the failure of the government to achieve its procurement target and objective. This practice also puts the government in an embarrassing situation when it has to meet its needs through import by paying higher prices than those paid to domestic producers.

Instead of continuing with the present system of the MSP, which later also turns out to be the fixed procurement price, sometimes with added bonus, there is an urgent need to follow a dual price system to meet objectives of price guarantee and procurement. Such suggestions have been made but not implemented so far. It is suggested that the government should immediately start differentiating between the MSP and procurement price (PP). The PP should be above the MSP but it should be kept flexible. There should be a central authority in the ministry of food which should declare the PP on a weekly basis; it can even be done on a daily basis, depending on the market situation. The field level procurement official should be given some flexibility to make changes at the margin to ensure that the required quantity of produce is procured. This would also not cause a distortion in markets as public agencies would compete with private trade.

Price Outlook for 2007-08

The fourth advance estimates of the ministry of agriculture, issued on July 19, 2007, have raised wheat output to 74.8 mt, which is 1 mt higher than the previous estimates. This level of wheat output is sufficient to meet the overall domestic demand in the country and we need not import wheat for meeting the current year’s consumption. However, there are two more aspects of wheat requirement in the country. These are to meet PDS supplies and maintain a minimum level of buffer stock till the next crop season. The government had a buffer stock of 4.56 mt on April 1, 2007, which met the minimum norm. After this, official agencies procured 11.1 mt of wheat, which when added to the buffer stock of April, is 15.6 mt. Then, there is the offtake during May and June, which might have taken the total stock with the government to below 15 mt as against the requirement of 17.1 mt in the month of July. Thus, even if sufficient wheat is available in the country, enough is not available with the government to be secure in terms of buffer stock. Though the difference between actual and required stock is small, past experience shows that deficiency of stock in the month of July often leads to a spurt in prices with a time lag. Moreover, a few of the big players like ITC, Cargill, the Australian Wheat Board, Britannia, Con Agro, and Delhi Flour Mills now take part in wheat trade, holding sizeable stocks. They can play with their inventories to affect increases in price and to take advantage of the same. In case the government has a reasonable stock, it can keep a check on any abnormal increase in prices during the remaining period of this year.

There is a considerable upward flexibility in the offtake of wheat from the central pool. The offtake of wheat during the last year was 11.7 mt whereas it was 17.16 mt during 2005-06, out of which 12.2 mt was meant for the TPDS. The reason for low offtake of wheat during 2006-07 was low availability with the government. During the year 2007-08, offtake should be at least 12.2 mt, which is same as the offtake for the TPDS during 2005-06, so that the PDS supply to the below poverty line (BPL) population is not reduced. Thus, retaining the carryover stock of wheat in April 2008 to the prescribed norm would require at least 1 mt more wheat than what has been procured by the government. This can come from the augmentation of the buffer stock by 2 mt.

In our view, the stock of foodgrain with the government has a very significant impact on the behaviour of open market food prices. This can be seen from the movement in wheat prices in the Delhi market (see the figure) since the first week