June 7, 2012

 

   

Though actual sales will cling on the amount of subsidy, Asian wheat prices could come under downward pressure in the second half of the year if India boosts exports to get rid of excess stocks, trade participants said.

 

India's wheat is being offered slightly above US$250 a tonne, free-on-board, compared with around US$275/tonne for Australia's cheapest milling grade. Lower Indian prices will also drag down rates for wheat from the upcoming harvest from the Black Sea region and weaken demand for even US wheat, they said.

 

India currently exports around 115,000 tonnes of wheat a month, too small a volume to make a difference in the global market. But all of this could change if the country opens its government stockpiles for overseas sales.

 

As of May 1, the government's wheat stocks were around 38 million tonnes, and they may be even higher by the end of June, when most of the procurement of the latest local harvest will be completed. The government's mandatory national wheat stockpile requirement by end-June every year is 20.1 million tonnes.

 

Due to more than double the required stockpile and another rice harvest due in October, India is eager to clear grain storage space, and one of the proposals mooted is to export wheat.

 

"The government works best in a panic and may try to export large volumes to prevent a further rise in the already near-record inventories," said a New Delhi-based exporter of agricultural commodities.

 

He said India's wheat crop from previous years could be shipped out both for milling and animal feed categories but the price will be sharply lower than the government's economic cost incurred in buying and maintenance.

 

Analysts say the government will have to categorise the difference between the economic cost and export price as a World Trade Organisation-compatible export incentive such as ocean freight reimbursement.

 

However, they also point out that preparing such a proposal may not be easy for any bureaucrat because exporting below costs incurred may be termed by auditors and those opposed to the sales as "losses".

 

The government-run State Trading Corp., in a tender that closed last month, asked private Indian and global trading companies to submit export bids on wheat in official stockpiles. The companies offered to buy the wheat at up to US$230/tonne, free on board, well below current market rates of US$252-255/tonne and also the government's own carrying cost.

 

If a miscellaneous cost of US$40/tonne to pack, transport and load the cargo at port is accounted for in a US$230/tonne FOB price, the government will have to provide wheat around INR10,535 (US$190) per tonne. This is less than 60% of the government's carrying or economic cost of more than INR18,200 (US$330) per tonne that includes purchase, maintenance and transportation charges and local taxes.

 

It is also lower than the government's own procurement price of around INR12,850 (US$233) per tonne, making subsidised exports a politically difficult initiative.