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Indian commodities: Ostriches rule the roost - Views on News from Equitymaster
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  • Sep 6, 2007

    Indian commodities: Ostriches rule the roost

    Indians are very savvy traders, but individually. The bureaucracy that manages the nation's stocks of agricultural commodities seem to be functioning in a kind of time wrap where the inter-relationships between India and the rest of the world fade into the background chaos. Decisions taken are almost always after the season's produce is in the 'mandis' rather than before the crop is harvested.

    In today's day and age, technological help is just a click away. Thanks to a number of satellites that map each corner of the country as well as the detailed local level administration, Indian 'babus' can easily figure out the area sown every season, the crops sown, and even important variables like the state of water resources. One would feel that to justify the expense of putting up such highly expensive propositions into space, the ministry would proactively use all their inputs to determine the final availability of a particular commodity in any given season. But ground reality is another matter altogether.

    India today has the dubious distinction of leading world prices in sugar and wheat, and unfortunately, both to India's disadvantage!! FY07 had actually seen sugar leading the charge on the Wholesale Price Index, so much so, that a filmmaker actually titled his venture recommending using less of it!! And this year, there is so much cane sown that the ministry is pressurising the sugar mills to start the crushing season. What with the various government rules and regulations, a mill owner actually stands to lose Rs 4 per kg of sugar manufactured. And this loss-making production is to be exported in a scenario where just the expectations of India's bumper production have subdued international sugar prices by 20%!

    The 'Wheat' saga is another case in point. Wheat is a 'rabi' or winter crop in most of India. For two years in a row, wheat production in India was low at 68 to 69 million tonnes (MT). Wheat prices were upwardly mobile and prices of processed foods like biscuits and bread too rose in tandem. Wheat buffer stocks plunged to all time lows. However, to keep the inflationary tendencies in check, the government tried to keep its minimum support prices low at Rs 8.5 per kg and bought 11 MT (15% of the total production of the season).

    Worldwide there were reports of the Russian and Australian crop being lower, but the government did not raise the bar to stock up good quality Indian grain and in the bargain let Indian farmers get a better price for their pains. However, after private mill owners like ITC and Cargill, swept the domestic markets clean at Rs 9.5 per kg, the government decides to import grain in the world market where rates were anyway on the higher side thanks to reduced production in the two of the world's largest producers of wheat. In effect India has ended up paying almost Rs 16.4 for a kilo of this imported wheat. Despite this purchase of 0.8 MT, the wheat buffer stocks at 13.6 MT are lower than the targeted 17 MT.

    To sell in a falling market and buy in a rising market and be the market mover in both cases, seems to sum up India's position to a tee.



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