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The great Indian grain game

The great Indian grain game

Wheat trade in the country is no longer what it used to be. Underlying the new dynamics is the loss of self-sufficiency in production. BT looks at how the farmer misread the market, and (surprise!) the government got it right. Here's how procurement can be made more efficient.

This April, Bhupinder Singh, a wheat farmer from Moga district, Punjab, decided to bet on wheat market prices. He held back his entire stock of 350 quintals in the hope that prices would rise. Unfortunately, he relied on information that was a year old. Last year, the two large wheat producing states of Rajasthan and Madhya Pradesh witnessed drought conditions. A similar situation prevailed in Australia, a major exporter of wheat, thus, driving up global prices.

This year, however, not only was there a good harvest in the two states, the southern continent is likely to witness a good crop, too. Says Pramod Kumar, CEO, Sunil Agro Foods, a large south-based miller, who sources his stock from Punjab, Haryana, Uttar Pradesh and Madhya Pradesh: "Madhya Pradesh has produced at least three times more wheat this year compared to last year. Also, production in Punjab, Haryana, Uttar Pradesh and Gujarat has gone up at least 10 per cent."

Result: the government, a major procurer of wheat (See Is It Good Enough?), has come through as a smart buyer. Rather than raise the Minimum Support Price (MSP) of Rs 8.50 per kg to meet the requirements of the public distribution system, the government decided to float a tender in the global market, catching farmers on the wrong foot.

And, when it found the price too high (close to Rs 13 per kg), it decided to extend the procurement season to June 15. The manoeuvre ensured that the farmers' "hold out" melted enough for the Food Corporation of India (FCI) to pick up 10.75 million tonne of the commodity till the first week of June. "We will buy 11.2 million tonne by June 15," says Alok Sinha, CMD, FCI.


The only other hope for the farmer was also quashed when the central government informally "advised" organised traders like Adani Exports, Cargill India and Glencore India to keep off Punjab and Haryana.

Clearly, what helped the government beat the farmers' "hold out" gambit was the wealth of information it had on the harvest in the country. Yet, a significant number of medium and large farmers who can hold out (compared to the small ones, who cannot), are playing the waiting game.

Says Avtar Singh, another Punjab farmer, who tills 15 acres of land and produced 225 quintals of wheat this year: "Although I have sold close to half the stocks I had, I am still betting on the prices going up." Singh ended up realising Rs 8.50 per kg, a price he could have obtained two months ago.


He was lucky; he did not have to bear any inventory costs, since the stocks were kept in his own store house; but those who do not have this facility have to suffer an erosion of 20 paise per kg per month in storage charges. Singh remains defiant-he is hoping that prices will touch last year's level of Rs 12.50 per kg, double the price he got two years ago.

Underlying this rather one-sided market play is the fact that India is no longer self-sufficient in wheat. But what this year's wheat trade goes to show is that the farmer is ill-equipped to realise the best price for his crop.

Farmers, however, still live in hope. Asks Ajmer Singh Lakhowal, Chairman, Punjab Mandi Board, and President, Bharatiya Kisan Union (Punjab): "The government imported wheat a few months ago at Rs 12 per kg. Why can't we get the same price?"


The buyer's power (the government is the single largest buyer of wheat in India) stems from the weakness of the seller, the farmer, who operates in a market that works mostly on an informal and expensive lending system, lack of information on other markets and the absence of scale, which, in turn, defines a good part of reforms required in the agriculture sector.

Ironically, some of the farmers are only comfortable with this age-old system-where they borrow money at close to 18 per cent (this rises in some cases to as high as 36 per cent) from middlemen called artiyas. This is because the penetration of formal banking channels that offer loans at 9-11 per cent is poor.

Says Bhupinder Singh: "I am able to hold on thanks to the credit the artiyas offer." The artiya issues a piece of paper that can be transacted at the local village shops to meet farmers' daily requirements of food and clothing.

In search of money: Can the Indian farmer hold out?

Singh, unfortunately, fails to see the complete picture-the artiya does not offer him credit equivalent to the price he hopes to realise. Hence, if the market does not meet his price expectations, he bears the loss, not the artiya.

To eliminate information asymmetries, a National Spot Exchange is on its way. The exchange is expected to achieve what the National Stock Exchange did to stocks a decade ago-it enabled the customer to realise the best price by replacing the bilateral platform (customer-broker) with a multilateral one.

Another key development is the pending Warehousing (Development and Regulatory) Bill 2005, that will allow the setting up of a Warehousing Development Authority. What makes it superior to the prevailing warehousing facilities (that have a poor penetration in the country) is that the authority can issue negotiable warehouse receipts, against which the farmer can get bank finance up to a ceiling of 75 per cent of the value, thus, allowing him to escape the clutches of the artiyas.

This means big business opportunities for the private sector-the Eleventh Plan (2007-2011) estimates this to be close to Rs 1,00,000 crore-but it will be a while before farmers benefit from this measure. Says Anjani Sinha, CEO, National Spot Exchange: "You can expect large corporate houses to get into the picture."

Meanwhile, corporate interest in the grain market has already begun to ebb. Retailers like Kishore Biyani, CEO, Future Group, which operates the Big Bazaar chain, have already embarked on contract farming. "We currently have about 5,000 acres under cultivation in Madhya Pradesh," he says. Reliance Industries has already made its foray into the pulses business and is looking at expanding its business, say company officials. ITC, the single largest private wheat procurer, is also waiting in the wings to make its foray into the pulses market. "The only issue is that of standardisation. Once that is sorted out, we will start trading in pulses," informs S. Sivakumar, CEO of ITC's agri-business division.

While wheat pangs have developed only recently, the problem in the case of oilseeds and pulses, is more chronic and deep-rooted. The country has been importing pulses for decades-the country produces around 16 million tonne, against a requirement of close to 18 million tonne-and this trend is unlikely to ease. The reason: the MSP for pulses is on the lower side, compelling farmers to switch to more lucrative crops. As a result, production is virtually stagnant.

In the case of edible oils, the country imports close to half its requirement of 11-12 million tonne; palm oil imports from Malaysia top the import charts. Beefing up food security on this count will not be easy, as palm is an extremely competitive crop. Farmers have to go through a seven-year gestation period which is common to most plantation crops; this is a luxury the average Indian farmer can ill afford.

The story on the sugar front, too, is far from sweet. Sugar mills cannot sell in the market at will-the government picks up 10 per cent of the produce at a fixed price. For the rest, the government sets quotas for the mills to sell through the year, since the perishable crop is available for only five months of the year.


So, what do the sugar mills do? They have got a stay order from the local courts in Uttar Pradesh, Andhra Pradesh and Karnataka to jump the quota limit set by the central government. Says R.P. Bhagaria, Chief Director, Department of Food, Directorate of Sugar: "Till sometime back there were cases of companies selling sugar in excess of their free sale quota (FSQ). At present, there are no such cases. We have decided to withdraw subsidy from any such company that is found selling in excess of the FSQ"

The agriculture sector is replete with examples of government failure-both due to over-regulation (sugar) as well as total neglect (wheat, pulses and oilseeds). The political class is beginning to realise that it can ill afford to ignore this sector: the Prime Minister recently announced a Rs 25,000-crore package to resuscitate agriculture. The objective: enhance food security and improve public spending in segments where private sector interest will take a while to generate.

However, given the chronic nature of the malaise in the agriculture sector, a cure is some distance away. Says Y.K. Alagh, economist and Chairman, Institute of Rural Management Anand (IRMA): "The measures that are being put in place, if implemented well, will take 3-5 years before they start showing results, so it is a long-term game."

But till then, the chasm between farmer and the upwardly mobile city dwellers will only widen. Result: the Prime Minister's plea for "inclusive growth", it seems, will take a while to materialise.

(With Aman Malik)

Published on: Sep 03, 2007, 5:18 AM IST
Posted by: AtMigration, Sep 03, 2007, 5:18 AM IST