Government intends to evacuate 10 MT of wheat; export price of new wheat should be $220/tonne.

Reports suggest that the government intends to evacuate 10 million tonnes of wheat at the earliest via exports. Choked warehouses are to be emptied for the next paddy/rice crop of October 2012.

Domestic demand is fully saturated. Accretion of grain with the government has touched 75 million tonnes - almost thrice the peak buffer norm.

The foremost issue is determination of quantum of subsidy for aligning Indian fob prices with competition from Black Sea exports.

Based on the estimated economic cost of 18,220 per tonne for crop year 2012-13, Indian wheat - after accounting for financing, port handling, shortages, demurrage and margins of 1,000 - is priced at $363 per tonne fob ($1 = 53), provided it is made available at port towns.

Grain of Russian origin is $260 per tonne fob. The disparity of $103 per tonne will widen to $123 per tonne in July 2012 when Black Sea countries start shipping their new crop around $240 per tonne.

India has been absent from the world market for six years. For accelerating exports, market focus has to be shifted from Black Sea to India.

Moreover, non-wheat Indian content - rags, leaves, pebbles, dust, mud, threads, etc - in jute and polypropylene bags has to be discounted. The Food Corporation of India's (FCI) specifications spell a maximum of 15% as damaged or shrivelled grain versus international norm of 7-8% maximum.

Indian values will have to be lower by another $20 per tonne, or at around $220 per tonne fob. Total subsidy on economic cost may be $143 ($363 - $220) per tonne, or 7,579 per tonne, for crop year 2012-13.

Price fixed by the government for the latest crop year, 2012-13, may be 10,641 ( 18,220 - 7,579) delivered at port towns. Fob cost in Indian rupees will be 10,641 + 1,000 = 11,641, or $221, per tonne approximately.

FCI has estimated annual carrying cost at 5,020, or around $94, per tonne. Net subsidisation of new crop will be $49 ($143 - $94) and negative for earlier crops. Principle of deduction of two-year carrying cost from economic cost was applied in 2001 by the then-government for fixing export price at port towns.

The same formula now applies generally for one-and-a-half years of the current crop. The only other factor that supports price discounting is likelihood of rupee depreciation.

There is a probability of international wheat values further declining in September/October 2012. CBoT May/September futures of corn have a negative spread, or inverse, by $50 per tonne. Put simply, market infers $50 decline in the corn prices from September/October onwards, or a 20% plunge.

USDA report of May 10, 2012, reconfirms increased corn output by 75 million tonnes over last year: a 9% increase without corresponding diversion to ethanol.

Lower corn prices will curtail demand of feed wheat and signal bearishness in wheat. It will be difficult to determine and vary subsidy on ad-hoc basis by official fiat with fluctuating market. Ad-hoc subsidisation also defies WTO-compliance.

Source : economictimes.indiatimes.com