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Don’t rush into export ‘opportunity’ presented by Russia-Ukraine conflict

Devesh Roy and Neelkanth Mishra write: India’s prospects for sustained wheat exports are limited. The surplus stocks are a fraction of the quantity exported annually by Russia and Ukraine.

Written by Devesh Roy , Neelkanth Mishra |
Updated: April 21, 2022 2:04:12 pm
This sudden shortage of wheat in global markets and the surge in prices has spawned a discussion in India on how best to capitalise on the opportunity. (Illustration by C R Sasikumar)

The effects of conflicts show up in countries geographically distant from the war zone. India faces strong headwinds to growth from the surge in energy costs due to the Russia-Ukraine clash and the resultant sanctions. The elevated geopolitical uncertainty also threatens global growth, which hurts Indian exports.

On the other hand, distant countries also get an opportunity to fill the void left by conflict areas being unable to export. Russia and Ukraine together accounted for nearly 30 per cent of global wheat exports. This sudden shortage of wheat in global markets and the surge in prices has spawned a discussion in India on how best to capitalise on the opportunity. India’s wheat output has consistently exceeded its demand for the past five years, as seen in the buildup of inventory. Wheat inventory was 23 million tons at the end of February. The rabi harvest, which is projected to be around 111 million tons (this has some downside risk), would augment it significantly. When the last rabi harvest ended in June 2021, with output at 100 million tons, stocks of wheat with the Food Corporation of India (FCI) touched a record high of 60 million tons, two-and-a-half times the buffer norms for July.

MSP of wheat and global wheat prices

It would, therefore, appear that India is ready to reap windfall gains. Yet, on closer look, the prospects for sustained wheat exports appear limited. To start with, the available surplus of around 25 million tons (including the seven million tons exported last year) accumulated over five years, implies an average annual surplus of five million tons. Not only is this a fraction of the nearly 60 million tons of wheat exported annually by Russia and Ukraine, but even at $500 per ton, it would be worth just $2.5 billion annually.

Further, given how little political appetite exists in most countries for food price increases, particularly for cereals, exporting foodgrains also requires political resolve. Exporting all the surplus stock would push up domestic wheat prices, potentially inviting restrictions on future exports, similar to the recent hikes in export tariffs on palm oil in Indonesia. Exporting for a year and then banning exports is bad for trade relationships. In agricultural trade, India has the dubious distinction of being an unreliable trading partner, which partly explains its 1 per cent share of global wheat exports despite being the second-largest producer in the world. Rushing to“encash the opportunity” can potentially dent the long-term prospects for agricultural exports.

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A bigger concern from the perspective of a sustained opportunity is that Indian wheat is not competitive globally in most years. As the government (through FCI) buys 40 per cent of all the output at the minimum support price (MSP), and FCI holds most of the surplus grain at a high cost, exports only occur when export prices far exceed the MSP (Figure 1). Under WTO commitments, the government (read FCI) may not sell procured grain for commercial gains. For private players to route the surplus to exports, a large gap is necessary given the additional intermediary (FCI releases wheat into the market, traders buy from the market and then export). As the MSP only rises every year, in years where global prices fall, exports would be difficult.

Consideration of the export parity price (EPP) amplifies the lack of competitiveness. The price a producer can expect to receive is the FoB price (the price when loaded onto the ship) minus the cost of getting the produce from the farm or factory to the border or the port. If the latter is high, as it is in India, the EPP falls for the producer, which further constrains exports. At Rs 1.2 to move one ton per kilometre, domestic rail freight costs are higher than the global average. A study conducted by IIM-Kolkata found that road transport costs from wheat producer-states were even higher — Rs 4.5 from Uttar Pradesh and Rs 2.8 from Madhya Pradesh. Domestic logistic costs in aggregate are over 13 per cent of GDP compared to the global best practice of 8 per cent. There is inefficiency at the ports too. While wheat also uses dry-bulk shipping, in container handling, India’s cost per container of $1,374 is substantially higher than those of other agricultural exporters like Thailand and Vietnam at $759 and $913, respectively. The question is: After meeting all the costs, does India remain competitive and leave enough margins for sellers? The crisis can be an opportunity for India to fix the fundamentals, like its “time to trade” and “costs to trade”, which are among the highest globally.

Perhaps the most important constraint on sustainable Indian exports is the composition of importers and the role of non-price attributes like food safety, quality, and variety of wheat. Russia exports to Turkey, Egypt, Turkey, and Bangladesh, and Ukraine to Indonesia, Philippines, North Africa, Bangladesh, Korea, Thailand, and Spain. Neighbouring Bangladesh importing wheat from Russia and Ukraine when India is accumulating surpluses deserves scrutiny. Generally, though, several of these markets are high value, demanding food safety and quality, and have preferred varieties of wheat. A recent ICRIER study showed that Indian agriculture produce faces more rejections in key export markets compared to other developing countries. India has the highest number of consignment rejections in both European and US markets despite a comparatively low level of agricultural exports. Addressing these challenges, whether concocted or real, would be more helpful in boosting the sustainable export opportunity.

Lastly, a long-term sustained export strategy must incorporate the changing nature of global trade. India’s opening up of its trade follows the “heterodox” approach: Open on the export side while being restrictive on the import side. This creates political difficulties in trading relations, but may also not be good economics.

Rushing into opportunistic export deals would thus appear to be short-termism, and cannot be a strategy for agricultural exports. Not delivering on quality or not honouring commitments sustainably can have counterproductive long-term effects, hurting India’s reputation. Much of the expansion in trade historically has occurred through new products and varieties and new customers, which requires new links, agreements, and looking at opportunity costs of wheat production, market structures within the country (like the FCI’s role), as well as reducing the risk of frequent policy interventions.

This column first appeared in the print edition on April 21, 2022 under the title ‘India’s wheat opportunity’. Roy is a Senior Research Fellow with the International Food Policy Research Institute and Mishra is co-head of APAC Strategy for Credit Suisse. Views are personal

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