Chafe At The Bit

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Outlook Magazine| May 14, 2007

agriculture: procurement

Chafe At The Bit

Is India staring at the prospect of turning into a perpetual wheat importer?

LOLA NAYAR
Ailing Procurement

    * Bad weather led several state agencies to give varying projections about a shortage in wheat production this year.
    * Private traders and companies offered a higher price than the state-stipulated MSP of Rs 850 per quintal to farmers.
    * Government's procurement started slipping with fears of a shortfall in the expected wheat buffer stock.
    * Large farmers, whose land holdings have become bigger, began hoarding in anticipation of future price rise.
    * Farmers now have additional income sources; hence their dependence on immediate wheat sales has reduced.

***
"India may well have entered a perpetual food insecurity zone this year." This dire prediction comes from Vijay Sardana, director, Achievers' Resources, an agri-business resource centre. Ominously, he also prophesies failure for the government's attempts to control inflation through the agriculture produce price. With these two indicting statements, Sardana demolishes the policymakers' favoured strategy of shoring up foodgrain buffer stocks to help them to reduce retail prices and ensure availability both for the public distribution system and during crises like droughts.

The pessimism rings true especially in the case of wheat, where the inability to adapt to changing market dynamics has impacted procurement efforts. Experts think India has entered a worrisome phase where she will become a perpetual wheat importer. This is after the 2000-2005 period, in which India exported over 14 million tonnes. "Call it a panic reaction or an attempt to rein in prices, but we have set in motion steps to import wheat, while stepping up efforts to buy it from the local farmers," says an official in the food ministry.

Although India's wheat production is estimated at 73.5 million tonnes this year, or over four million tonnes more than the previous year's output, the country may end up importing 3-5 million tonnes. Now, it seems to be the only way for the wheat buffer stock to increase from 4.5 million tonnes at the beginning of this season to a healthy 22 million tonnes. One of the reasons is that while demand continues to rise rapidly, production seems to have plateaued around the 70 million tonne mark.

In addition, procurement through the Food Corporation of India (FCI) has gone awry. A month into the season, there are fears that there will be a huge shortfall in FCI's target to buy 15 million tonnes. This is despite the fact that FCI and other agencies (like the State Trading Corporation that have been roped in) have so far bought 8 million tonnes, and the procurement in Punjab has been over 90 per cent of the wheat that's arrived in the market, and higher than last year in Haryana.

"To ensure better response from Uttar Pradesh (the third largest source), we have introduced an additional 2.5 per cent commission for the arthias (agents) and hope to mop up around 5 lakh tonnes," claims Alok Sinha, CMD, FCI. Still, food secretary T. Nand Kumar is only "hopeful of crossing the 10 million tonne mark as the procurement is expected to continue till May end." Although Sinha is more optimistic with his figure of 12.50 million tonnes, it is still short of the buffer stock target.

What has led to this piquant situation are factors like the demand-supply mismatch, entry of private traders who can pay higher prices, and the farmers' new-found ability to release stocks slowly in the market. "Farmers know there is a shortfall. So, if possible, they are holding on to the stocks to realise better prices later," explains Bhagwan Das, secretary general, Punjab Young Farmers Association. Punjab's agriculture director Balwinder Singh Sidhu admits that many farmers are seeking "a better price" outside the mandi.

Here's how the situation developed this year.Hailstorm and then early warm weather affected production during the maturing period. The government still doesn't have real estimates of the damage and, according to D.P. Singh, president, All-India Grain Traders Association, various government agencies doled out their own shortfall estimates. But Harbans Lal Rosha, president, Commission Agents Association, Punjab's Khanna mandi, predicts a 15-20 per cent drop due to weather conditions.

It became complicated after what Sinha feels was "mischievous" reporting by a leading financial daily. The newspaper hinted that, like last year, the government may later offer a higher bonus to farmers, over and above the minimum support price (MSP) and bonus of Rs 850 per quintal. To contain the tendency to hoard this would have caused among farmers, FCI issued denials in local dailies in Punjab and Haryana, which did ease up procurement. However, it seemed still way short of the buffer stock target.

So, when the private sector stepped in to buy wheat at higher-than-MSP prices, the farmers had a choice. The latter expect the private players to pay around Rs 1,100 per quintal in a few months, against prevailing prices of Rs 900-950. "We hope to see prices rise further as companies like Reliance Industries (with its ambitious retail plans) are quoting Rs 950-1,000 per quintal now," says Satbir Dagar, who cultivates wheat and sugarcane in Aligarh, Faridabad and Sohna.

Dagar, like scores of others, is slowly switching to organic farming, largely due to the interest shown by Reliance to purchase the higher-priced organic wheat. It has also fired the ambition of a group of farmers, including Dagar, to explore the idea of setting up a retail outlet for organic produce.

There are rumours in Punjab and Haryana that private firms and traders have paid advances to farmers to stock their produce now for delivery at a later date, when retail prices shoot up. Unlike in the past, when the government's MSP was the best possible price, private traders and big firms are now aggressively vying to buy at higher prices.

However, D.P. Singh, who also heads Sara International, a diversified group handling foodgrains, rubbishes reports of hoarding by large buyers like ITC. "Unlike in the past, over the last year or so it is the farmer who is holding on to stocks. In many cases, the mandi trader may have given them 20-30 per cent advance to do that for delivery once the prices rise," explains Singh. He estimates that big private players may have acquired around 2 million tonnes of wheat so far this year.

Singh may be partially right. For, there is no denying the fact that wheat cultivation has undergone a change in Punjab and Haryana. One, there's a greater move towards land consolidation, either deliberately or inadvertently. High debt burden, low yields, and a subsequent migration to urban areas in search of better jobs has forced small and marginal farmers to lease out their land to bigger farmers. Sidhu admits that 7 per cent of the farmers in Punjab hold around 27 per cent of the estimated 4.2 million hectares of agricultural land. These farmers have holdings of 10 hectares and more.

Larger holdings offer a better cost advantage, admit bigger farmers. Haryana too is encouraging the same trend and has recently framed rulesâ€”to be notified soonâ€”to usher in contract farming, says Haryana agriculture secretary P. Sharma. The net result: farmers today have more capacity to hold on to their stocks and, hence, negotiate better with state or private buyers. More importantly, big farmers are no longer dependent on agriculture as their only source of income. For example, many have supplemental incomes from children working abroad.

Meet Harbhajan Singh Chahal, from Punjab's Sangrur district, who says he hasn't "sold anything so far, as I am waiting for a better price".With his children settled abroad and no debts to service, he admits that despite lower-than-expected production, he can afford to take the risk. Surjeet Singh Rakhra of Punjab too has sold only 40 per cent of his wheat produce grown in half of his 100-acre farm. In fact, Rakhra uses his own godown to stock up, and sells only when prices are high. Dagar has only sold 20 per cent of his produce, and that too to private traders for Rs 1,000 per quintal.

Observes Shamsher Singh Surjewala, former Haryana minister and the leader of the Congress' farmers cell: "In Haryana only around 60 per cent of the wheat seems to have reached the market this season, with most of it being sold to the government agencies. The remaining 40 per cent is still with the farmers, who are holding on in expectation of better prices over the next three to four months."

Krishan Bir Chaudhary, executive chairman, Bharat Krishak Samaj, explains that the farmers have also realised that they incurred losses by selling to FCI at Rs 700 per quintal last April, while the market price went up to Rs 1,000-1,100 this January. Therefore, he contends that the government needs to make its MSP market-linked to woo farmers. "When the government can import wheat at Rs 1,200 per quintal, why can't it pay farmers Rs 1,000 per quintal, which is closer to market prices."

But this is something that the finance ministry doesn't want to do, as it will hike subsidies and mar the government's balance-sheet. Maybe, the outlook will change as the government finds out that farmers are more willing to sell to private parties or hoard themselves to get better prices. Or maybe, it will not change as a future glut in the market forces the farmers to sell to FCI at the MSP price. At the moment, however, the government is using imports "as an insurance in case we don't get enough stocks to meet our public distribution system (PDS) and other buffer stock requirements." And praying that domestic procurement gets closer to its target.

By Lola Nayar and Chander Suta Dogra