Reuters reports that quality of Indian wheat, a key issue for traders.
(emphasis mine) [my comment]
UPDATE 2-India to allow 2 mln T of wheat exports after polls
Thu May 14, 2009 5:09pm IST
* India to allow 2 mln T wheat exports after poll
* Traders say need subsidies to compete in global market
* Quality of Indian wheat, a key issue for traders.
NEW DELHI/SINGAPORE, May 14 (Reuters) - India reaffirmed plans to allow exports of 2 million tonnes of wheat after its election process ends but traders said on Thursday only a government subsidy would make exports viable and grain quality was a concern.
India banned wheat exports in early 2007 and stopped shipments of non-basmati rice last year to shore up supplies at home, but a record harvest [poor quality wheat] followed by massive purchases by government agencies has left it with an almost unmanageable surplus [of rotting wheat].
"The Group of Ministers had taken a decision to allow 2 million tonnes of wheat for exports," Trade Secretary G.K. Pillai told reporters. "The process is underway. The exports will be allowed after elections." [India's stockpiles of edible wheat are already too small, so allowing the export of edible wheat would be a disaster.]
Official election results will be announced on Saturday. [Expect more focus on the quality of wheat after the elections.]
A Singapore-based traders who sells Australian and Black Sea wheat in Asia said there were concerns about the quality of wheat stored by the Food Corp of India (FCI), an official agency that buys grains from farmers at state-set rates.
"Wheat that is stored in FCI warehouses is old, some of it is badly stored and some is in good shape, so there is so much variety in quality, he said.
"People don't know what they are getting, if you buy Australian wheat you know what you are getting," he said.
Black sea milling wheat was quoted at $235 a tonne, including cost and freight (c&f;) to Southeast Asia, while Australian wheat was priced at $265 a tonne and U.S. soft white wheat was $285.
India, which sets the price of wheat it buys from farmers, announced a minimum support price for wheat of 1,080 rupees per 100 kg, or $220 per tonne, to ensure adequate returns for farmers. [Key point: India's government buys wheat, "whatever the quality".]
Traders say this will allow them to deliver wheat in Southeast Asia at about $235-$240 per tonne.
A panel of Indian ministers agreed on March 5 to lift a ban on wheat exports after elections but traders said the decision of the outgoing government would not be binding on a new government.
Traders said the government would have to provide sufficient subsidies for exports as Indian prices were too high to make shipments viable.
My reaction: India has announced the export of to allow 2 million Tonnes of wheat exports after elections. This is unlikely to happen.
Under the FCI Act, the India's government is obliged to buy all the wheat, "whatever the quality", that comes to the mandis in traditional states where purchases are made. Under India's system, a large harvest of rotting wheat is worth more than a smaller harvest of edible wheat. Simple logic dictates that buying wheat, "whatever the quality", will over time lead to the buildup of large inventories of rotting, inedible wheat.
Just like US banks with their toxic securities, India doesn't want to face the truth about its wheat reserves. Rather than dispose of its inventory of inedible wheat, India wastes valuable storage space stockpiling more of it every year. India's grain reserves, like the balance sheets of US banks, have become filled with worthless assets.
Conclusion: The amount of edible wheat in FCI warehouses is much, much smaller that India's "official" wheat reserves. India can't export inedible wheat, and it does not have enough edible wheat to afford exporting it. Even If India does export 2 million tons of wheat, it will have to then import 2 millions of wheat later (at a higher price) due to its insufficient stockpiles of edible wheat.
The solution to India's overflowing granaries is not exporting grains, but disposing of its large stockpiles of rotten wheat.