FCI Has Too Much Wheat: Either It Must Revise Prices, Or Auction Stocks

On 30 April, the Ministry of Consumer Affairs, Food and Public Distribution came out with an order saying the government would sell 10 million tonnes (mt) of wheat from the Food Corporation of India (FCI) warehouses under the open market sale scheme (OMSS).

The move to sell wheat from FCI warehouses is part of the government’s efforts to reduce its bulging stocks. In April, the FCI had 29.29 mt of rice and 16.99 mt of wheat in its warehouses. Besides, it had unmilled paddy stocks of 15.55 mt.

The stocks in FCI warehouses are far more than the 11.58 mt of rice and 4.46 mt of wheat stipulated as stock norms as on 1 April. Besides, FCI has to have a strategic reserve of two mt of rice and three mt of wheat in its warehouses.

In addition to these stocks, the FCI has procured 24.25 mt of wheat from 1 April to 3 May. Procurement in Punjab is nearly 10 mt, while in Haryana it is 8 mt and in Madhya Pradesh, 4.2 mt. The Centre has set a target of 35.79 mt - the volume of purchases from wheat growers last year - for wheat procurement this year.

According to the Agriculture Ministry, wheat production during the current crop year ending June is estimated at a record 99.12 mt against 97.11 mt last year. The higher output estimate is despite deficient rains in some growing regions.

In view of bulging stocks and estimate of higher production, the government increased customs duty on wheat to 40 per cent on 29 April this year. The duty was raised by 10 percentage points to prevent prices of wheat from crashing in view of a glut situation.

While announcing that it will be selling wheat under OMSS, FCI said the foodgrain will be sold at a base price of Rs 20,800 a tonne in Punjab, Haryana and Madhya Pradesh.

The offer of Rs 20,800 is only for the first quarter of the current fiscal. Subsequently, FCI will raise the offer price by Rs 550 a tonne every quarter. FCI is charging this price against a minimum support price of Rs 18,400 a tonne fixed by the government for wheat procurement this year.

On top of the FCI offer price, if a bulk user like a flour mill wants to get wheat at its factory gate, then freight charges will have to be paid additionally. If a flour mill in Bangalore wants to buy the wheat, it would have then to pay additional freight charges of Rs 3,000, calculated from Ludhiana, pushing up the cost further.

The problem for flour mills is that at the most, they can purchase stocks that can last till June or July since they don’t have the capacity to keep stocks that can last for a year or will be hard pressed to find cash to pay for the raw material upfront.

The flour mills could import wheat as they had done earlier. But the 40 per cent import duty has made imports unfeasible.

Currently, wheat milled in the Black Sea region is quoted at $210 (approximately Rs 14,650) a tonne . For Rs 14,000, the import duty will work out to Rs 5,600. But Black Sea wheat, which is mainly from Ukraine, is not suitable for making Indian flat bread or chappati.

Therefore, Indian mills have to look at Australian wheat, which sells at a premium of nearly $25 a tonne. Besides, the mills will have to pay charges for transporting wheat from the port to their mill gate.

The recent hike in import duty has made imports unviable and thus put the flour mills at a disadvantage since their options are limited now to get their raw material at a competitive or reasonable price.

What the FCI offer price and the wheat import duty will do is to give private trading firms an advantage. In India, firms like Cargill and Glencore buy wheat from growers. They have world class storage facilities and hence can store the foodgrain for a longer period of time. However, flour mills are charged a premium over the FCI offer price by these trading firms.

The other problem for the mills is distribution of wheat to below poverty line people at Re 1 or Rs 2 or even free of cost by various state governments. The wheat finds its way into the hands of some private traders and thus, the objective of the government to supply foodgrains at low cost is defeated.

During the United Progressive Alliance (UPA) government regime, the Food Ministry had discouraged state governments from supplying foodgrains at cheaper rates as the scheme was being misused by vested interests.

In view of all these, the mills are forced to buy wheat at around Rs 26,000 a tonne or Rs 26 a kg. This, in turn, pushes up the prices of atta in the retail market to over Rs 40 a kg for the common man.

The issue here is FCI is offering wheat, probably purchased last year or the year before, at a higher price. Now, is it fair on the part of it to charge the mills so much for even an old crop?

On the surface, looks like FCI is charging the private mills for the costs it incurs on storage. But are storage charges so high that Rs 550 a tonne is added to the offer price every quarter?

Also, state governments levy various cesses and mandi fees on the Centre for purchasing wheat from farmers. The Centre is doing two things to help the state governments.

One, it is procuring foodgrains to help them and ensure there is no distress sale by growers that could lead to law and order problems. Two, the procured foodgrain is, in turn, supplied to states for sale through ration shops.

In such circumstances, is it fair on the part of the states to levy over 10 per cent as cess and mandi fees for wheat procurement? What FCI has done by coming forward to offer wheat at such a price is to indirectly help some private traders gain undue advantage. Reports say that wheat prices are running below the MSP of Rs 18,400 a tonne.

According to Agmarket, wheat prices in Punjab and Haryana are running at MSP currently. In Madhya Pradesh, the foodgrain is selling lower - below Rs 17,000 - in Panna, Shajapur, Bhind and Chhindwara districts.

FCI should review its offer prices so that it doesn’t favour a few private traders, while also ensuring that mills will buy the stocks and cut the bulging stocks. Or, it could even resort to selling its stocks through electronic auctions as it did a few years ago.