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Home›World Trade Organization›war in ukraine: sell wheat, not war: if india acts quickly, war in ukraine could earn it $8 billion

war in ukraine: sell wheat, not war: if india acts quickly, war in ukraine could earn it $8 billion

By Tracie Murphy
March 14, 2022
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The invasion of Ukraine by Russia will weigh heavily on the Indian economy. Foreign institutional investors (IFIs) have flocked from emerging markets, stock and bond markets are down, and the trade deficit is exacerbated by high import prices (particularly oil). The disruption to global shipping has added to the congestion that has long plagued container traffic and ports around the world. Thus, freight rates skyrocketed.

But every dark cloud has a silver lining. Ukraine and Russia are among the largest wheat exporters in the world. The global wheat trade is typically around 200 million tonnes per year, with the Black Sea accounting for a large portion. Indeed, Black Sea prices for certain items have become more important to world trade than traditional Chicago flagship prices.

The war pushed up world wheat prices. This gives India a golden chance to export record quantities of wheat. A few years ago, India exported a few million tons per year. This figure fell to zero when Indian wheat prices became higher than world prices in the late 2010s. But in the current year (2021-22), rising world prices have made Indian wheat viable, so that exports will increase to 7 million tonnes. In 2022-23, high world prices are expected to allow India to export as much as its ports can handle, or 15 to 20 million tonnes. If India can get an average price of $400 a ton for 20 million tons, that will mean $8 billion. He must hurry and sign contracts quickly because an early end to the war can cause prices to fall.

The world price of wheat did not exceed $160 a tonne a few years ago when supplies were plentiful. India’s minimum support price (MSP) for wheat was much higher, so India could not export wheat in those years. But now says Siraj Hussain, former Union Food Secretary, in a recent column for The Wire (bit.ly/35VCFLY), the US price for hard red winter wheat is already $539 a tonne, as markets expect the war to hit a big hole in global supply. Black Sea wheat exports could fall by 30 million tonnes, while exports of corn, soybeans and sunflower oil will also be hit hard. If India jumps into the fray with wheat exports of 15-20 million tonnes, the world price will drop a bit. Even so, the price could average $400 per ton, a bargain.

Tear as you sow

The next sowing season in the Russian and Ukrainian steppes is fast approaching. At present, all agricultural activities – from the supply of seeds, fertilizers and agricultural machinery to credit and marketing – have been disrupted by the war. The sowing season can be entirely lost in parts of the steppes, wiping out an entire year’s production. This could keep short-term supplies and prices high until the end of 2023.

India’s massive wheat exports will not only yield a forex bonanza. They will also facilitate a sharp reduction in bloated government food stocks. These have been rising for years since purchases exceeded public distribution system (PDS) levies and wheat exports were unprofitable for some time.

The interest and cost of storing food stocks, along with losses from pests and moisture, mean that the economic cost of holding stocks can increase by up to 10% each year. PDS sales attract increasingly higher subsidies every year, since the sale price is fixed by law at ₹3 per kg of rice and ₹2 per kg of wheat, while the purchase prices of the two cereals are increasing every year. Massive exports will help reduce bloated food stocks, which in turn will reduce food subsidies and inventory holding costs. It will be a triple whammy.

India is a major rice exporter. But the world price of rice has not changed much. India imports edible oils and corn, the prices of which have soared.

Buffer stocks peak at the end of one supply season and bottom at the start of the next supply season. The April 1 norm for buffer stocks of rice and wheat is only 21 million tons, while actual stocks are 82 million tons, four times higher. For wheat alone, the security stock standard on April 1 is only 7.46 million tonnes, compared to actual stocks of 23.4 million tonnes.

The World Trade Organization (WTO) agreed at its Bali meeting in 2013 that developing countries can build buffer stocks with subsidies, but not sell them later on export markets. This means that the Indian government could face technical obstacles in exporting surplus grain from government stocks.

Not against the tide

But rising world prices have also pushed up the prices of Indian mandis. Private exporters buy wheat in mandis for export. They could buy 15-20 million tonnes of wheat in the next marketing season, leaving relatively little for the government to buy from the MSP.

Private exporters will only buy high quality wheat with low moisture content. The government may end up buying mostly rain-damaged wheat – farmers bribe food inspectors to accept this. This is a separate problem requiring reform.

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