Indian Commodity Prices – Political & Beurocratic War On Common Man

                Indian commodity price rise in 2009 -2010 fiscal year for certain commodities may be more a political & beurocratic lobbying rather than mere international price movements. This year thankfully India has added fuel to the rising prices which have pushed the prices to the next level. As on today Food inflation in India has moved upto 17.09% which is substantial on a GDP growth of 7.5% average this year. Indian Government says that it’s doing its best to control domestic prices but for me, it’s a pure misguide to common man, which has actually fallen fatal.

I see the movement in a different angle than some analysts with few major commodities like Sugar & Dairy which have become hot news as on date.

This year global sugar price increase is a sole product of Indian sugar cooperatives tactful lobbying, influential politics & Stock holding. Let’s not blame international market.

Sugar is basically a crop which is driven by price sentiment & realization. Farmer takes decision to go for Cash crops or Sugar plantation based on the price he receives for the previous sugar crop at factories.  Due to surplus production in 2007 & 2008, many farmers have been cheated by the so called cooperative system of Sugar factories which is mostly monopolized by few major stake holders. Our present Agriculture minister, who himself has shares in more than dozen factories in Maharashtra which accounts to half of major running mills.  This has lead to farmers diversifying into Cash crops for better realization in 2009, which led to a shortage of 40 lakh tones as per Agriculture Ministry. Now here comes the biggest question, that how come Agriculture ministry was not aware of the total crop acreage for this season, if yes they blame it on drought. But actually we find that the total acreage this year was 18 % less than last year which is coupled by drought this season for shortage.

Sugar is the only crop which adopts FIFO system in books of entry, which means that the first cane which goes in comes out of factory first. Sugar factories work on minimum 3 years planning & workout as the crop itself is cultivated as 12, 18 & 24month crop depending on the region and type of irrigation facilities. There is always a buffer stocks @ minimum 14% per season which are maintained for basic commodities like Sugar at state & central levels warehouses.

Last year (2008 -2009 fiscal) many sugar suppliers had to liquidate their positions cutting down on the margins, this year Agriculture Ministry had to bail out these cooperatives & had openly came out with a public statement that we may expect sugar shortage by 40 lakh tones near to the time when everyone where eagerly waiting for the early crop to be crushed in mills. India one of the largest producer and consumer is short by 25% on total production is a big blow to International market. This has coupled heat & speculation on international market with prices surging from 380 USD/mt to 780 USD/mt within a span of 4 weeks & left only two major exporters like Brazil & Thailand to cover the vacuum. Many players in International market had started covering their positions even before Indian government has announced anything. Do you think our Agriculture minister is fool enough to lift import duty on Sugar after 2 months, absolutely not? He is more intellectual than anyone else, where in all the domestic produce which was at the factory gates have been sold at current international price levels at 780 USD/Mt into domestic wholesalers, which had suddenly roused up the prices in domestic retail market. And when India lifted duty on imports making it to Zero, it was already too late for importers in India to cover up at lower levels and many of them have booked at higher levels with many difficulties and short coverage from Brazil, added my huge transit time from Latin America.

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Many traders who have imported in India now, have the bear the loses next quarter as we will be having a total of 80 lakh tons (54 lakh Mt + 8 Lakh + Buffer stock in state warehouses) before even the next season crop comes in.

This play game has left sugar cooperatives and political lobby happy making common man a mere spectator.  

In addition to Sugar, Milk prices in India have also raised to such an extent that, it’s become hard to believe that we are the largest milk producers in world accounting to less than 1% of international exports & have a shortage domestically. Then how can we blame international prices when India does not play much role in International Dairy export market. International prices have now slowly started falling down especially due to large intervention stocks lying in EU & stocks in USA for Milk powders. Currently International prices for Milk powder are far lower than Indian domestic prices, which may be a possibility of India to import. But we cannot import on present 40% import duty and the decision will be only done on mercy of our Agriculture Minister. And will be too late to catch on the prices !!!

Ministry claims that this year the basic reason of domestic price rise in India is due to raw milk availability, but that’s not the real reason to cash on.

Do not imagine that cows & buffaloes have given less milk this time or many have been routed to abattoirs, absolutely not. 

When International prices have moved up for casein mid this year, much of the global casein was available at 8000 USD/mt & above. Whereas Indian season has started at the same time and our casein seemed attractive at levels of 6000USD/mt far lower than International pricing.  Many of guys advised not to give incentives on exports but, as said earlier we are run by lobbying by casein manufacturers and one biggest casein factory owned by our beloved Agriculture Minister. Due to export incentives on casein much of the raw milk is sucked into factories and moved to USA & Far East major destinations for casein.

This has left to shortage of Milk for 70+ private players & retail supply shooting up the prices to roof. Major losers here are public & biggest gainers are cooperatives due to internal high prices & Casein manufacturers with export realization.

Many are trying to request government to put a ban on casein exports from past 4 months, but I am sure that this ban or removal of export subsidy will be done only after a month when India will enter into lean season & most of the export volumes have made their way to destinations.

In both the cases its mostly lobbying
In both cases our minister is Involved directly or indirectly as a owner/ Shareholder in Sugar mills & Dynamix (one of the largest private dairy & exporter)
In both cases he is the key decision maker or policy maker as Agriculture Minister.

But who cares for all the above, we have already tasted 59.06% rise in potato & 29.8% inflation on onion prices with our GDP expected to close down on an average of 7.5% with great difficulty.

Adding on to this heard that Biscuit would be 10 to 15% costlier, why not as both the above said commodities have a share.

I just tried to be precise on how we can be fooled simple beurocratic lobbying, which is purely my personal analysis on market outlook.

For any comments, advices & suggestions on this article, please feel free to write at balupest@yahoo.co.in

Regards

Bharath Kumar Thota

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