Grain price falls below MSP in spot market

Dilip Kumar Jha / Mumbai Jun 21, 2012,
Business Standard
The price of grain fell below the minimum support price (MSP) in the Delhi spot market yesterday due to a supply glut on bumper output and absence of large trading firms. The Food Corporation of India’s much higher purchases than the earlier estimates, resulting in storage problems, added to the woes.

Wheat for fair average quality variety was quoted at Rs 1,222 a quintal, substantially lower than the MSP announced by the government for the 2012-13 marketing season. The Centre had only last week raised the MSP for wheat by 15 per cent or Rs 165 to Rs 1,285 a quintal for the current marketing season. Similarly, the price of paddy slumped to Rs 990-1,020 a quintal and to Rs 1,240-1,250 a quintal for the common and fine varieties. On Thursday, a rise in the MSP for paddy had been announced, from Rs 1080 to Rs 1,250 a quintal for the common variety. The MSP for the fine variety has been raised to Rs 1,280 from last year’s price of Rs 1,110 a quintal. While these are for the kharif season, open market prices for the earlier season’s stock is creating anxiety among farmers.

The fall in the spot trading price of major grains indicates that traders have given a thumbs-down to the MSP rise, which is set to benefit only producers of a couple of states, including Punjab and Haryana, where FCI has been active in grain procurement. Distress sale, however, continues in other major grain producing states such as Bihar, West Bengal, Uttar Pradesh and Madhya Pradesh, where farmers continue to sell to the arhatiyas, the middlemen, at a substantially lower price than the MSP. The FCI's absence and private players finding it unviable to procure grain at the MSP in these states have pulled down prices of major foodgrain across the country.

“Traders have realised only FCI can procure grains at the MSP, that too, with funds from the government. Since private players would have to go back to sell it in the open market, they do not feel much sense in their procurement. Hence, grain prices are likely to remain lower in the near future,” said Vikash Gupta, proprietor of Superior Agro Crops Pvt Ltd, a Delhi-based grain trader.

Bulk traders such as Cargill, Adani and others remained absent from active buying, according to some traders in the Delhi grain market.

Wheat prices on the National Commodity & Derivatives Exchange have plunged to trade at Rs 1,205 a quintal for delivery in September. The July expiry wheat contract is trading even lower, at Rs 1,168 a quintal. Grain prices are down, on a record harvest, with rice and wheat output estimated to be 102 mt (90.2 mt last year) and 88.3 mt (86.9 mt), respectively.

To meet the annual procurement obligation, FCI requires an allocation between Rs 3,000 and Rs 4,000 crore. With the rise in MSP, the allocation is estimated to increase. Private sector entities such as the National Collateral Management Services Ltd (NCMSL) and National Bulk Handling Corporation, along with others, have offered to reduce the procurement cost by 10 per cent if they are allowed to procure on its behalf.

“While procuring foodgrain from the market, the government must decide the objective for doing so -- whether it is being procured for food security and buffer norms for market intervention or release through the Public Distribution System at a subsidised rate for people below the poverty line. Mixing the two can create confusion,” said Sanjay Kaul, managing director, NCMSL.

Total grain stock in FCI’s central pool had swollen to 82.4 mt as on June 1, compared to 65.6 mt in the corresponding period last year. A quantity of 31.8 mt of wheat was initially estimated to be procured during the current rabi marketing season (RMS). However, as on May 24, a quantity of 32.3 mt had been already procured in the central pool as against a total procurement of 28.3 mt in the previous RMS. It is estimated the procurement during the ongoing RMS will be 36 mt, about 7.7 mt higher than last year.

FCI should require 9.8 mt of buffer stocks and 2 mt of strategic reserves of rice as on July 1. Wheat stocks as on the same date ought to be 17.1 mt and 3 mt under buffer norms and strategic reserves, respectively. The available stock, therefore, is 250 per cent higher than the required buffer stock. FCI has procured 16.2 per cent additional rice (including unmilled paddy) at 32.15 mt this year, as compared to 27.7 mt last year.

According to Kaul, it makes no sense for private players to stock grain for future sale. For stockists to make a profit, the spot price should remain higher than MSP, he said.