Tuesday, May 3, 2011

India Defers Lifting Wheat and Rice Export Ban

India, like most of Asia, is suffering from a prolonged bout of inflation. And not just inflation. But food and energy inflation. While Americans spend about 10% of their disposable incomes on food, the percentage is much higher in countries like India. Estimates vary but run anywhere from 33%-70% of incomes. In any event, it is a much larger figure than the developed world and America in particular.

This background context is important in understanding why Indian officials are still hesitant about lifting a more than a 3 year old ban on wheat and rice exports. They are understandably nervous about the potential impacts on social stability.

It is also likely that the Reserve Bank of India, the central bank, will act to raise interest rates to cool rising prices. Unfortunately, the source of much of the world's problems are not based domestically but come from abroad in the form of Washington DC's Federal Reserve. The Fed's insistence on maintaining low interest rates has resulted in an ocean of liquidity for Western fund managers to speculate on multiple asset classes. The original intentions were to stimulate lending among US borrowers. However, returns on asset classes such as commodity trades have proven to be far more lucrative and that's where the bulk of the funds have migrated. Of course, all trades carry an element of risk but ever since QE 2 was announced in late summer 2010, the returns on commodity trades have beat any loans that financial institutions could make to cash strapped US borrowers.

India Panel Defers Lifting Of Wheat, Rice Export Ban
An Indian ministerial panel deferred a decision on lifting a ban on wheat and rice exports as it wanted to first take stock of requirement under a proposed food security law to increase subsidized grain sales, a senior government official said.

The country is facing a dilemma as there is little space left to store grains in government warehouses. That had triggered speculation the government may soon allow limited exports of wheat and rice.

India's Farm Ministry had been pushing for some exports as procurement from a bumper wheat crop is underway, but food ministry officials have opposed the move, saying that it will need to keep all the stocks bought from farmers to meet the proposed food security law.

Last month, Farm Secretary P.K Basu said India can easily export 2.0 million tons each of wheat and rice because of good stocks and a likely bumper production this crop year through June.

India, the world's second-largest producer of wheat and rice, has maintained a ban on exports of the two staples for more than three years to curb inflation, although it has allowed limited shipments under diplomatic agreements.

The country is expecting a record foodgrain output of 235.9 million tons in 2010-11 because of favorable weather and higher plantings, up from 218.1 million tons last year.

As of April 1, India's rice and wheat stocks stood at 44.18 million tons, more than double the buffer requirement.

The food ministry official, who didn't want to be identified, told Dow Jones Newswires that the ministerial panel cleared a proposal to import edible oil for subsidized sales to the poor until Sept. 30.

The move will allow the world's top edible oil importer to continue supplying cheap cooking oil beyond the previous deadline of March 31 to millions of poor families. The food ministry had proposed to import 500,000 metric tons of edible oil through various state-run agencies on behalf of provincial governments.

India's state-run trading agencies have been importing edible oil regularly since July 2008 and selling them below cost for welfare programs. The federal government later reimburses the agencies for selling edible oil below cost.

The state-run agencies imported around 650,000 tons of edible oil in the last fiscal year that ended March 31.

India meets more than half of its total edible oil requirement of about 15 million tons through imports from Indonesia, Malaysia, Argentina and Brazil.

The ministerial panel also approved a proposal to supply around 120,000 metric tons of common-grade rice and 106,234 tons of wheat flour to Maldives from April 2011 until March 2014 to honor a diplomatic request, the official said.

The panel also approved a proposal to supply a total of 5.0 million tons of wheat and rice from federal stocks to poor families over six months starting June 1, a move that will help trim stocks at overflowing warehouses.

Source: CME News for Tomorrow

The Bottom Line: Indian officials are still nervous about inflationary outlooks and are acting to build up abundant food reserves. Ultra low US interest rates are contributing to a massive ocean of liquidity that is raising commodity prices around the globe.
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