How to manage farm inventories: Economic Times 12th May 2011

The recent debate on the merits of exporting surplus wheat is important as it brings to the forefront the fact that we do not have a comprehensive food policy . Normally, concerns on food production relate to ashortage in case there is crop failure. Even here, the reaction is always a case of too little, too late aswe are reluctant to accept the problem and the acknowledgement comes only when the crisis is at the doorstep. It is also ironic that we donot know how to deal with a surplus. When there is a surplus, we hold on to it and do not want to part with it as there is fear that the next harvest may not be good enough. What is required is a comprehensive policy that deals with both surpluses and shortages.

Let us look at the surplus story first. The country had surplus sugar production in 2007-08 and 2008-09 and exported 4.7 million tonnes and 3.3 million tonnes respectively. Subsequently, there was a shortfall in production, which was a global phenomenon that had led to considerable criticism of the country not building a buffer that could have been harnessed. The solution was to ban sugar export, and import 2.4 million tonnes. Now, with wheat stocks overflowing in the granaries and the procurement season being on, there is talk on the possibility of exporting the surplus. Is this a good idea?

Today, about 60% of the produced wheat enters the market as marketed surplus. Hence, of the 84 million tonnes, about 50 million tonnes enter the market. About half of this is absorbed through the procurement process by the government, thus leaving just 25 million tonnes for private traders.

Intuitively, we can see that an artificial scarcity is being created by the government even in times of surplus production as the government is procuring and storing more than the buffer norms warrant.

Clearly, the answer here is that the government should offload the excess stock to private marketers and channel the rest through exports as the cost of holding on to the grain is high and not commercially viable. The under-recovery is close to Rs 9 per kilo of wheat dealt with by the government in terms of difference between economic cost and PDS price. Surplus stocks being held magnify this holding cost of wheat.

Now, since the government has a commitment to the farmers to buy wheat as part of an open-ended procurement programme, there is need to review this system. Even at the level of status quo in the extreme case where the systems are not changed, the surplus wheat above the buffer norms should be offloaded in the market (there will be double costing in the present scenario). Alternatively, with the UID scheme, the government can pay the farmers the difference in price but not physically take on more than what is required. This way, the surplus can be harnessed.

What about export? Export is the best option once the domestic market is satiated as it helps us to take advantage of the global market to get better returns, which would have been the case this year as there has been a case of declining global stocks due to lower production in Russia and China. Producers would have been able to get better value for their produce while we would simultaneously lower our holding cost of such surpluses given the limited warehousing space.

On the shortage side, the medium-term strategy has to be to improve productivity and migration of farmers to grow crops where we have a deficit, such as pulses and oilseeds, and those that consume less water. But that is more on the production side that necessarily involves providing incentives such as water supply, seeds, fertilisers, etc.



However, from a policy perspective, we need to decide in advance the strategy for products that are imported such as pulses and edible oils. Around 20% of our pulses and 55% of edible oil requirement are met through imports today. Output of pulses will peak at 17.3 million tonnes and oilseeds at 30.25 million tonnes in 2010-11.

But the Indian case is peculiar because, in years where production is good, like 2010-11 for pulses, we end up importing less. The clue is to create a buffer for pulses and edible oils in years when production is better and global conditions are normal. This way, we can ensure that when production fails, which can be anytime due to variable weather conditions, we can fall back on these buffer stocks. This will help ease supplies as well as moderate prices. This policy will also help in using the released warehousing space in wheat for other crops such as pulse, oilseeds and sugar.

The message here is that we should learn to manage our production levels more cogently. Variations in output are going to be part of a system that still has around 70% of farm output dependent on monsoon and where logistics support is suboptimal. We have to judiciously stock surpluses and leverage the export market to incentivise our farmers. Hence, this entire process of managing surpluses and shortfalls has to be dynamic, and just as companies manage their inventory, so too should the government. The issue is that the government being a non-profit organisation does not know how to handle these stocks and, hence, is over-obsessed with security and being politically right. The obsession for security leads to excess stocking. And acknowledging food shortage is a political issue and, hence, self-defeating. Ideally, the government should cease its intervention once the buffer stock level is met through the FCI and re-route the surplus stock into the private market beyond these levels.

The choice of providing increasing MSPs is with the government, and cash may be paid to the farmer directly. But trade in farm products should be left to the market because when there is profit motivation through private marketing and exports, the solutions that emerge are superior, which is what it should be at the end of the day.