FOREIGN COUNTRIES' POLICIES AND PROGRAMS

Changes in Store for Yemen’s Flour Market

Yemen has recently privatized imports of flour, eliminated import licenses, and scrapped consumer subsidies, which may alter the buying patterns of the world’s largest commercial market (700,000+ tons/year). Flour can now be imported and distributed freely by the private sector and sold in the market at the prevailing price. Last February, Yemen took similar steps to liberalize its wheat market, and now with the changes to its flour import system, should be in compliance with International Monetary Fund and World Bank demands.

The new free-market orientation for flour is in stark contrast to the old Government tendering system, where import licenses (and financing) would be awarded to a Yemeni private trader, who then contracted with foreign suppliers for delivery. A license gave the trader exclusive import rights for a specified

shipment period. Once the flour arrived at port, the trader was required to sell it (in local currency) to a government-owned/licensed distributor at exchange rates substantially below market rates. The trader then turned that money (local currency) over to the Central Bank, which was responsible for settling payment with the supplier in dollars. The size of the tenders usually ranged from 200-400,000 tons, with the last one held in May (150,000 tons), which will be supplied by the EU and cover import needs through January.

Now, in the absence of any government intervention, import demand for flour may change in at least three ways: first, no more big tenders covering several months’ needs; second, a shift from purchasing large cargos (10-20,000 ton) to smaller ones (5,000 ton or less) for immediate delivery due to the absence of government-backed financing. That new pattern would seem to favor nearby suppliers (e.g. Persian Gulf) which have a quick turn-around time and cheap freight, instead of the EU, which is currently the sole supplier. Third, demand for imported flour may fall due to the elimination of consumer subsides and the expected expansion of domestic production. To what degree that mill expansion occurs, however, is uncertain based on the current difficulties (e.g. shortage of electricity; financial) in running the only commercial mill of significance in Yemen - the Red Sea mill - which has consistently operated well below full capacity despite the strong demand for flour.

In general, Yemen’s combined import demand for wheat and flour has jumped 25% in the past few years, and is expected to reach 2.4 million tons in 1999/2000. Virtually all of that growth has been for wheat, with strong demand coming from households which purchase bagged wheat for grinding and other uses. Conversely, flour imports, which go to bakers, have remained stable, with reportedly only modest growth in commercial flour production. Imports, however, are expected to decline in concert with increased milling capacity.

Based on reports from the Office of Agricultural Affairs, American Embassy, Riyadh. For further information, please contact Paul Gallagher at (202) 690-4298.

Falling Euro Helps To Lower EU Import Barriers

The Euro has shown unexpected weakness since its January 1 introduction, losing about 15 percent of its value relative to the dollar. This has meant a $30/MT drop in the maximum duty-paid price, which is capped at 155 percent of intervention. Next year’s Agenda 2000 reforms will further cut import barriers through a reduction in the intervention price. That would mean a maximum duty-paid price of only $160/MT (at the current Euro exchange rate), which would allow imports of U.S. durum, DNS, and even HRW to enter with little or no duty if prices returned to their averages of the past 5 years.

The lower barriers do not necessarily mean higher imports. They do, however, make imported grains more attractive vis-a-vis domestic grains, particularly since the EU market has polarized as prices rise for tight supplies of high-quality wheats. Market changes after the 1993 CAP reforms boosted plantings of low-quality varieties at the expense of high-quality varieties, resulting in more import demand for quality wheats. These factors together contributed to a tripling of imports from the U.S. over the ensuing several years. This year’s decline in the dollar value of the maximum duty-paid price has the potential to further boost imports, with the United States a likely beneficiary.

For more information, contact Jay Mitchell at 720-6722 or Eric Wenberg at 720-2231.

India Is Faced with Burdensome Wheat Stocks

A combination of generous government policies and extraordinarily favorable weather has led to record accumulation of wheat stocks in India. These stocks were put at 22 million tons, nearly 50 percent above desired levels, at the end of the government procurement period on June 30. At the same time, domestic wheat consumption is being restrained as the Government of India (GOI) seeks to reduce food subsidies by increasing prices to consumers. Prospects for large exports are very limited because India’s wheat prices are high relative to world market levels and because of quality problems.

Procurement

This year's procurement already has topped 14 million tons, accounting for 93 percent of total market arrivals. Record wheat stocks, combined with comfortable (though not record) rice stocks, are causing major storage problems. Although the 1999 wheat harvest is an estimated record 71.5 million tons (3 percent above the 1997 record and 8.5 percent above last year's crop), the large stocks are not so much the result of higher output as they are of policy measures and market forces which together (perhaps unintentionally) have raised the public sector's role in the marketing of wheat.

India's huge, government-owned, wheat stocks were created largely by two policy decisions: (1) the decision to boost farm support prices (also known as procurement prices) substantially in recent years; (2) the decision to increase the price of wheat sold to consumers through the public distribution system (PDS) in order to reduce the food subsidy (see table 1). These two policies, which increased production and procurement while slowing off-take, have resulted in today's burgeoning wheat stocks.

Stocks surged at times in the '70s and '80s and were largely associated with heavy imports (memories of food shortages and droughts were still undoubtedly vivid). The current imbroglio can be traced to early 1998 when, in response to a 7.4 percent increase in the support price, procurement reached a near record 12.6 million tons. Additionally, the government imported 1.5 million tons of wheat from Australia. The support price was raised by another 8 percent this year to rs. 5,500 ($129.50) per ton. The record crop, continuing government intervention in the market, and liberalized import regime (permitting private flour millers to bring in cheaper foreign wheats), have provided little incentive for private traders to buy this year's crop. Hence, virtually all arrivals in north India have been bought by the government procurement agencies at the support price.

The rapid stocks build-up was also a result of a drop in off-take from government stocks. Off-take declined from 13.3 million tons in 1996/97 to 7.8 million in 1997/98 and increased only slightly to 8.9 million in 1998/99. Although fully satisfactory explanations for the poor off-take are lacking, the root cause was the narrowing of the gap between open market prices and the prices charged the PDS and flour millers. Many consumers will purchase open market food grains when prices are equivalent to or at only a slight premium to PDS supplies, as open market wheat is perceived to be of better quality. At the same time, flour millers in south India found that they could import wheat more cheaply than buying it from the Indian government, leading to imports of around half a million tons in 1998/99.

Table 1: Production, Procurement, Support Price and Issue Price of Wheat/ton

1/ Price for wheat sold into the PDS for Above Poverty Line (APL) persons. The price applicable to the Below Poverty Line (BPL) population was established at rs. 2,500/ton effective June 1, 1997.

2/ Effective May 1, 1990

3/ Effective December 28, 1991

4/ Effective January 11, 1993

5/ Effective February 1, 1994

6/ Effective June 1, 1997

7/ Effective January 29, 1999

8/ Post estimate

Table 2: Wheat Procurement and Distribution Costs (per ton) - 1999 Harvest

1/ In southern states

2/ Based on prevailing world price.

Exchange rate: $1 = rs. 42

What's Next?

The Indian Government is concerned about the high wheat stocks and is looking at several options for reducing them. Some possibilities are presented below:

Exports

The cabinet recently authorized exports of one million tons. However, given the price of Indian wheat and its inconsistent quality, sizeable exports will be difficult. Everything considered, it is unlikely that India will be able to export significant amounts of wheat unless the world market strengthens or the rupee is devalued. Exporting wheat at a loss would have negative repercussions both internationally and among Indian consumers.

Increase the Allocation to Below-Poverty-Line Families

Another policy option being discussed is to increase the monthly wheat allocation to the BPL population from the existing 10 kg/family to 15 kg/family. This would lower stocks by at least 3 million tons annually. Although a costly measure, it would be far better than letting the grain go out of condition in open storage.

Lower the Price to Above-Poverty-Line PDS Users

A reduction in the issue price of wheat to the APL population would also help boost off-take. Though attractive politically, it is costly. Moreover, it is expected that even without a price reduction, PDS off-take will increase somewhat in coming months. Almost all wheat stocks are in government hands so open market prices will be forced to rise.

Extend the Open Market Sales Program

Under this program, the government sells wheat to flour millers/traders at below wholesale prices, typically during the lean season in order to keep prices under control. Indications are that this program will be in force throughout this year, not just the lean season. However, unless prices are significantly reduced or imports by private millers are reduced(thereby forcing them to buy government wheat), this program will have a limited impact on stocks.

Time for a Policy Change?

India's recent policy of raising procurement prices to farmers, raising PDS prices to consumers, and offering uncompetitive prices to local millers has left India in the peculiar position of having large stocks of some of the costliest wheat in the world and no clear notion of what to do with it. Moreover, the emphasis on cereal grains may be having a negative affect on the Indian diet, as per capita availability of pulses (the average Indian's major source of protein) continues to decline. While some price support for farmers, some assistance to the neediest, and adequate reserve stocks will continue to be public policy goals, questions arise regarding the limitations of nearly total state management of wheat supplies.

From a report prepared by the Office of Agricultural Affairs, American Embassy, New Delhi. For further information, please contact Rick O’Meara at (202) 720-4933.

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Last modified: Thursday, November 13, 2003