India - It's All Starting To Make Sense Now

If there's one thing you can rely on it's that you can't believe a word a politician says. If that politician happens to be an Indian one, then multiply that up by seventeen, subtract 0.3 and add on your birth date to the power of three million.

What are the slippery buggers up to this time, you ask. Well you will recall that the government there recently imposed a limit on the amount of domestic sugar stocks that any of the large companies such as Nestle, Pepsi etc could hold. They can hold any amount of imported sugar, just not Indian sugar.

Well now it would seem there is talk of introducing similar restrictions on soybeans, edible oil and wheat. They've already extended a ban on exporting edible oil to last until September 2010, now they are proposing to impose stock limits on how many days usage food companies can hold.

The government say that the measures will prevent hoarding and help arrest spiraling food prices in the world's second most populous country. It will not have escaped their notice that by going down this route they are effectively passing a large slice of the financial burden of having to import these products onto the multi-nationals.

If they go ahead and introduce this legislation then it's a nifty bit of Ronaldo-esque footwork, the implications of which are pretty complicated.

Short-term the move would likely drive prices lower. Any processors such as a flour miller or soybean crusher would effectively have to sell any wheat/bean stocks he's holding that are extra to the imposed limit (in the case of sugar that's fifteen days).

Once any initial wave of stock-clearance has taken place, what happens then? If there's insufficient wheat or soybeans available on the domestic market, will the processors be forced to import? Or will the government suddenly and magically find the missing key to their stores and start to release stocks?

In the case of wheat we are told that there is little stock in private hands anyway, whatever wheat is available in the country is behind lock & key, held by the government. How much is really there is open to question, around 31 MMT at the end of July was the official figure.

If that quantity really is there, and it's fit for human consumption, both of which are highly debatable, that still wouldn't be enough to last until the 2010 harvest in March.

Meanwhile poor monsoon rains leave a huge question mark hanging over crop production, and it's impact on demand, for summer crops such as rice, sugar cane and soybeans. Production and the timing of the harvest of these crops will also impact upon wheat and rapeseed plantings for the 2010 harvest.

Despite the farm minster's protestations that August rains have improved the situation, rainfall is still 20% below normal on a national level upto and including Sept. 7th. In many of the major crop-producing areas of the country it's worse, in Andhra Pradesh 21 of it's 23 states have declared a drought, here monsoon rains are 30% lower than the 50-year average.