Come on, confess. Aren’t you convinced that someone somewhere is profiting from the sharp rise in your monthly food budget? Don’t you just hate companies that market and process essential commodities for making things tough? The government is equally convinced too.
But mention profits to a company in the food and commodity business these days and its managers sigh. If only. And that’s really the biggest absurdity this year.
Even though the country is in the throes of an official drought, for most large and rule-abiding players in the sector there was hardly any extra money to be made in the summer of 2009.
In some commodities there was over supply. So profits were never a possibility. Exhibit A is wheat. There is so much wheat in the market currently that the price doesn’t fully reimburse handling and interest costs. Millers in the South complain that a lot of the subsidized wheat meant for ration shops is ending up in private chakkis, which has depressed prices. But no one is listening. As long as atta and maida stay cheap, the government can live with it.
In some cases, consumers are more spooked by the scarcity psychosis. Things are not actually so bad. Take chana, gur, spices, vegetable oils, and potatoes. On commodity exchanges, prices of their future contracts for October, November and December are steadily higher than prices for the September contract. When people see this steady rise in prices, they believe it confirms a shortage.
On the contrary, it shows that processors and traders have adequate supply right now to meet demand. All they need is an assurance that stocks will be available later at reasonable prices. So the market is rewarding anyone who builds up inventory over the next few months.
Had there been a real scramble, prices in the near months would have been much higher than those in later months because every one would have paid a premium for immediate delivery. So currently, no one can milk over-the-top profit in these commodities.
Then there is sugar, which has become a bit like the emperor’s new clothes. Analysts say they can see profits coming in the new season. Yet no one has been able to pin point from where. India is dreadfully short of sugar, and consumers and the government can’t be blamed for believing that if it is selling for Rs 35/kg, somebody is certainly fattening off sugar. Sugar barons themselves have boasted to shareholders that every Re 1-per-kilo rise in retail prices would add tens of crores to bottom lines. They may be in for a rude shock.
It was easier to make money in the 2008-09 season because the industry started out with about 10 mn tonnes sugar that was made when cane was cheaper and sold when wholesale prices were zooming. Those who refined imported raw sugar further boosted profits.
But things may not be so smooth in the 2009-10 season that starts October 1. For one, there will be barely 2 mn t unsold sugar lying in godowns. So the strategy of selling cheaper stocks at a hot new price is all but dead.
Moreover, India is expected to produce maximum 15 million t sugar. But it has the capacity to make 26 mn t. This means the industry would be operating at virtually half its capacity for a shorter period because cane is almost certain to run out sooner, after buying raw material (aka cane) at record prices to stop it from getting diverted to gur or worse, fodder. If the levy quota is raised to 20%, mills will be left with even less to profit from open market prices.
In short, higher fixed cost and higher raw material cost will get loaded on to each kilo made and sold locally. However, margins will be capped by competition and by imported ready-to-eat refined sugar. So while consumers will pay more, companies may not be profiting as much. Some companies will certainly do well. But their number won’t be large. Lastly, there are commodities where companies had genuine opportunity to help tide over the shortage through free trade. But they fell victim to government meddling. Take pulses. States began the onslaught by imposing such absurdly low stock limits on traders and processors that you were left doing business in single truck loads. Then they sent police to ‘crack down’ on hoarders in a script straight from those Eighties potboilers where the ‘lala’ owned dingy godowns stacked with precious foodgrain and vegetable oil. The raids made no difference because inventories weren’t there.
Now Delhi has muscled in. It has forbidden companies from storing imported pulses (and sugar too) for more than three days at government-owned ports and warehouses. This means a cargo of 50,000 t has to be unloaded from the ship and moved out of the port within 72 hours. Given current infrastructure and the lack of private godowns in Kolkata and Mumbai, where 70% pulses land, such a rule says just one thing to companies: stop importing pulses (and sugar). Or we will get you. Sure. Some companies already have. How this menacing attitude makes dals cheaper food ministry won’t say. Truth is despite the filmy stereotypes and the consumer paranoia assiduously nurtured by the government, no company loves a drought. It muddies the waters too much. The annual corporate production, sales and profit numbers get shot to hell. Nightmares of raid keep managers awake at night.
From the potato farmer struggling with spiralling labour and diesel costs to large companies with squeezed margins, everyone is waiting for 2009 to go away so that they can get back to business as usual. Except government babus, that is. For them, each change in the rule book is a potential personal economic stimulus package. Plus, they love the flood of meetings.
POSTED BY : PALLAVI SINGH
PGDM 3 SEM, 'B'
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