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Government global grain reserves

Despite arguments of liberal market economists, many governments, especially in Asia and the Middle East, continue to buy and stockpile wheat and rice.

Government involvement in grain markets probably goes back to the beginnings of settled agriculture. Egyptian and Chinese records document the role of dynastic administrations in collecting and storing grain thousands of years ago.

Nowadays governments worldwide may buy 10% to 20% of all the rice and wheat produced in a given year, so up to 240 million tonnes out of about 1.2 billion tonnes for the combined crops of the two cereals, but the variation in procurement from country to country is huge. Not just domestic purchases figure into the tally. State wheat importers in Japan, the Middle East and North Africa, and elsewhere may account for around 35 million tonnes.

Global reserves of cereals in government hands at any given time could be in the range of 200 to 250 million tonnes. The International Grains Council (IGC) forecasts 2013-14 ending wheat stocks at 188 million tonnes and rice at 108 million tonnes. China and India traditionally account for the lion’s share, but Thailand stockpiled a peak of 18 million tonnes of rice over the last two years before selling at a loss. Governments of Middle Eastern and North African nations may hold 15 to 25 million tonnes of wheat at any time.

Problems of government grain

In every country the issues surrounding government grain procurement are economically complex and highly political. And, of course, they are fraught with potential problems of poor governance.

There is a standard set of arguments against strategic grain reserves. First of all they require large investments to build the storage facilities, and even more to fill them. Grain markets are volatile and risky but state agencies must constantly decide how much to buy and when, and how to rotate the stocks through sales or other distribution.

Case against strategic grain reserves

  • Expensive and risky to operate
  • Without profit motive,inefficient management practices and waste
  • Creates market distortions
  • Guesswork in estimating need and setting prices - Market does a better job
  • Requires transparency and good governance

Efficient management of public grain stocks is extremely difficult. Most government grain facilities have at least two or three times the personnel of similar private operations. Often they are vehicles for political patronage through jobs. Operational costs can be high. Storage losses from infestation, moisture and pilferage can be an even greater cost.

Let’s go on a quick world tour and see what goes on with governments when it comes to grain reserves. This will be a very high level view.

East Asia

East Asia is a region where governments are very involved in buying and storing grain from the poorest country (North Korea) to the richest (Japan).

China has the world’s largest production of both wheat at 122 million tonnes and rice at 142 million tonnes on a milled basis based on IGC forecasts for 2013-14. Maize production is 218 million tonnes and is mainly for feed use, but some is also held in the government grain reserve.

Data about public grain stocks are treated as a state secret in China, but IGC projects total ending stocks of wheat in China at 57 million tonnes and rice at 50 million tonnes for 2013-14. It is probably safe to say that 90% is held by state grain companies. Grain traders sell mainly to these state companies and large millers depend on them for supply.

In China, two main policy goals have been at play: self-sufficiency in the two staple cereals and higher incomes for farmers. In February 2014, China officially announced the target of domestic production of 95% of the country’s grain consumption would be abandoned.

It is likely that state grain agencies will still buy a significant portion of both wheat and rice - from one third to one half. The government sets prices significantly higher than the international market price to ensure production targets are met. The grain is auctioned off to private millers and traders through central government auctions.

The public grain stocks are not used for food safety nets or for retail market intervention. The idea is to pay prices high enough to help close the income gap between poor farmers and the average city dweller. This in turn promotes social stability by slowing the massive migration of rural poor to cities.

Elsewhere in East Asia, governments buy large parts of the rice crop to keep prices high enough to sustain farm households, even while per capita rice consumption has gone down substantially with economic prosperity. Japan’s Ministry of Agriculture, Forestry and Fisheries maintains a monopoly over wheat imports, and often doubles the price when reselling to domestic mills, thus generating funds to subsidize domestic wheat production.

South Asia

India ranks number two in the world in production of both wheat, at 93 million tonnes, and rice at 103 million tonnes, according to an IGC estimate. State governments buy much of the surplus and public grain stocks at times may be as large as China’s.

In 2013-14 government procurement of rice will be about 32 million tonnes. For wheat it was 25 million tonnes, down one third from 38 million tonnes the year before.

Government ending rice stocks are forecast to be 20 million tonnes for 2013-14. The target stock level is 11.8 million tonnes. Wheat stocks were estimated at 22 million tonnes, down 10% from a year ago but still much higher than the official target level. This is one hazard of intervention. Once started it is difficult to limit.

India’s government frequently experiences well-publicized problems with management of these excessive stocks including tremendous losses from insects, moisture and pilferage, much of which results from traditional bagged storage practices.

India’s grain policy goals are quite different from China’s. The main purpose of state grain purchases is for distribution of food rations to the poor. This is done through state level Pubic Distribution Systems that supply cereals to Fair Price shops in every village and city district. Poor households holding ration cards pay just a fraction of the market price for several kg of wheat and rice per month. The Food Corporation of India coordinates the movement of both rice and wheat from surplus to deficit states. This scheme is estimated to cost the Indian government $20 billion per year. Most economists would argue this money could be better spent on infrastructure.

Bangladesh (population — 160 million) and Pakistan (population — 200 million) are large countries whose governments buy only limited amounts of grain. Nevertheless, despite still high levels of poverty, both have attained a satisfactory degree of food security.

Why governments hold grain?

  1. Emergency reserves
    • Sudden onset disaster
    • Slow onset disaster
    • Food safety nets
    • Public distribution system - India
    • Subsidized bread – Egypt, Tunisia, Turkey
  2. Market intervention
    • Buying to support farm prices
    • Sales to dampen price spikes

Bangladesh’s government buys 1 to 1.5 million tonnes of the annual rice crop that is now close to 35 million tonnes. The country no longer needs to import rice. Rather it may soon have to start exporting large quantities. The government does buy from abroad up to 1 million tonnes of wheat per year, mostly from India. The private sector imports in an average year another 2 to 3 million tonnes of wheat. The government stocks are rotated via distribution to the poor through a myriad of programs and as well as through open market sales if prices rise.

Southeast Asia and Australia

In Thailand, Vietnam and Myanmar governments procure surplus rice that eventually gets exported. In most other Southeast Asian countries, government grain agencies import rice. In the case of Indonesia, rice importation is a monopoly of Bulog, but the country is now on the verge of self-sufficiency with imports at just 1 million tonnes equivalent to around 3% of consumption. In the Philippines, the National Food Agency (NFA) imports some rice and gives licenses to private companies to also buy.

The Thai government has a long history of buying some surplus rice from farmers that it has then sold for export. In 2011, an election year, the Shinawatra government greatly expanded rice purchases at prices 30% to 50% above international prices. Forty percent of Thai households grow rice and the government was re-elected, but controversy, scandal and massprotests have ensued. The Thai government has owned up to a record 18 million tonnes of rice due to its “rice pledging scheme.” Thailand produces about 21 million tonnes but consumes only 10 million tonnes. Peak exports were 12 million tonnes but fell to 6.7 million tonnes two years ago due to the misguided policy. Many observers expect the government to fall as a result of the scandal surrounding its rice buying.

Since Australian Wheat Board’s loss of its single desk status, direct local government intervention in the wheat sector is minimal, though Australian wheat is purchased by many state-trading enterprises.

Middle East and North Africa

The Middle East and North Africa is the world’s most important wheat importing region. It is also the region where governments are most dominant in procuring and holding food grains. These countries are the ones that have been the most aggressive in recent years in expanding their strategic grain reserves.

The region’s imports account for 48 million tonnes of the international wheat trade of 142 million tonnes. These imports are split evenly between the North African countries and those in the Middle East.

The bulk of imports are handled by state-owned grain import monopolies. The largest government wheat importers are Egypt, Iraq, Saudi Arabia and Algeria. Government agencies in each country are major owners and operators of grain storage facilities, though there is some reliance on the private sector, too, especially in Egypt. Smaller countries in the region whose governments operate wheat import monopolies are Tunisia, Kuwait and Qatar.

Western Hemisphere

The United States has no public grain procurement or government stocks. Grain reserves were halted in the U.S. in 1996. The Canadian government gave up its wheat buying monopoly through the Canadian Wheat Board in the western provinces just two years ago.

The U.S. government still subsidizes farmers through federal crop insurance programs and direct payments costing taxpayers several billion dollars per year. And it provides food assistance via debit cards to 45 million low-income people. But this is done without government grain buying.

The only Latin American countries where governments are heavily involved in grain purchasing are Cuba and Venezuela. In effect, the huge stocks of high quality grain always available in the U.S. from Gulf ports serve as a de-facto strategic reserve for these two countries and others in the region.

European Union and Turkey

The 28 countries of the European Union produced 143 million tonnes of wheat and 301 million tonnes of total cereals (IGC 2013-14 estimates). The net wheat surplus is 20 to 25 million tonnes in most years.

The E.U. protects its markets with import quotas and tariffs and still has a system of minimum support prices for certain cereals. This means governments may buy grain from farmers when market prices are below a fixed level, which is the officially set as the E.U. intervention price of €101.

Because of high international grain prices, there has been no basis for intervention purchases by the E.U. in recent years. Surpluses could be exported profitability outside the E.U. Therefore E.U. grain holdings have been at a minimum.

Each E.U. country has a so-called paying agency that is funded directly from the European Union budget when intervention is done. However, E.U. rules do not allow governments to own and operate their own grain storage facilities. All E.U. grain is kept in leased private storages.

Turkey has a well-organized grain market where the government through the Turkish Grain Board (TMO) plays an important role. TMO is a state enterprise whose role is to hold emergency reserves and to intervene in the market to stabilize prices. It buys from farmers when the crop is large and prices are low. It may import when the crop is small to replenish its reserves. TMO has about 4 million tonnes in storage capacity at its own facilities.

Turkey is a candidate for accession to the European Union. It therefore must take some steps to harmonize its grain market policies with those of the E.U. TMO will have to be split into a paying agency on the one hand and a grain storage operator on the other once it is granted E.U. membership.

Sub-Saharan Africa

Among the 50 or so countries of sub-Saharan Africa, there are just a handful where there is public ownership of grain stocks. Eritrea, a closed country with a centrally planned economy, is the only one where the government completely monopolizes procurement of surplus grain and imports.

Zambia’s Food Reserve Agency buys most of the surplus maize to support incomes of small farmers but at a huge cost to the national budget when the maize eventually must be exported at a loss. Annual purchases have been up to 1 million tonnes.

Ethiopia has limited holdings. The government has privatized all grain processing companies but maintains a wheat import monopoly and cooperates with international food aid donors to operate a grain reserve holding 400,000 tonnes in a country that consumes about 20 million tonnes of food grains per year. Sudan’s government holds reserves of millet and sorghum purchased from farmers through the Agricultural Bank.

South Africa’s government abandoned its wheat marketing board in the early 1990s. There are no more public grain stocks in the country. The country is the major exporter of white maize to other countries in Africa and even to Mexico in some years. Large carry-over stocks held by private traders in the country serve as a reserve for the region.

Conclusion

Despite the arguments of liberal market economists, many governments, especially in Asia and the Middle East, continue to buy and stockpile wheat and rice. With the exception of Japan, most rich countries avoid the practice, and few of the poorest countries of Africa can afford to hold reserves either. Some nations may cut their stocks, but others are just as likely to create a new reserve or expand their holdings. Thus state reserves will continue to be an important factor in global grain markets for the foreseeable future.

Grain Storage trends in India

By David McKee and Munishwar Vasudeva

Indian government agencies at the state and federal level are expected to hold an unprecedented stock of 90 million tonnes of rice and wheat when the annual wheat procurement drive ends in June, up from 78 million tonnes a year before.

Over 99% of this government grain is still stored in 50-kg bags in state-owned warehouses or in the open  air. Such has been the practice for decades despite storage losses of 10% or more, according to some official estimates.

Now a movement is gaining momentum in India that will revolutionize both the modalities and technology  of government grain storage. Many initiatives among states and at the center’s Food Corporation of India (FCI) are propelling this drive for reform.

IndiaGrainStorageCover2

These schemes include Public Private Partnerships (PPPs) for construction of dozens of steel silo storage  facilities, long-term contracts with builders of traditional go-downs under a scheme called Private Entrepreneur Guarantee (PEG), and the large-scale introduction by companies of storage services using hermetically sealed silo bags to hold cereals procured by the state.

Current Situation

At present, FCI operates a network of warehouse facilities throughout India in both grain surplus and deficit states with storage capacity of 27 million tonnes of bagged wheat and rice. State agencies hold stock on behalf of FCI in warehouses totalling another 16 million tonnes, bringing the total government covered storage capacity to 43 million tonnes.

Privately owned warehouses already built in the last several years for guaranteed 10-year lease to government agencies under PEG hold another 7 million tonnes of grains.

FCI and state agencies dispose of an additional 18 million tonnes of capacity in facilities called Covered Area Plinths (CAP), consisting of an earthen platform of standard dimensions holding stacks of jute bags covered by tarpaulins. Such technology, introduced during British colonial rule, is officially considered to be “scientific storage” but has high rates of grain losses due to moisture exposure, rodents, lack of aeration and delayed liquidation of stocks.

Only wheat can be stored outdoors in this manner on CAPs. With the exception of a couple of states, government agen-cies do not hold paddy but purchase or collect as levy payments sacks of milled
rice which must be kept in warehouses. Space shortages often mean that bagged wheat is moved outside when the rice crop is harvested and processed in the fall in India’s dual cereal crop breadbasket states of Punjab and Haryana.

Due to successive record wheat and rice crops and the state’s obligation to purchase these cereals at a minimum support price that is often higher than the market price, the national storage gap, estimated for last year at about 10 million, continues to widen.

Furthermore, labor rates in India have been on the rise, increasing the costs associated with manual unloading from trucks, stacking and de-stacking in go-downs, and loading of 50-kg bags back onto trucks. Organized labor demanding higher pay or a change from contractual to departmental status has been able to effectively close down major government warehouse facilities for months at a time.

Driven by top-down guidance from FCI, as a policy decision most Indian government agencies have decided to no longer construct their own storage facilities but will rely on the private sector instead. Furthermore, these agencies are now requiring that all new storage be bulk automated facilities in order to
reduce labor strife, operating costs and quality deterioration.

Federal PPPS

At the federal level, PPPs for silo storages have been officially endorsed. In India’s 13th Five Year Plan for the years 2015 to 2020, the National Planning Commission has committed the country to realize 18 million tonnes of silo capacity for government’s grain in storages to be provided by the private sector on a Build, Own and Operate (BOO) basis.

In the shorter term, FCI is completing the planning work and government approval to launch tenders this year for grain storage facilities to hold 2 million tonnes of wheat.

This targeted amount of storage capacity has been allocated by FCI as the nodal agency to 42 storage facilities in 10 different states, including 38 locations of 50,000 tonnes and four of 25,000 tonnes. About 1.6 million tonnes is to be located in production zones in five surplus states: Punjab, Haryana, Madhya
Pradesh, Uttar Pradesh and Bihar. The remainder will be for consumption in grain deficit areas in five states: Assam in the northeast, West Bengal in the east, Maharashtra and Gujarat in the west and Kerala in the far southwest.

Bin size will be standardized at 12,500 tonnes. All facilities will be required to have rail sidings, which could be 30% of overall project costs. Potential contractors must have land or an agreement in place for the purchase of suitable land in order to participate to bid to build steel silo storages for lease to the  government.

Tendering will be handled by FCI. Bid documents are under preparation and will be approved through a num
ber of agencies including the Ministry of Food, Planning Commission, and various departments of the Ministry of Finance. The tender is expected to be announced by mid-year 2013. FCI hopes to award the 20-year storage contracts by the end of 2013.

Companies will bid based on annual storage rates per tonne. The storage facilities will have to be built to FCI specifications, though they will not be owned by the agency.

Under the proposed structure, any newly built silo storage will be declared a “mandi” (grain market square). But unlike in traditional mandis, farmers will have the right to deliver the grain for sale directly to the government without having to go through commission agents known as “ardhiyas,” who exact legally fixed middleman charges of 2.5%.

So far this ambitious program applies only to wheat, which makes up about two-thirds of all government cereals stocks, and for which the storage periods can be as long as four years due to the strategic reserve nature of some FCI holdings. Rice, which has a higher turnover rate, will continue to be stored in go-downs.

FCI is proceeding from several years of experience with a very successful “pilot” PPP program undertaken with Indian corporate logistics giant Adani Group as the tender winner. Seven steel silo storage facilities totaling 550,000 tonnes of capacity were built in production and consumption zones and linked by bulk rail transport. The seven facilities operate with a total of only 80 staff members.

State PPPS

While the FCI continues the federal planning and approval process, individual state governments have already pushed ahead with their own PPP projects. Punjab, the state with the largest wheat surplus, last year put into use a 50,000-tonne steel silo facility built by a private sector group under a tendering process.

Madhya Pradesh, which has transformed itself from a wheat deficit to the number three wheat surplus state in the last several years, has launched its own tender for PPP storage. It calls for 500,000 tonnes of steel silo storage at 10 sites of 50,000 tonnes each. In MP, the government is providing the land for the new storage sites.

The basis is Build Operate and Transfer (BOT) with bid winners to operate for 10 years with an option for 10 more years before ownership takeover by the government. The federal FCI model, on the other hand, is BOO so ownership is never transferred to the state. The federal Planning Commission will provide a 20% subsidy on the project costs.

The MP government has fixed the guaranteed service charge at 62.5 rupees (U.S.$1.20) per tonne per month based on total capacity. This is the same as paid for warehouse storage of bags. To compensate for this low rate, MP government will provide a subsidy on the estimated project costs of up to 20% beyond the federal subsidy. However, bidding will be based on the amount of subsidy required by the private contractors, so that a winning bid could result in a subsidy well below 20%.

RFQ (Request for Qualifications) has been completed and offers should arrive in May.

Silo Bags

In 2011, the Government of India started test trials of silo bags under the Ministry of Food, Consumer Affairs and Public Distribution. These were carried out at FCI go-down sites in Nerela, Delhi State and in Sanewal, Punjab State. After six months of trials, test results were published and states were encouraged by the center to use the new technology for government grain.

Madhya Pradesh has taken the lead in the introduction of silo bags to India. After conducting field trials for 25,000 tonnes near Bhopal, where wheat was filled in the cocoon like bags in May 2012 and emptied out in mid-March of 2013, it has now placed orders for about 1.3 million tonnes of storage capacity with three Indian companies which are the agents for separate manufacturers in Argentina, where up to now this hori-
zontal bulk method has enjoyed the greatest success.

Under the MP model, private operators bid competitively to provide a storage service based on a per tonne, per cycle fee. Contracts are signed yearly with companies that already have the storage bags and handling equipment in the country or under delivery.

One acre can store only 2,200 tonnes of grain in silo bags, so land requirements could be an obstacle. However, the MP government owns large tracts which are leased to farmers but must be allowed to rest every few years. This fallow land will be utilized for storage sites. Land preparation consists only of some levelling.

Each bag is about 200 feet long, 9 feet in diameter (60 meters x 3 meters) and can store around 200 tonnes. The bags are made from three-layer HDPE (high density polyethylene) 220 microns thick. Grain is protected from rain, UV rays and other atmospheric conditions.

The bags are hermetically sealed so that within three weeks 16% carbon dioxide is generated, sufficient to kill any insects in the grain. Holes from pecking by birds can be patched easily with tape.

The bags are unrolled like a sock while being filled by a silo bag loader tractor which is fed by a screw conveyer that lifts grain from the ground into a grain cart. The 200-foot long plastic sack is coiled on one end with a heat seal at the other end. The process of filling the bag pushes the tractor forward. One bag can be stuffed full of wheat in an hour.

IndiaGrainStorageCover

The operator provides a complete package of services including receiving, weighing, filling silo bags, and
emptying them to fill 50-kg bags when government requires. MP is now paying these service providers about 500 rupees per tonne ($10) per grain cycle from receiving to delivery of bags of 50 kg. Conventional warehousing costs the government about 700 rupees per tonne.

Rajasthan, another new wheat surplus state with an underdeveloped mandi system, is likely to adopt the MP silo bag approach at least as a temporary solution before silo facilities can be built for longer term storage.

India gaining infuence in rice market

A view inside Dunar Food’s hygienic plant in Haryana state just north of New Delhi.

After China, India is the number two rice-producing and consuming nation. Record crops the last two years means total annual supply of 108 million rice equivalent is much in excess of domestic demand. Government planners are less concerned now with how to maintain an adequate emergency reserve in case of consecutive failures of the annual monsoon rains than with how to store and dispose of the burgeoning surplus.

Dunar Foods large mill near Karnal, Haryana state, India — one of three in different states — sits among wheat fields that will be replanted with rice during the summer monsoon season. Photos courtesy of David McKee.

One belated response has been the removal in September 2011 of the export ban on non-basmati rice. According to an IGC report, currently India is on track to increase overall exports 6.1 million tonnes this marketing year, up 50% from 4.1 tonnes last year.

If the trend continues, which seems likely given the high level of stocks and continued production increases, India could soon become the world's leading supplier of rice to world markets, overtaking second-ranked Vietnam and usurping Thailand from the number one position that it has held for decades. Rice millers and exporters in all corners of India have been gearing up production to take advantage of the new external market openings. Vijay Setia, president of the All-India Rice Exporters Association, estimates that there are 1,000 rice millers producing for export. The majority of mills may sell through traders and brokers. But the largest exporters are the biggest rice millers. Those that receive major foreign orders often subcontract production to numerous small neighboring mills.

Suresh Sundaresan, executive director of the same association, estimates that as much as 16% of the current crop could be available for export even while ensuring buffer stock norms of 33% of annual use. But the government must be flexible in reducing its minimum export price to speed the outward flow, he says.

A view inside Dunar Food’s hygienic plant in Haryana state just north of New Delhi.

A view inside Dunar Food’s hygienic plant in Haryana state just north of New Delhi.

India's rice exports cover the entire spectrum of varieties, processing and quality grades, from high-priced, store-branded basmati varieties, both parboiled and raw, for wealthy markets like the Gulf countries of the Middle East, North America and Europe, to certain grades of broken rice for West African countries, to common varieties of raw rice for government food organizations like Bulog in Indonesia.

Rice Mosaic

This  diversity  is  a  reflection of the variegated picture of rice production and milling in India. The major differences are between north and south. The biggest surpluses are produced in Punjab and Haryana in the shadow of the Himalayas, where the superb irrigation infrastructure, sophisticated commercial farmers, and high government prices combine to make rice a mono-culture during the Kharif season from April to autumn when it alternates with the other mono-culture, wheat, in the dry Rabi season.

Haryana and Punjab produce an annual crop of around 15 million tonnes. Nearly all of it is marketable surplus as the people of the region traditionally consume just a few meals of rice per week. The Food Corporation (FCI), a federal agency that operates the central grain pool, takes the bulk of the surplus.

FCI pays the Minimum Support Price to farmers for common varieties purchased by a number of state level organizations from the mandi system of agricultural markets. The paddy is delivered to rice mills, about 700 in Haryana and 3,300 in Punjab, on a quota system during the harvest in September.

The mills are expected to complete milling of the rice by March 31 for delivery to government warehouses and eventual shipment  to  rice deficit states, mainly in the south.

Nine out of 10 rice mills in both states are doing only custom milling for the government and have an average capacity of less than 2 tonnes per hour. Only 300 of Punjab's rice millers buy their own paddy to produce for the open market in addition to government business. Just a handful of the largest millers completely forgo custom milling for the government.

One state where rice milling has become relatively consolidated is Andhra Pradesh in the south, where just 600 mills produce over 14 million tonnes, the second most of any Indian state after 15 million tonnes in West Bengal. The government's share of the market is less important there, so fewer small mills are surviving only through custom milling for the state. To suit local tastes almost all rice is parboiled, a more capital intensive process. Both of these factors may help to explain why clusters of bigger milling enterprises have developed in major production zones.

Basmati Rice

A new sector of large modern automated rice mills has emerged in the north that have based their growth on the surging demand for higher-value, attractively packaged, specialty varieties both in export markets and domestically.

Dinesh Chhatra, general manager who heads up Adani Wilmar's recent entry into branded rice sales, estimates that half the rice milling in the two northern states occurs in relatively large-scale enterprises processing 24 tonnes of paddy (rough) rice per hour and more. In the southern states, where rice is the most important staple, he says just 10% of all rice is milled in larger mills.

Some rice milling plants in Haryana and Punjab now count among the largest in the world with hourly processing capacity of 100 to 200 tonnes. They have sophisticated milling technology and other processes to extract maximum value by producing an array of high-value byproducts such as rice germ and rice bran oil.

LT Foods, KRBL, REI Agri, Kohinoor Foods and Lakshmi Food and Energy all rank among the largest rice processors and exporters. The key to growth of most of these is exportation of several varieties of tne long-grained, aromatic basmati rice to dozens of countries in all regions of the world.

Dunar Basmati rice packaging

Sophisticated packaging is one aspect of marketing strategies for Middle Eastern countries that take a big share of India’s high value basmati exports.

Sundaresen said that in a rare show of cooperation, last year India and Pakistan settled their long-standing dispute over the use of the name "basmati," agreeing to a common geographical index for certain varieties grown in a contiguous region of the Indian subcontinent.

India has traditionally exported nearly all of the basmati it produces, simply because it commands such high prices on international markets. Few Indian consumers were willing pay for basmati multiple times the cost of the common varieties they were accustomed to since childhood. But now basmati rice and branded rice in general have seen a tremendous surge in domestic consumption thanks to higher incomes accompanying economic growth.

KRBL Ltd. is one major rice miller that has exploited this trend. Anil Mittal, chairman and managing director of the company, reports that 85% to 90% of production at his 130-tonne-per-hour plant is basmati rice, but that his sales are split evenly between the international and domestic markets where KRBL has built one of the country's leading rice brands, India Gate, which Mittal says may be extended to rice bran oil and even whole wheat flour for chapattis.

"In 1998, only 10 percent of rice sales in India were branded, and 90 percent were unbranded," Mittal stated in a recent interview. "Now 65 to 70 percent are branded, and  in five years  rice will be 90 percent branded."

Government  Rice

This branding trend applies mainly to the 4 million tonnes of basmati rice and additional 10 million tonnes of specialty varieties that were produced last year, according to Mittal, and excludes the 30 to 32 million tonnes of rice that is purchased annually by FCI for the central pool as well as rice self-consumed by farmers.

Without government procurement, it is clear that many of India's rice milling enterprises, whose number Mittal puts at 45,000, would go out of business.

The Government of India announces an MSP every year to be paid to farmers. The price is sufficient to bolster farmers' incomes guaranteeing that enough rice is grown to ensure food security. The central pool also furnishes the bulk of the heavily subsidized common varieties that are provided as either raw rice or parboiled rice to the 25% of families in most Indian states that hold ration cards under the Public Distribution System.

The FCI procures rice at 18 rupees ($0.38) per kg but sells it to the state governments for just six rupees per kg. The states, at their own discretion, may increase the subsidy from their own budgets. Often this happens prior to elections. In the southern state of Tamil Nadu, every ration card-holding family is now entitled monthly to 35 kg of rice for free versus a previous price of one rupee per kg.

Government subsidized rice is invariably poor quality and so a high percentage of beneficiaries, many of whom are no longer truly poor, do not bother to go to Fair Price Shops to get their rice. This opens the door to leakages from the official channels. One academic study published last year by Reetika Khera of the Indian Institute of Technology in Delhi concluded that over 40% of food grains, including rice, is illegally diverted from state run public distribution systems to open market sales. But the study also determined  this figure  is actually down about 10% from several years before.

Given the low cost and the increasing quantities being pushed through the system to reduce stockpiles, it is not surprising that there is much anecdotal evidence about old, poor quality government rice being fed to chickens by rural ration card holders or by commercial poultry farms that have purchased it on the black market.

Food security

There is little doubt that India has abundant non-basmati rice for itself and others. The challenge is for the soon-to-be top rice exporting nation to live up to its responsibility for global food security by not repeatedly closing the door on exports each time international prices suddenly spike.

At the same time, the government could do more to increase world rice stocks simply by building more and better storage, a process that is well under way.

Finally, a reduction of the state's role in the sector would allow extra room for well-run rice milling companies to create greater value in Indian agribusiness.

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Lifting the screen on Indian milling

Industry expanding despite government controls and challenging business environment

The owners of roller flour mills in India like to describe their country’s wheat industry in sweeping terms:
• an annual harvest that has reached a record level of 88 million tonnes;
• about one-third of the crop each used by farmers, bought by traders or by the government;
• more than 1,200 roller milling companies grinding from 15 to 18 million tonnes of wheat per year into refined flour
called “maida” and other products;
• several million tonnes of branded packaged stone ground whole wheat flour or “atta”; and
• most importantly, 40 to 45 million tonnes of atta still ground on a job-work basis in villages, towns and even in large cities by small electric or diesel driven stone mills, known as chakkis.

The 100-tonne-per-day flour mill of Gillco Agro Pvt. Ltd. stands among irrigated wheat fields near Ludhiana, Punjab. Photos courtesy of David McKee.

Such broad brush strokes, however, conceal the enormous complexity of India’s grain value chain. Wheat production and consumption vary tremendously from region to region. Differing tax regimes on wheat purchasing and wheat product sales give artificial advantages to millers in some states and put those in others at a huge disadvantage. Government procurement of wheat for the “central pool” in surplus states and movement to deficit states for heavily subsidized distribution to the poor under an array of state level welfare schemes results in massive distortion of markets and creates incentives for illegal behavior at all levels of the supply chain, as does a highly regulated agricultural marketing system for wheat that protects unneeded intermediaries, reduces the efficiency of supply, raises costs through extra fees and taxes and prevents millers from procuring directly from nearby farmers.

The central government periodically reduces excess stocks through release for export or forcing poor quality wheat on to the domestic market while preventing importation of high quality wheat by millers. When the monsoons fail, the government may import wheat itself.

Expansion

Despite the heavy-handed role of the government and challenging business environment, the roller milling industry, which is entirely privately owned, has been steadily expanding during the last two decades of economic liberalization and rapid GDP growth in India. Millers estimate that refined flour consumption has been increasing at the rate of 7% to 8% per year against an average population increase of 2%. Leading equipment suppliers estimate there are 20 to 30 new roller mill plants being built every year.

The total number of roller mill stands installed may be as many as 15,000 to 20,000, estimates Manesh Lokin, a milling industry consultant, meaning average mill capacity of 100 to 150 tonnes per day. Many of the new milling plants being built or on order are as large as 300 tonnes per day, placing them among the biggest in the country.

This expansion notwithstanding, the roller milling industry remains fragmented with national milling groups having failed to emerge. Only a handful of companies have multiple milling plants and usually they are clustered in one region of a state.

On the other hand, by some estimates up to three quarters of India’s roller milling companies’ owners may have close or distant family ties. They are mostly members of the same Mawaris community of wealthy merchants, one branch of whom made their profession the construction and operation of industrial flour mills throughout the country. Brothers, cousins, nephews and uncles often cooperate to found mills in the same state or even district, or move onto new states where they perceive market opportunities. But their companies remain separate entities.

Indian roller millers traditionally produce a different product range than their counterparts in other countries. Only 55% of refined flour may be extracted for bread and biscuits. Millers also separate out fractions of fine semolina called “sooji” and used for pasta, and coarse semolina called “rawa” for traditional sweet foods like halwa, in addition to 10% atta, and finally 20% bran.

Chakki atta

For the last 10 years, roller mill owners have been increasingly targeting the market for packaged branded atta. Traditionally, Indian families store wheat at home and take 10 to 15 kilograms (kg) at a time to chakkis for custom milling. In large cities, this practice has been slowly dying out as busy lifestyles and dual income families cause many to opt for packaged atta from shops and supermarkets. In the largest cities, only 10% to 30% of families still take wheat to chakkis. Often they are the more well-off ones, with domestic help available to perform this task.

Depending on the state, a quarter to three quarters of roller milling companies have also installed lines of mostly Indian-style horizontal stone mills in order to produce their own brands of atta in all package sizes. The mills make use of the cleaning sections and bagging lines of their roller mills.

Indian consumers prefer chakki atta over roller mill atta for its taste and texture. It is commonly thought that stone grinding breaks the starch sufficiently to release extra sweetness while burning it slightly to give added flavor to chapatis (flat bread cooked on a griddle) and nan (flat oven bread).

Some of the most successful roller milling companies are contracted copackers of chakki atta for the handful of national brands. By far, the leader in this segment is the domestic consumer goods giant ITC, whose Aashirvaad brand sells 100,000 tonnes per month.

Multinationals General Mills and Hindustan Unilever have also targeted this segment for over a decade with their Pillsbury and Annapurna brands, respectively. Besieged by local lowprice competitors unburdened by either the high overhead costs or heavy advertising budgets, both companies have retrenched. None of these market leaders own their own chakki mills, relying instead on the larger flour milling companies who invest in lines of large diameter horizontal stone mills to supply them. According to C.S. Saboo, managing director of Sunstone Engineering Industries, a major manufacturer of stone mills, there are over 50 roller milling companies that also dispose of production lines of 15 to 25 stone mills.

The historic Century Flour Mills Ltd., established in 1955 in Chennai in the southern Indian state of Tamil Nadu, still operates at a capacity of nearly 150 tonnes per day roller milling and another 100 tonnes per day stone milling.

Overall growth in the commercial whole wheat atta segment has been driven by the entry of hundreds of new players. As most urban and many rural consumers switch to ready-made atta, new local commercial stone milling enterprises have sprung up, particularly in the areas of heavy wheat production and consumption, resulting in fierce price competition.

Barriers to entry are minimal. Just a handful of stone mills are sufficient to start up a commercial atta mill, preferably with a cleaning section and bagging and packaging lines. Wheat can be purchased by the truckload from traders at mandis or at a discount if it is illegally diverted from government distribution channels. A brand with colorful 5-kg, 10-kg or 25-kg packaging can be created easily. These small local companies produce a fresh product tailored to local preferences. Their packaged atta can be marketed directly to wholesalers and brokers who supply retail shops.

Just in the 200-km corridor between Mumbai and Pune, Saboo estimates there have been 50 new commercial chakki millers started up in recent years to supply the two largest cities in Maharashtra state.

Fortified atta

A phenomenon that has also stimulated commercial atta production has been policy changes in several states to distribute subsidized vitamin- and mineral-fortified atta to ration card holders under their Public Distribution Systems, instead of bagged wheat which beneficiaries would normally take to local chakkis for custom milling but which is often illegally “leaked out” of distribution channels.

Both roller milling companies with or without chakki production and the new chakki atta companies have been able to qualify for production quotas under these fortified atta schemes, whereby they receive wheat for fee-based milling into fortified atta.

For example, in Rajasthan, where daily per capita wheat consumption of close to  300 grams is the highest of any state, the largest program for fortified atta now operates. Some 120 mills, including 70 roller milling companies, are officially grinding about 95,000 tonnes of atta monthly for distribution in 10-kg packages to most of 14.4 million ration card-holding families in all categories through a network of 25,000 Fair Price Shops. Production for government welfare schemes is the only business being done by up to onethird of the enterprises involved.

Wheat purchasing

Further complicating the life of roller mill owners is the heavy involvement of both the central and state governments in wheat purchasing. Thanks to a highly developed irrigation infrastructure fed reliably by the Himalaya snowpack, the wealthy and highly mechanized farmers of Punjab and Haryana states in the north produce a combined annual wheat surplus of about 18 million tonnes, nearly all of which Food Corporation of India purchases at the central government Minimum Support Price (MSP) through a comprehensive network of agricultural trading centers (mandis). A farmer rarely has more than 10-km distance to go to sell his crop.

From its location in the heart of the city, Century Flour Mills still delivers much of its refined flour in jute bags according to the preferences of Chennai’s baking industry.

However, millers in the two states, who must pay MSP for wheat, face low price competition from neighboring Uttar Pradesh, where traders and small farmers sell wheat at well below the MSP, since the government wheat purchasing system is underdeveloped, with mandis often 50-km apart and farmers lacking means of transporting their grain.

The result is that millers in the Punjab and Haryana may run at a fraction of their capacity even as wheat flour arrives from Uttar Pradesh and huge amounts of wheat are poorly stored for up to four years by FCI all around them.

Haryana millers have also lost the New Delhi market due to state taxes on their wheat purchases and wheat flour production not faced by Uttar Pradesh millers.

Uttar Pradesh, which occupies most of the Ganges Plain, has the largest number of roller mills of any Indian state at around 200 enterprises, according the Roller Flour Mills Federation of India. New mills are being built every year. Wheat production is increasing as the state has experienced a delayed Green Revolution.

Despite the state’s population of 200 million, millers are able to export more and more surplus flour to other states, thanks in part to lower wheat prices due to the inability of the government to enforce the MSP.

Neighboring Bihar, India’s poorest state, is also experiencing a boom in its wheat industry, with yields rising and new mill construction doubling the number over the last five years, stimulated by a state government subsidy of 30% of the investment cost. Conversely, to the south, the state of Jharkand has seen a halving in the number of mills since it separated from Bihar in 2000. This is mainly due to a tax on wheat and wheat products, which is not collected in Bihar.

Millers in the states of southern India, where wheat is not grown, have traditionally relied on FCI for much of their wheat supply, since that agency’s mandate is to move wheat from surplus to deficit states. In Tamil Nadu, however, supply from FCI in recent years has become less reliable.

Consequently, many of the mills have shut down because they lacked the financial resources to buy whole trainloads of wheat from the north or import wheat from Australia and elsewhere when it is allowed.

The number of operating millers has fallen from 54 to 33 in just four years, according to the Tamil Nadu Roller Flour Mills Association.

As India’s wheat production increases and wheat processing enterprises grow in number and size, one wonders how much more rapidly the industry might evolve in efficiency and scale if the invisible hand of the market had freer play in both the supply chain and distribution channels.

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