Knowing the pulse of Pulses

Pulses have gone past 200 kg and there is great hullabaloo. Political parties are using it as a saber to cut and thrust at Modi Government. News papers are reporting the 'raids' on traders and the capture of thousands of tonnes of stocks which is also said to be softening prices while actually it does nothing of the kind. It is common sense,  when you raid stocks with traders and impound them, the impact will be disruption in supplies which can only act to increase prices. The government is reported to have 'successfully raided' and impounded about 85000 mt tonnes of Pulses, mostly from Mumbai. Most of these quantities belong to importers who had contracted to import large quantities at prices   between Rs.85/kg to Rs.135/kg during the last few months when it became apparent that Khariff crop of Pulses is bad following the failure of monsoon. It is likely these stocks rot in ports or godowns sealed by Government, benefiting nobody except the bureaucracy that will extract its pound of flesh from the traders who took the risk to do what was required to do under the circumstances of poor supply. Not that the Central Government has not tried to do imports on its own. The few thousand tonnes it had contracted to import are lying unlifted in ports as no state government other than Tamil Nadu and Andhra has shown interest to lift them. The reason is that they do not have the wherewithal to mill, polish ( the imported stock is with shells) and distribute them through the public distribution system.

If you recall, this is a repeat of a pattern. In 2009/2010, the price of Tur dal went up to Rs.120/kg and all other pulses went up in unison. There was failure of supply and much debate ensued in the pink press about how the cheapest source of protein is becoming unavailable to the already malnourished poor. In fact, there has been no improvement in the productivity and supply of pulses in the last many decades. The demand, however has been rising, albeit slowly. Pulses belong to a category of wage goods that have high income-elasticity of demand at lower ranges of income. To explain the micro-economic jargon, when the poor and lower middle class earn more, they tend to spend more on items like pulses and milk in proportions that are more than the increase in overall income. If a family earning Rs. 10000/- start earning Rs.15000/- they may increase their monthly purchase of pulses from 500 gms to 1 kg, a 100% increase for a 50% jump in family income. If we our GDP grows at 8% per annum and at least a few million move up in the income ladder, additional million kgs of pulses are required each year!! However, where is the supply response to it. The fact is that low food prices actually mask the reality of mass poverty in India. I would say if vegetable and food prices not go up in India, it is hardly a good sign. I saw with my own eyes in Calcutta. In mid nineties when the middle class bhadralok of Calcutta bought vegetables for Rs.2/- and Rs.3/- a kilo and rejoiced how cheap it was to live to Calcutta, in 24 Pharganas and East Midnapore district , the biggest vegetable belt I have seen anywhere, farmers were hardly getting Rs.4/- per tokri ( basket ) . I could not even imagine what the farm laborer was getting paid. All this, when we were paying not less than Rs.20/- a kilo in Delhi. This was one more reason for me to detest the leftists and their lofty ideologies.

What government can do to improve supply of pulses ? The Nehruvian tools of price and quantitative controls, control on movement and distribution, demonizing the traders, procurement by white elephants like NAFED or Food Corporation of India and imports by State Trading Corporation of India for channeling thru public distribution- they are all old hat. The starting point for all supply side responsiveness is price discovery and a free and unhindered market with transparent flow of information . Human kind knows but one tool to ensure transparent flow of price information of commodities, that of future trading. For example, light-sweet crude futures is quoted today at Nymex for deliveries in July 2017 at $54.67 per barrel of 200 litre while the spot price $49.56 per barrel. This means there is a likelihood of the crude going up by a moderate 10% over next 1 year and more. This makes it clear to all refiners, marketers, owners of oil tankers, plastic manufacturers and other consumers of petroleum and its derivatives what to expect in terms of prices in the foreseeable future.

How does this come about ? In statistics there is a theory called the 'inertia of large numbers'. It is elementary knowledge that price is function of demand and supply, the demand being represented by 'buy' and the supply being represented by 'sell' in a market for a commodity. By removing the need for actual delivery , when traders and other participants in the ecosystem of the commodity in question are allowed to take positions in future with respect to price and quantities and then cancel them on the settlement day, a mechanism of price discovery as well as a tool for hedging against price fluctuations is afforded to those interested in price stability of the commodity they are buying or selling. When traders buy ( go long ) or sell ( go short ) with respect to prices and quantities of the commodity in future and agree to square up positions in a stock exchange format without taking delivery, the centripetal and centrifugal forces of 'buy' and 'sell' cancel out and as they converge at multiple points on a time scale, a long term curve of future prices is obtained.

Forward Contracts, Futures and Options are various the variants of derivative trading that helps price discovery and provide the necessary information required to producers, traders, bankers, importers, exporters, insurers, processors, logistics service providers, retailers etc the ability to respond to spikes in demand or slump in supply adequately. Without such a mechanism any business in commodities is shooting in the dark and organized sector keeps away from it. Farmers and consumers pay the price for the inefficiencies of the supply chain and government's knee jerk reaction. For example, if suddenly Government arranges for an import of 5 million tonnes of pulses ( for example ), it will be a case of shutting the barn door after the horse has bolted. When pulses arrive the prices will be so low that the farmers will be hesitant to sow the crop next year!

A few months back, the same story was repeated in the case of Potatoes in West Bengal. West Bengal is a big producer of high quality potatoes. States like Orissa depend on supplies from West Bengal for this staple. Last year when there was supply shortage and prices started going up in Bengal there was hue and cry. Mamta Government responded by stopping flow of Potatoes from Bengal and banned interstate trading to soften prices. This year the reverse happened. The farmers expecting prices like last year had sown more and there was a bumper crop. Prices fell to Rs.300 to Rs.400 per quintal while production cost itself averages to Rs.450 a quintal. Scores of farmers committed suicide. The whole sordid saga would have been avoided if we had futures in Potatoes.

Ironically, the farmers who supply to Pepsi were happy . Pepsi's whose entry into India was bitterly opposed by our commies has been a great succor to our Potato farmers in West Bengal for the last two decades. Farmers supply to Pepsi at contracted prices.

As usual the bhadralok of Bengal were happy that Potatoes were cheap in Bengal compared to other parts of the country. There was no stirring of the conscience of our liberals and leftist intelligentsia. No demand for rational discussion on agriculture marketing and distribution. Probably their rationality stops with inquiring whether or not one can safely urinate on idols of hindu gods and goddesses.

You may ask if it the only way forward and it is a 'perfect' way of doing things. I would say that there is no such thing as 'the perfect system' like there is no such thing as 'perfect religion', any such system claiming to be so will cause untold horror and miseries as we all know. However it is the way it is done world over, whether it is electricity, coffee, orange juice, wheat or cut flowers. We in India have been brought up since 1947 that the Government is responsible and capable of delivering us potatoes and pulses cheaply and that the traders are basically black marketeers and  the villains. This is the credo of Nehruvian economics whose shackles no politician can break even to this day. They could do that in the case of 'wants' like cars and cell phones and not in the case of 'needs' like potatoes , pulses and electricity. The politicians y play to the gallery knowing well how any attempt at reform will be twisted and played against them.

If anybody is worried about what they traders will do when their stock are impounded at the port, they need not do so. Our entire play in agricultural commodities is fueled by black money as no organized player will get into it for want of such tools like futures and options. These traders are essentially big money bags and they would have already factored in the risks knowing the proclivities of our Government and the powers they have under 'The Essentially Commodities Act', the single most important tool of Nehruvian Economics to control prices, supply and distribution of what the Government may from time to time consider as essential commodity! It is , if at all, a write off of their black money. They will wriggle out of the situation by suitably 'engaging' with the powers that be in this high stakes game.