FDI in Retail May Not Always be Favourable to Local Farmers

A recent analysis of Nielsen data on food prices in US done by JP Morgan has found that for every 12-week period since May 14, 2011, Wal-Mart has been raising food prices faster than its competitors. So, if the consumers are not benefitting by way of lower rate of price increase, then who is benefitting from large retail chains? Certainly not the suppliers. Contrary to popular opinion, the FDI in India is not being driven by the consumers. Nor by the producers. 

The process by which capitalism has been replaced by corporatisation is being defended using the theoretical principles of competitive capitalism. However, there is no theoretical economic foundation to support the prevailing belief that a corporatised economy is capable of meeting the overall needs of society.

Corporatism is not capitalism. Corporations are designed to amass capital – to generate profit and to grow. None of the necessary conditions for competitive capitalism exists in today’s economy in India. The economy is moving away from market coordination towards a corporate version of centralised planning (supported by state-of-the-art technology). The problems of the centrally-planned economies of the communist regimes were not merely a lack of sophistication in management and planning. Central planning by government or corporation is a fundamentally wrong way to try to coordinate an economy. Had centralised planning been a result of free-market competition, it would then have been good for society. Corporatisation is not a market aligned system but a centrally-command structure with the basic flaw of growth for the sake of growth. 

Corporate agriculture is fundamentally different from the agriculture we have known in India, in the past. A corporation is a legal entity and not a person. It has no family, no community, and increasingly no nationality. The corporations that increasingly control agriculture have no commitment to India and certainly not to the farming in India. The retail corporations may help the growers get loans to buy buildings and equipment but they will abandon those growers if the contractual arrangement becomes unprofitable or even troublesome. We are in the midst of a great social experiment – an experiment being carried out by non-human entities that we have created and let loose to plunder Indians. 

Specialisation, standardisation, and consolidation are often cited as the keys to successful farming. In the past, the policy and practice in India had supported the industrialisation of agriculture by favouring those who have specialised in specific enterprises, standard production practices and operated on a commercial scale. Until recently, the industrialisation of agriculture meant advantages of the economies of scale but now it points to a situation of increased corporate control.

For the farmers, the most important strategy for surviving the next farm crisis may be to get to know the neighbours and turn them into customers. The concerted moves for dismantling the APMC market structure in the name of malpractices and corruption is directed to deny the opportunities of a decentralised free-market to farmers. 

Farmers’ markets, or cooperative marketing in any form, will provide more opportunities to bring local farmers and community members together through their common interests in sustainably produced food. Friends don’t abandon friends in the neighbourhood when the going gets tough. 

Published in The Economic Times

Trading Cos Look at New Sources of Financing after Credit Squeeze

Global trading companies’ talent and deep pockets have helped them get incredible powers. Regulators may be cracking down on big banks and hedge funds internationally but trading companies have largely remained untouched. Many are unlisted or family-run and have immense political clout. The commodities trading industry has diversified its sources of credit over the last decade as rising raw material prices have increased financing needs. However, most trading companies remain dependent on cargo-by-cargo short-term letters of credit.

Unlike commodity producers, trading firms don't just make money when prices go up. Most rely on arbitrage -- playing the divergence in prices at different locations, between different future delivery dates, between commodity qualities in different places… thus liquidity and cash flows are important.

The gains made in situations of short squeezes can often get negated if liquidity and credit squeezes have been triggered by their own banks. Global trading companies used to operate on huge liquid credit lines given by bankers. It seems that with the latest credit squeeze, trading companies are aggressively hunting for fresh lines of credit in the non-traditional geographies.

Three years ago, it was a freeze in trade lending which slowed global trade flows. Unfortunately, Europe’s sovereign debt and banking crisis is now resulting in numerous unintended consequences, especially in the commodities space. French banks such as BNP Paribas, SocGen and Credit Agricole are the main financiers of big commodity trading houses, many of which are run out of Switzerland. In recent weeks, as these lenders engage in significant asset contraction, they are reducing the availability of credit and raising its cost.

Three years ago, some of these large trading companies would have hardly glanced at alternative sources of commodity trade funding in non-traditional geographies. The scenario seems to be changing and borrowing in alternative currencies (other than US dollars) is no more exotic.

Trade finance is a huge business, with lending hitting more than US$170 billion. A drive by some banks to reduce the size of the balance sheets have aggravated the impact on commodities trade finance in light of new Basel III capital rules. While banks needed to hold capital equal to just 20% of the value of letters of credit under Basel II rules, the new agreement raises the bar to 100%, greatly increasing the cost of lending.

Trade finance, which supports US$14-16 trillion in annual global commerce, is crucial for international trade. Fewer than 3,000 defaults were observed by International Chamber of Commerce (ICC) in the full dataset comprising 11.4 million transactions. Therefore, it was argued that the increase in the leverage ratio under the new regime would not reflect market realities and may significantly curtail banks’ ability to provide affordable financing to businesses in developing countries and to SMEs in developed countries.

Following the recent consultation between the Basel Committee on Banking Supervision and World Bank, WTO and ICC, the rules for Basel III have been tweaked to promote trade with low-income countries. These alterations will reduce the amount of capital that confirming banks have to hold against letters of credit issued by lenders in low income countries.

The earlier insistence on the “sovereign floor” rule had made trade finance too expensive, even though it was extremely safe. The agreement to waive the so called sovereign floor for certain trade-finance related claims on banks using the standardised approach for credit risk will make credit more accessible in the low income countries. 

Published in The Economic Times

Just Use of Raw Material Key to Sustainable Development

Prior to the outbreak of the recent economic and financial crisis, there was a sharp increase in the demand for raw materials. Although the overheating has temporarily disappeared owing to the downturn, access to raw materials remains a highly important subject. This is because our concerns not only relate to prices but also to availability and relative prices. These factors determine industry competitiveness. Pressure will mount as soon as economic activity starts gearing up. Metals and fuels are source of our prosperity but the supply of some of these is faltering. 

At present, over 40 thermal power stations have coal stocks that are barely sufficient to meet the demand for about a week. As many as 29 projects have less than four days of coal reserves. The government has asked coal companies to step up supplies to power stations facing shortage of coal to ensure that power generation is not interrupted. 

A slew of factors, including less production from CIL collieries due to heavy rains, floods in Orissa and Telangana agitation, have hit coal supplies to power units. The threat of a strike by miners comes at a time when the power situation in the country is grim as many plants of NTPC, the country’s largest power generator, are running below capacity levels due to paucity of coal --the key raw material for generating electricity. 

Fuel prices have almost doubled over the last year and their impact on manufacturing have been worsened by the current power shortage, which has forced most local manufactures to use expensive diesel-run generators to power systems for more than the half of their production time. Any distortions in pricing and access to feedstock have a direct adverse impact on competitiveness, given that feedstock can make up a huge part of the production costs. 

Since August, the steel and allied industries in Karnataka have been facing acute shortages of iron ore, following the imposition of a mining ban in the state by the apex court. The iron ore supply crisis at JSW deepened last month when its longterm supplier NMDC stopped supply of the raw material. The state-owned company was adhering to the apex court order for selling all its ore from the state through the e-auction route. 

Industries need predictability in the flow of raw materials and stable prices to remain competitive. Policy makers should be committed to improve the conditions of access to raw materials, be it within India or by creating a level-playing field in accessing such materials from abroad. 

Our preoccupation with short-term price movement often ignores the potential of a more circular economy to increase economic resilience. Over a period of time, the pressure on raw materials will increase substantially. Therefore, we will need to use raw materials in a much more sustainable manner as the present pattern of exploitation and consumption cannot be maintained and our production process, feedstock use, consumption patterns will need to radically change to ensure sustainable development. 

Published in The Economic Times

Clearing Houses Now Accept Gold as Alternative Currency

Clearing arrangements for commodity contracts may be viewed as a process through which market participants seek to control risk. Such arrangements include both “clearing” in the sense of reconciling and resolving obligations between counterparties and “settlement” which finally extinguishes the obligations. 

One of the largest clearing houses of the world, LCH Clearnet, will begin accepting physical gold bullion (up to $200 million per member) as collateral amid growing demand to depart from the traditional reliance on cash and other securities to cover margin requirements. 

The move follows similar steps by many exchanges to increase the use of physical gold as an acceptable deposit and reinforcing the precious metal’s allure as an alternative currency. 

In October 2009, CME allowed physical gold to be used as collateral for margin requirements. ICE followed suit in November 2010. Last month, CME allowed the cap per member for gold collateral to be increased from $200 million to $500 million. 

It is important to point out a few facts that determine how clearing houses or central counterparties (CCPs) devise their margin strategies. First, it is critical to separate CCP margins into variation margin and initial margin. The variation margin is calculated on a trade-by-trade basis and offsets changes in value, whereas initial margin provides default protection and is usually calculated on a portfolio basis to allow for the offsetting of risk. There have been concerns that as the jostle for a piece of business continues, there may be temptations to relax financial standards and asset quality. That could include reducing the collateral quality instead of lowering margin requirements for members and a move which could weaken the mechanism in the event of a default. 

What is the fair price of commodity collateral? Given the complexity of pricing derivatives and the compounded challenges of calculating initial margins, there is no clear-cut solution to measure these risks. Physical commodity collateral may have a present market value of 100. However, on forced sale, the asset may be worth 60. In such situations, when a party approaches with an offer of 80 (with no other bidders in fray), should the offer be acceptable? The standard theory will say yes as 80 is more than 60. It’s a tough call for the creditors but not as tough as a forced sale. Book value may not be always the same as forced sale value. 

Clearing houses or CCP run a perfectly matched book. Every obligation to a member is matched by a precisely equal and offsetting claim against another clearing member. Therefore, clearing houses do not incur market risk. Collateral requirements do not in themselves provide adequate protection if collateral levels are not continuously monitored and related to risks incurred. 

Most clearing houses or CCP around the world conduct a routine margin settlement per day based on positions and market prices at the end of the trading day. The fund transfers associated with these margin adjustments are typically affected the following day. An essential condition for sound clearing and settlement procedures is that incentives to monitor and control risk should coincide with the capability to fulfill the monitoring/control function. The safeguard in the Indian context is that it is monitored on a real-time basis. 

Published in The Economic Times

Forex Swings Hit Commodity Values

We have seen that over the past few weeks, a number of central banks are stepping in, with a view to smoothing foreign-exchange volatility. Prices of internationally traded commodities are notoriously volatile due to market fundamentals and exchange rate movements. Commodities today are a diverse group of international markets that operate quite separately from each other. 

The value of commodities is dependent upon the currency they are exchanged for and when that currency is weak the commodity will appear to be very expensive and sometimes mistakenly very valuable. The effects of Currency Agreements as well as the Trade Agreements on the participating economies are important. Both types of agreement have multiplied in recent years. Many countries have fundamentally changed the way their currencies relate to the currencies of other countries either by adopting a common currency (Euro for EU) or through Bilateral Currency Swap Agreements where the trade settlements are done in their own currencies rather than in US dollars and finally by way of Multilateral Clearing and Payment Agreement (CPA).

While trade agreements and currency unions are often justified on the basis of the presumed effect on trade volumes, the reverse is also true. Currency agreements which lead to trade cannot be avoided. Erstwhile USSR and India used to conduct bilateral trade using an instrument called a “Rupee Rouble Escrow Account”. Boris Yeltsin unilaterally abrogated 1978 protocol without any legal or compensatory financial recourse.

China has signed Bilateral Currency Swap Agreements with Brazil, Korea, Hong Kong, Malaysia, Belarus, Indonesia, New Zealand, Kazakhstan, Uzbekistan, Argentina, Iceland, Russia, Indonesia and Singapore amounting to more than US $ 95 Billion. All these countries are important trading partners of China. In addition to border trade, ordinary trade can also be settled in both countries' official currencies. Chinese authorities are taking measured steps to internationalize the usage of the RMB (Renminbi) through a bilateral currency agreement. China which now holds large US assets is trying to diversify assets away from the US dollar.

China as per certain estimate undervalues its currency to almost 35%. China does not allow its currency, to float freely on exchange markets. This along with other subsidies and mercantilist trade policies keeps Chinese exports cheap and thus more attractive to consuming countries. Trade between India and China amount to around US$60 billion with an annual growth rate of 40%. The two countries in 2009 signed a bilateral currency swap agreement, but it has not yet been officially launched. There are also reports that some of the entities who are importing from China, are trying to tweak the existing commercial regime so they can borrow in the RMB to pay off the suppliers.

Chinese prefers to do things step by step. All the bilateral agreement should be seen as China's transitional move to make its currency RMB fully convertible and to challenge the US dollar. Eventually, wider use of the RMB outside China could redefine the balance of power as the rest of the world begins settling its bills with China in RMB instead of the US dollar.

Given the importance of China in the world commodity market, the ramifications can be significant.

Published in The Economic Times

Conflict Commodities: Illicit Trades Fuel Armed Conflicts in Africa, Asia

Demand for rare commodities obtained from an impoverished region could often lead to horrible atrocities and provide fuel to armed conflicts. The concept of conflict commodity emerged initially in relation to conflict diamonds financing rebellions in Angola and Sierra Leone.

Diamonds are not the only minerals dug out in war zones; there are other equally important minerals such as tin, tantalum, tungsten and gold, which are largely destined for the global electronics industry to be used in mobile phones and laptops.

The ‘Conflict Minerals Law’ has been included in the Dodd-Frank Act. The provision tucked in the financial reform bill requires publicly-traded and major electronic companies such as Apple and Intel to submit annual reports outlining what are they doing to ensure their minerals are conflict-free.

Revenue from the cocoa trade has fuelled years of conflict in Ivory Coast, the largest producer of cocoa, which is used as a main ingredient in chocolates. Millions of dollars worth of cocoa revenue has funded both sides of the conflict with the tacit acceptance of cocoa companies. Conflicts financed or sustained through the harvest and sale of timber is emerging as a serious problem in many countries in Asia and Africa. Conflict commodities that cannot be easily hidden, like timber, are generally exploited with the overt connivance of actors connected to the state. The case of the once dreaded Veerappan in sandalwood smuggling is a pointer.

This creates clear opportunities for state actors to extort funds from illicit trade for personal gains. Warlords have clearly used conflict commodities to finance military operations. Commodities are bartered to trading partners either directly or in exchange for weapons and munitions needed to carry on wars. If carbon credit accounting could be managed in an integrated manner across business networks in order to save the climate for the future, why could we not do the same to save lives in conflict regions? Commodities that can be seized and transported easily are more likely to be used to fuel conflicts. The conflict resource fuelling the world’s deadliest war in the Congo is gold. Gold bars are less traceable than diamonds. Gemstone tanzanite was in for closer scrutiny after the attacks on the World Trade Centre because of a report that said Al-Qaeda members bought it to fund its networks and activities. Timber is more easily looted than oil but less easily than the surface deposits of diamonds or coltan, a mineral indispensable to the operation of cell phones.

Sometime ago, supermodel Naomi Campbell found herself in the dock facing uncomfortable questions about blood diamonds, a term, she was quick to point out that didn’t even exist back in 1997 when she met warlord Charles Taylor.

Let’s hope that CEOs don’t find themselves answering awkward questions how conflict resources might have made their way to their businesses and what efforts they should have taken to stop such things from happening.

Published in The Economic Times 

Futures Markets Are Helping in Price Dissemination Across India

Ten years ago, housewives trusted the neighbourhood shop for the price of grain and the family jeweller for the price of gold. Today, one can surf any channel or glance at any newspaper for commodity price information. Awareness about commodity prices has been made possible due to the unstated contribution of futures exchanges in India. The benefits that the country has derived by way of price dissemination promoted by futures exchanges remain unacknowledged. Traders can no longer fool consumers or producers.

The notion of nonmonetary benefits might sound strange but upon reflection, it makes perfect sense. Over the years, middlemen had greatly benefited by price opacity. However, the very fact that futures market in India has created an environment whereby everyone cannot be fooled about the price at all times is an acknowledgement of its contribution. The market has certainly moved towards a more transparent base.

Not many countries in the world can boast commodity market yards where computers installed at commission agents’ office disseminates crop price information. India is one of the few in the world. The price dissemination technology that is being used by the Indian commodity exchanges is the best price outreach programme in the world in contrast to many of the established exchanges in the world where it hardly gets out of the offices of the financial intermediaries.

Price discovery made on APMC yards, which are mostly fragmented over-the-counter markets, cannot deliver desired results because price discovery in spot market is affected by geographical dispersion, differential needs of buyers and sellers in terms of quality, quantity, place of delivery and difficulties associated with handling physical delivery and absence of option to settle the contract by payment of price difference. The spot market does not meet the need for price forecast felt by the participants in the physical markets. However, reference prices of commodities are reliably available on national future exchanges. Ten years ago, in the absence of such reference prices, deal structuring took more time or sometimes had to be abandoned.

We must acknowledge that the commodity futures market is an important vehicle for modernisation of the organised market. The primary social benefit from the commodity futures market is informed production, storage, and processing decisions. Well functioning markets can assist in stabilising prices by providing signals to producers to increase production of key commodities that are in short supply. Commodity price awareness of common man proves that the first stage of growth has already happened and the futures exchanges have contributed largely into this market evolution.

Published in The Economic Times

Velocity of Data Flow in Commodity Market Distorts Price Trends

A few days ago, I got a call from a commodity analyst asking me whether the explosion in France’s nuclear reactor is going to impact energy prices. On probing, I found that close to the nuclear power station, near Avignon, there was an industrial accident and not an explosion in the nuclear reactor. We have become information addicts. While increased amounts of data and information can be advantageous, it also comes with the feeling... how do I make sense of all this? Can’t we break this down into a handful of simple points? Supplementing the concerns of information overload, there is Wikleaks. Is it gossip mongering or are they genuine leak? Recently, a few interesting insights were revealed concerning the commodity market.

Hear No Evil: When oil prices surged to a ridiculous $147 a barrel, conventional wisdom held that normal supply and demand issues were the cause. US officials met a Saudi minister who expressed his deep concern that high prices would destroy the demand for crude. Adding that the Saudis were having a hard time finding buyers for their oil, he also asked the Bush administration to rein in Wall Street speculators. This brings out a very important fact that while market is sensitive to all sorts of information, the government prefers to keep its ears closed in proverbial the “hear no evil” manner.

See No Evil: An interesting cable (released earlier) by Wikileaks has shown that the US government was acting on behalf of the world's leading producer of genetically modified (GM) seeds in targeting the EU for its stand on GM crops. It certainly revealed to what extent governments can serve the interest groups. US and Spain trade officials strategized how to increase acceptance of GM food in Europe, including inflating food prices on the commodities market.

Speak No Evil: In India, income tax raids were conducted on big diamond merchants when the list of Indian Swiss bank account holders was reportedly leaked. Sticking with the diamond story, Grace Mugabe (Zimbabwean president’s wife) sued a newspaper for carrying reports from Wikileaks which revealed that that Mugabe's family and the central bank governor were directly involved in the illegal smuggling of blood diamonds. While the commodity world often seems to be grappling with information overload, it is clear that Wikileaks cables are not going to have any material impact on prices. While informed decisions are always good, the velocity of information flow in commodity market has distorted price trends.

Short-term thinking can be fatal in commodity markets, especially when they are propagated selectively. Analysts often tend to zero in on small, quantitative short-term improvements when assessing macro, strategic issues. While they may be statistically significant, are they meaningful?

We cling nervously to the melody, but we don't handle it freely,

we don't really make anything new out of it, we merely overload it.

- Brahms

Published in The Economic Times

New Investor-Driven Dairy Models May Push Cattle Owners Out of Biz

It is more than twelve years since India overtook the US as the world’s largest milk producer. The surge in milk production can be accredited to the establishment of dairy cooperatives under the Operation Flood program. Till recently, dairying in India was considered a success story. However, with the rising price of liquid milk at urban centres, the sector is being viewed with skepticism and alternative models of growth are being pursued.

The thrust of the Indian dairy growth was driven by the objective of making liquid milk available to the population. In the current demand spike, the prices of dairy products have risen due to the change in the food habits of people. The growing demand for pizzas is one example where large quantities of cheese and butter are used. Driven by the financial projections, a large number of entities have jumped into dairying which includes companies with interest in energy and real estate, with politicians not excluded. Overcapitalisation, clubbed with the investor’s expectations, is likely to send prices soaring in the Indian market. Earlier in 1990s, the global logic of dairying financialisation was aggressive local brand gobbling and killing them with global brands or co-branding. Companies, which marketed value-added products worldwide, had no commitment to make available liquid milk to the masses. The brands themselves became valuable financial assets and their value could be boosted through a blend of Wall Street wizardry and aggressive marketing. During this time, Parmalat, a multinational Italian dairy company, collapsed with a $20-billion hole in its accounts in what remains Europe's biggest bankruptcy.

Amusingly, some leading global dairy players who haven’t earlier contributed to India’s milk production growth are now offering help to increase India’s milk production, which is “said to fall short” by 3 million tonne from the projected demand. It would be interesting to note that there is a decrease in milk production in the EU, the US and Latin America. New Zealand’s production costs have tripled in the last decade and it is no longer a low-cost producer. The milk feed price ratio has changed due to maize and soybean price rise. Over the past two years, the average price of milk has doubled internationally. The world average herd size is 2-3 (1-2 in India) and one billion (75 million families in India) people are said to be living on dairy farming.

The financialisation of dairying in India looks inevitable. The dairy models which are pursued by some entities have an overriding dominance of capital in the production and marketing chain. Currently, India produces milk at 58% of the world average cost. The central logic that is suggested in new models has evolved under the influence of investor's expectations which is different from the socio-commercial goals that were earlier pursed. Cashstarved dairy farmers are likely to get increasingly marginalised in the suggested scenario. All seem to be missing the point that the biggest stakeholders in dairy industry are cattle-owners due to the highly perishable nature of the commodity. 40% of the global milk production is still not processed. The dairy industry will face grave supply chain crisis if the marginal and small dairy farmers are isolated in any business model.

Published in The Economic Times

Import Dependency of Commodity Supply a Cause for Concern

India is an important consumer of commodities, ranking fifth in overall energy use, and third largest consumer of coal. In agriculture, it has a much greater presence by being the largest consumer of sugar and tea and the second largest consumer of wheat, rice, palm oil and cotton. India has sharply increased its edible oil consumption. However, India’s commodity consumption has grown at a slower rates than China.

The import dependency of commodity supply remains a cause of concern. Using indicators, like the country concentration, import dependence and supply risks for high economic importance commodities, it is apparent that not only the price but also physical availability and counter party suppliers are some of the potential areas of concerns.

Country concentration risks for agricultural products and energy resources are relatively high in India. The entity concentration risk (dependence on a few companies for sourcing) is growing as well. Other counties like Korea too are dependent on four trading companies for its import of grains. China inspite of its huge international political clout is dependent on only three companies, like Vale, BHP and Rio, for its iron ore imports.

While China had been acquiring rights of commodities (through acquisition of mines and farm lands) around the world to mitigate concentration risk in sourcing, the Indian acquisition in the natural resources have not followed any commodity-based structured approach. Barring a few private sector acquisitions, the investments in commodity resource pooling have been very insignificant compared to projected surge in demand.

On the other hand, negotiated price settlement has been the order of the day in China but in India driven by the fear of CVC and RTI —the same has been sacrificed in favour of global tendering. This has resulted in India often having failed to get favourable prices. Unfortunately, the PSU trading houses & Oil PSUs have been relegated to mere channelising agency as sales facilitator rather than vehicles for strategic sourcing.China’s overseas investments in natural resources assets had focused on oil and minerals.

The price of food commodities such as rice, wheat and soyabeans had surged in 2008. Thereafter, state owned China Investment Corporation’s (CIC) purchase of an $856m stake in Noble Group (the commodities trading company) is the clearest indication that Beijing wants to secure agricultural commodities supplies. Since then, countries including Saudi Arabia and South Korea have invested in overseas farm plots to increase their food security.

India has also an import dependent model for Energy (Coal from Indonesia & Crude from West Asia). India’s low self-sufficiency rates for pulses (imported from Burma & Canada) and edible oil (imported from Indonesia, Malaysia and Argentina) can do little to blunt the commodity pressure. In fact, the nation’s already fragile self-sufficiency in food and grains is likely to decline steadily with the new food security bill despite its good intentions. While there is nothing wrong in being an import dependent commodity consuming nation but subjecting the economy to import mismanagement, whims & fancies of savvier suppliers and arm-twisting by countries (recent coal policy of Indonesia) is a matter of growing concern. Failure of the government in economic diplomacy as well as failure to leverage India’s position as a large consuming nation will be paid by millions of domestic consumers. Government in the past had remained mute spectators with long term policy starvation often reactively resorting to non- sustainable price control mechanism.

Published in The Economic Times

It’s Time for Reality Check on Malls Before Allowing FDI in Retail Sector

As India continues to debate on the pros and cons of foreign direct investment (FDI) investment in the retail sector, it would be interesting to understand the interplay of politics, corporate influence, intrigues of supermarket chains and greed governing the trade treaties with the fourth largest staple diet of human consumption, banana, in focus. 

Supermarkets are now the only players in the banana chain to consistently make profits from bananas. It is estimated that bananas represent 2% of the total turnover of North American and EU grocery retailers. Bananas are the single most profitable item passing through the check-outs with more than 33 thousand product category in stores. While retail chains may appear as warriors on behalf of poor consumers getting the best possible deals for products, workers who produce them are paid rock-bottom wages and their local environment is destroyed. 

It is important to note that the world banana market is geographically fragmented mainly due to transport costs and diverging import policies in the consuming countries. Around one fifth of globally produced bananas are exported from the developing countries to developed nations as an example of unidirectional South-North trade. The dominant banana importers are EU countries (29.2%), US (27.5%), Japan (8.2%), Russia (7.9%) and Canada (3.5%). Only the Dwarf Cavendish variety is traded while there are hundreds of varieties. The main banana producing countries, such as India or Brazil, are hardly involved in international trade. About 20% of the 70 million tonne of bananas produced each year enter global market. Just five companies—Dole, Del Monte, Chiquita, Fyffes and Noboa—control some 80% of the international banana trade.

The descriptor “banana republic” actually originated when a few of the companies in Central America having business interest in banana ensured changes of government in Honduras and then went on to convince the administrations of Truman & Eisenhower to order the CIA’s action in Guatemala. Colonial histories influence trade agreements and partly determine who exports to whom. In the ’90s, five Latin American countries (Costa Rica, Venezuela, Colombia, Guatemala and Nicaragua) backed by the US (on the instigation of an almost bankrupt company with a large banana interest) a filed formal trade complaint at the World Trade Organization and fought a series of trade disputes with EU.

From the beginning, commercial enterprises in banana trade in collusion with the friendlier governments derived profits from the private exploitation of public lands while the debts incurred became public responsibility. The companies, by manipulation of national land use laws, could cheaply buy large tracts of agricultural land for plantations whilst employing the native as cheap manual labourers after having rendered them landless. The biggest problem with banana trade is that the competition for the lowest prices is led by supermarkets which are constantly looking to buy the cheapest bananas. This comes at a great cost to plantation workers because they in turn are paid lower wages.

It is important to do some reality check with experience of other nations before allowing FDI investment in retail. 

Defer not till tomorrow to be wise, tomorrow’s sun to thee may never rise

– William Congreve

Published in The Economic Times

Beware! Corporates Are Out to Control Scarce Water Resource

“I am the Alpha and the Omega, the beginning and the end.

To the thirsty I will give water without price”

The Bible - Revelation 21:6.

The farmer flare-up at Maval near Mumbai (during the pipe laying for industrial belt of Pimpri-Chinchwad) should not be dismissed as politically motivated. Water stress is just beginning to show in India. With increasing scarcity of water, the competition for water between agriculture, industrial and municipal users is set to intensify. The global market for water as a commodity is estimated to be over $500 billion and $2 billion in India. India uses approximately 829 billion cubic metres of water every year. By 2050, the demand is expected to double and consequently exceed 1.4 trillion cubic metres of supply.

India’s agricultural sector currently uses about 90% of total water resources. Farmers are expected to meet the rapidly increasing demand for food, feed, fuel and fibre crops even though most land and water resources have already been committed.

Water markets are new and evolving. The values of licences traded are in billions of dollars. World Trade Organisation and North American Free Trade Agreement consider water to be a tradeable good, subject to the same rules as any other good. Corporations through other multilateral world bodies are also trying to influence national governments to push privatisation and commodification of water as “the chosen” alternative to manage the growth in water consumption and severe water scarcity. Water trading involves the temporary or permanent transfer of a water licence. A temporary or term trade involves the transfer of an allocation of water for a set period of time.

The companies argue that privatising water is the best way to deliver it safely to the world. It is true that governments have done an abysmal job of protecting water within their boundaries. However, the answer is not to hand over this precious resource over to corporations who have escaped nationstate laws and live by no international law other than businessfriendly trade agreements. The answer is to demand that governments begin to take their role seriously and establish full water protection regimes based on watershed management and conservation.

Just as governments are backing away from their regulatory responsibilities, corporations are acquiring controls of water resources. Bottling companies in different parts of India pay very little towards water mining and have practiced unsustainable water mining in these areas to the detriment of farmers in the vicinity. Some of these corporations are gaining control over the burgeoning bottled water industry, the development of new technologies such as water desalination & purification, the privatisation of municipal and regional water services, including sewage & water delivery and the construction of water infrastructure.

India seems to be progressing towards privatisation of water, which will ensure that decisions regarding allocation of water will focus almost exclusively on commercial considerations. Naturally, corporates will seek maximum profitability and not sustainability or equitable access to water resources. It is important that “Blue Gold” (water) be guarded as a common property resource at all levels of government and no one should be given the right to appropriate it at other’s expense for profit.

Published in The Economic Times

How Shipping Industry Circumvents Regulations & High Operating Costs

The Indian Navy and Coast Guard rescued sailors from the cargo ship MV RAK Carrier that sank about 20 nautical miles away from South Mumbai. The incident came within five days of another oil tanker MT Pavit running aground near Juhu beach. Both are Panama-flagged vessels and the humanitarian rescue was carried out at Indian taxpayer’s cost. It is noteworthy that sometime ago the two ships that had collided near JNPT -- MSC Chitra and MV Khallija -- also happened to be Panama-flagged vessels. The Republic of Panama is the largest ship registry in the world, with more than 8,600 ships flying the Panamanian flag. This entire setup is a great business for the tiny Republic of Panama which makes millions of dollars every year from the fees it charges ship owners.

A ship is said to be flying a flag of convenience (FOC), if it is registered in a foreign country for the purposes of reducing operating costs or avoiding government regulations. Even 17% of Indian ships are registered under FOC. In many cases, the flag state cannot identify a ship owner; much less hold the owner civilly or criminally responsible for a ship’s actions. The country of registration determines the laws under which the ship is required to operate and that are to be applied in relevant admiralty cases. If major money laundering countries (such as Bermuda, British Virgin Islands and Cayman Islands) have been targeted by governments for insufficient regulations and poor enforcement, there is no reason why flag states (such as Panama, Liberia, Marshall Islands) should not be targeted on grounds of providing an environment to shipping companies for conducting criminal activities (illegal and unregulated fishing) and adverse effect on environment (oil spillage) through the conduit of global trade. Policymakers around the world should work to protect and enhance the conditions of international maritime industry and for the elimination of FOC system through the establishment of a regulatory framework for the shipping industry.

The modern practice of flagging ships in foreign countries began in the 1920s in the US when ship owners frustrated by increased regulations and rising labour costs began to register their ships in Panama. Today, more than half of the world’s merchant ships are registered using FOC, more commonly referred to as open registries. The top ten FOC counties have registered 55% of the world’s deadweight tonnage (DWT) including 61% of bulk carriers and 56% of oil tankers. Even, a country like Mongolia that is landlocked is offering open registries for ships. Around 74% of Japanese ships are flying a foreign flag and over 50% of the ships registered in Panama have a Japanese owner. It appears that the so-called self acquired diplomatic immunity is assumed by many of these FOCs. The open register offices are already issuing certificates, collecting payments and doing other documentation in India. Many of the people who have spent time at various levels in the regulatory and other government bodies have the ability of issuing equivalent certifications of all sorts on a pricelist.

Published in The Economic Times 

Creative Accounting May Help Miners Avoid Sharing of Profits

Commodity markets seem to periodically throw up controversies beyond the simple realm of price rise. A few months ago, it was the Central Vigilance Commission (CVC) chief ’s alleged involvement in palm oil tender and now the Karnataka chief minister’s alleged involvement in iron mining contracts. In the midst of commodity curse, reforms in several sectors continue.

The Mines and Minerals Development and Regulatory (MMDR) Bill 2010, which would be ready for ratification in the monsoon session of Parliament, would make it compulsory for all coal miners to share 26% of profits with affected communities. Companies operating in mineral sectors other than coal would have to share with the local population an amount equal to the yearly royalty payable by the mining companies to governments. Not all the details of the draft mining bill have been released.

A third of Indian coal mines cause pollution. No land taken for mining has been returned to state governments in the last 45 years and there is no systematic time-bound reclamation plan of mined out areas either. The MMDR Bill 2010 has several provisions for curbing illegal mining, including stricter penalties, debarring an entity found involved in illegal mining from future allocations, penal actions and trial of officials.

Mining is an extractive industry and differs in some ways from other types of enterprises. These differences occur in four main areas which affect accounting: Capital structure of mining enterprises, preproduction costs of a new venture, profit determination in final accounts and reports and royalty payment.

Big corporations always try to convince that high profits are good for everyone. The argument goes that the more they make, the more they will share. But as mining giants have shown, the more they make, the more they line the money to their own pockets. Creative accounting is part of corporate culture and this is likely to be extended to mining companies as well.

Creative accounting and earnings management are euphemisms referring to accounting practices that may follow the letter of the rules of standard accounting practices but certainly deviate from the spirit of those rules. The structure of the draft mining bill is wrong. Profits can be easily manipulated, especially by private players. The private sector often uses coal and iron ore to produce power or steel and it would be very easy for them to understate their mining profits through transfer pricing.

Should one could call it greed? Or dishonesty? With a crisis of confidence involving the fiscal probity of corporations, it might seem that things could get dirtier. To add to the chronicle of greed and dishonesty, there will be also matters of hypocrisy. The draft law proposes the profit sharing formula in a bid to smoothen land acquisition. The well-intentioned draft of MMDR is likely to get entrenched in the accounting and transfer pricing web in future.

Published in The Economic Times

Commodity Supply Chains Need Protection Against Terror Attacks

Terrorists in recent times have focussed their attention on soft targets. Site-specific vulnerabilities (such as airport) and person-specific vulnerabilities (such as political leaders) have drawn the attention of most terrorists. It is important to understand a few vulnerabilities in the commodity supply chain as well and take preemptive actions to mitigate them.

A particular concern is that of transport of food and energy products, whose vulnerability to terrorist attacks has the potential to disrupt a nation’s food supply and energy requirement. The impact of terrorism on commodity trade may vary across time and place. The threat of terrorism generally implies additional costs for transactions. An increase in transaction cost might affect the flow of commodity trade.

Certain foodstuffs and agricultural products such as grains provide greater possibilities for terrorist interference than others. Grains are generally stored in government warehouses which are protected by few security personnel. Warehouses and terminals ostensibly provide more visibility to terrorists. These locations are particularly vulnerable and security to these installations needs to be enhanced. Perhaps, it would be prudent to provide security cover through a more professional force such as CISF in India.

Also the enormousness of India’s agricultural system poses a significant challenge to protect against agro-terrorism or bioterrorism (the deliberate release of biological pathogens or other harmful agents). Observers and intelligence analysts consider the occurrence of agro-terrorism to be a “low probability - high consequence” event, largely because terrorists act against their primary targets (such as transport hubs) directly creating anxiety, fear and disruption. However, there is a growing concern that terrorists may utilise agroterrorism as other types of terrorist attacks are becoming more difficult due to increased controls.

In the energy sector, many of the tank farms of petroleum and petro-chemical products are adjacent to moderate to densely populated areas that could be impacted by a terrorist attack. Road tankers that queue near the delivery and dispatch terminals are vulnerable to attacks by even a lone terrorist. The detonation of a weapon in a sabotaged truck or firing from an elevated wooded terrain adjacent to the depot could cause fatal destructions. Though large oil depots are supposed to be well protected, the current surveillance systems are more intended to prevent vandalism and theft of goods rather than a high intensity terrorist attack. Personnel issues such as the selection of drivers represent a major security concern to all modes of transportation. To understand how food and petroleum product transporters deal with the hiring of drivers along with scrutiny is particularly important. A nationwide computerised network of the commodity transport drivers and programs to educate and train drivers could provide a quick and positive return on investment.

Cargo contamination and hijacking are two of the top concerns of carriers for several years, albeit for different root causes: accidental contamination and hijacking for theft purposes. In the wake of recent terrorist events, there has clearly been a heightened spectre of a terrorist attack on food storages and energy production sites.

A precautionary measure could be to work with the local anti-terrorist squads and local police to improve and create security policies, programs and facilities for commodity supply chains. On a more fundamental level, if poorer citizens can be assured that they have access to the resources needed to live, they are less likely to adopt combative ideologies that lead to terrorism.

Published in The Economic Times

Modern Storages Are a Must for Ensuring India’s Grain Security

Investment in storage infrastructure belonged traditionally to state agencies as investment of this type was viewed as economically unattractive and too complicated for the private sector.

In recent times, subsidies have been used as financial instruments to attract private investment into storage infrastructure by effectively de-risking the investment. It is a moot point that in spite of modern silos like the one put up at Moga, why others have not taken off.

The Centre has already announced a scheme for construction of godowns through private investors under a 7-10 year guarantee scheme.

Due to political and sometimes constitutional reasons, making outright privatisation of storage infrastructure is difficult and therefore concessions have been extremely popular.

A concession provides its holder the right to operate a service for a limited period of time (usually 20 years) at the end of which all the assets go back to the government. The concessionaire is responsible for all investments as well as other eventual targets specified in the contract in exchange for the right to the cashflow of the users’ payments. However, there is a growing disenchantment with concessions in particular.

Public investment in storage infrastructure has been declining as a proportion of both total government expenditures and GDP. Government agencies provide 61% (60 MT) of India’s total agri storage capacity which also includes a hired capacity of 23 MT. Dominant producers of food grain and related agriculture products are the major users of godowns and storage capacity. The cost of building silos to store a million tonne of food grains may be about Rs 600 crore considering that the required land is made available by state governments. State warehousing corporations under Government of India like FCI have already planned galvanised silo storage systems.

Replacing bags of jute with any other material will not solve the problem of wastage. If we are planning to store food grains in galvanised silos in bulk, we should also plan for the distribution system through bulk containers. This could be planned with the help and expertise of authorities connected with the Indian Railways.

Grain safety is as important as grain saving. Each region in India has evolved storage methods to preserve grains. In villages, we have grain gola (silos); made from wood or local material that protects the grain from moisture and rodents. In most cases, villagers use neem leaves or plantbased pest resistant methods to repel pests and fungus.

However, these silos-like structures are small and they are suitable for storing village produce for a year or two. These time-tested methods are being abandoned in recent times as they are replaced with concrete godowns, with support from central and state government under various schemes. Akin to many areas of government expenditure, government subsidy programmes are often at risk of corruption and fraud at the cost of taxpayer. The extent to which these two factors affect the subsidy policy is difficult to fully estimate because it is not commonly detected or reported to official sources. Precise figures are difficult to obtain and governments are also often unwilling to publicise occurrences of fraud and corruption out of fear of bad publicity or public concern at their lack of oversight.

 *all figures in the table are in million metric tonne

Published in The Economic Times