India, with the backing of China and other countries, has proposed that developing countries be allowed under WTO rules to stockpile food purchased from poor farmers at above market prices and classify those purchases as ‘green box’, minimally trade-distorting subsidies and unlimited in amount.  The U.S. and EU have argued that would undermine the WTO Agreement on Agriculture which classifies those purchases as trade distorting and in the ‘amber box’.  India has identified a policy problem, but has focused on the symptoms of the problem, not the causes.

India is currently harvesting a record large wheat crop for 2013/14 (April/March) marketing year estimated by the U.S. Agricultural Attaché in India at 95.2 million metric tons (MMT), up 0.3 percent from the Foreign Agricultural Service (FAS) of USDA estimate for 2012/13 at 94.9 MMT, also a record, and up 9.6 percent from a record 86.9 MMT in 2011/12.   This year is India’s sixth record crop in a row.  Since 2006/07 wheat production has gone from a three-year plateau of about 70.0 MMT per year to 95.2 MMT for 2013/14, a 36.0 percent increases in yearly output.

Since 2006/07 the government Minimum Purchase Price at the farm has escalated 93 percent to $252 per metric ton (MT) (about $7.00 per bushel) for the 2013/14 crop.  The government of India bought 28.3 MMT of the 2011/12 crop, 33 percent of production, 38 MMT of the 2012/13 crop, 41 percent of production, and a projected 40 MMT of the 2013/14 crop, 44 percent of production.  The government procurements have kept market price high – about $300 per MT.  Local millers and processors often buy from the government at preferential rates.  About 25 MMT of the wheat bought annually is used in government food assistance programs.

With the large government procurements, government wheat stocks on June 1, 2012 were estimated at a record 50.2 MMT and may be 56 MMT on June 1 of this year with projected procurements from this year’s crop.  The target government stocks level at the end of the marketing year (March 31) is 7 MMT, with 3 MMT of strategic reserves and 4 MMT as buffer stocks.  Government stocks at the end of the 2013/14 marketing year are expected to be more than three times that much at 24.0 MMT.  The Ag Attaché does not have a projection of privately held end-of-year stocks number, but they are thought to be small because of anti-hoarding laws.  The government has total food grain (wheat and rice) storage capacity of about 71 MMT, and on June 1 will have rice stocks of 34 MMT in addition to the wheat for a total of 90 MMT.  The government will need to find additional storage for 20 MMT before the monsoon season begins in late June/July.

The government banned wheat exports in February of 2007 when the wheat crop was averaging about 70 MMT per year.  The export ban was officially removed in September 2011, but exports were not significant because private supplies were limited and prices high until August 2012 when exports from government stocks were allowed.  Exports were 1.7 MMT in the FAS 2011/12 July/June marketing year and estimated at 8.5 MMT for 2012/13.

Tender prices in March were near the $300 per MT floor price the Indian government had set.  The government agreed that private traders could bid for 2012/13 wheat with a minimum price of $274 per MT plus 12.5% state taxes.  Private traders are already booking 2013/14 new crop wheat at under $300 per MT and prices are expected to move lower.    A lower floor price for government wheat would add to the subsidy costs for exported wheat.

If export prices fall near the Minimum Support Price of $252 per MT the government will face accusations from other wheat exporting countries of subsidizing exports.  When India first proposed the change in WTO policy the U.S. immediately raised the issue of food stockpiling in India enabling it to supply world markets with low-priced agricultural exports. For example, an Indian ban on rice exports caused government stockpiling of rice in the name of public stocks holding and led to India being the number one rice exporter at 10.3 MMT in the 2011/12 marketing year and the number two exporter in 2012/13 at 7.6 MMT.

India needs to make two critical reforms before coming to the WTO asking for rule changes.  First, it must undergo market reforms so most wheat is sold in the market by farmers to private merchants at market driven prices.  The government should not purchase 40 percent of the production at a politically set price and then use those supplies to drive the market.  Farmers should also receive some type of market signals that limit production before expected government held stocks far exceed storage space.  Private merchants should be encouraged to hold carryover stocks as a risk management program rather than fear the anti-hoarding officials.  The U.S. and EU spent decades trying all sorts of market interventions in the name of helping producers and consumers before learning that markets must play the dominant role in allocating production resources and final consumption.  India needs to learn from those experiences, not simply repeat them.

Second, the Indian government needs to reform the food assistance programs to help low income Indians that market interventions are supposed to achieve.  The principal outcome now is stocks accumulating to the point that government officials have no choice but to export some inventories.  Over a year ago in December 2011, the Indian Cabinet submitted a National Food Security Bill to the Parliament that proposed an entitlement to subsidized food grains for 62.5 percent of India’s population.  It may be a good bill or a bad one, but moving ahead with a new program would give WTO members a clearer look at what the longer-term plan for food assistance will be and how the WTO policy change would fit with it.  The U.S. Agricultural Attaché reported earlier this year that the some form of the bill will likely be taken up before the next Parliamentary election in May of 2014.

India should be applauded for the progress it has made in food production in the last ten years.  Much more work, including research on better seeds and improved farming practices, is needed.  Changes in those areas will be sub-optimal until government officials, both politicians and bureaucrats, recognize the limits of government management and the power of markets to direct economic activity, including food assistance to those citizens in greatest need of an adequate food supply.

Ross Korves is a Trade and Economic Policy Analyst with Truth About Trade & Technology (www.truthabouttrade.org). Follow us: @TruthAboutTrade on Twitter | Truth About Trade & Technology on Facebook.