October 14 – Don’t Trust India’s Lentil Minimum Support Prices

India’s policies towards minimum support prices for its crops continue to be highly debated, creating even more questions for the coming election.

Current Sales Position:

We are 0% sold on both red AND green lentils for 2018/19 old crop.

We are 0% sold on both red AND green lentils for 2019/20 new crop.

Post Your Lentils

 

Good morning,

This week we start in India where pulse crop policies continue to create controversy, both domestically and elsewhere. A USDA attache report this week from New Delhi pointed out that the government’s intervention into pulse markets in the last 5 years has failed to do the 3 main things they were supposed to accomplish:

  1. Cover India’s growing supply-demand gap;
  2. Stabilize pulse prices; and
  3. Appease farmers, who represent the largest voting base in the country.

 

It’s important that India gets things right because everything they do tends to impact the other players in the pulse game. They are, after all, the largest consumer (27% of global demand), producer (25% of global production), and importer (14% of global imports) of pulses in the world. As a side note, India’s demand for pulses is expected to balloon to 39 MMT by 2050, up about 55% from today’s 25 MMT in demand.

As we mentioned last week, the MSP for Indian lentil prices for the rabi winter masur (lentils) crop has been increased by 5.3% year-over-year to 4,475 INR per quintal. For our North American readers, this equates to a price today of $604.52 USD / metric tonne (or 27.4¢ USD and 35.5¢ CAD per pound.

MSPs are expected to be priced at 1.5 times the cost of production, but the cost of production in India has gone up significantly. To calculate the MSP, the Indian government is using outdated prices for fertilizer, diesel, and other crop input values.

Why does this matter?

The Indian government has likely boxed themselves into a corner. Up until this year, the Indian government used to calculate MSPs by a large number of factors, including supply and demand, market price trends (both domestically and globally).

With the change of how MSPs are calculated now being at least 1.5 times production, there is now an economic conundrum.

On one hand, you could easily argue that crop input providers could charge, relatively-speaking, whatever they want, knowing the government is going to take that cost and multiply by 1.5 for the farmer.

Conversely, the Indian government now has an incentive to underestimate production costs to ensure farmers are making a minimum of a 50% ROI on the crops.

Maybe we should move to India and farm there? Guaranteed returns sound great!

It’s not all roses there as government procurement at these levels is always capped. Thus, while it is a benchmark for us to think about, it’s not the true price for lentils all day, every day.

Updated Expectations For India

As the Indian rabi planting campaign is about to start, there is certainly some political unrest between the government and farmers there. In addition to the way that the MSP is being calculated, farmers are also campaigning on things like:

  • Lower fuel and electricity costs’
  • A full waiver of all crop loans; and
  • Lifting a ban on using diesel vehicles older than 10 years old (i.e. tractors).

The government has about 5 months to figure out how to further appease their largest voting population: small, rural farmers. A federal election in India is likely in April 2019 and the government is hoping to incentivize farmers further this rabi growing season with these better MSPs. Further, they are optimistic in achieving a rabi pulse crop production target of 17.4 MMT.

This would be 1.5 MMT more than last year’s record 15.9 MMT pulse harvest for the rabi winter season.

The word from analysts and international traders suggests that last year’s record harvest only added to the gluttony of supply, and thus, actual market prices (not MSPs) are significantly depressed. Thus, there’s certainly the possibility that farmers might opt out of planting the same amount of pulses as last year (and definitely not more, like the government is hoping for).

While the country saw about 91% of the average monsoon rains, very good moisture was received in northern states like Madhya Pradesh and Uttar Pradesh (the two main provinces where the majority of the rabi pulse crops are grown).

Currently, the estimate for India’s kharif pulses production is 9.2 MMT, down slightly from last year’s kharif crop record of 9.3 MMT. If the 17.4 MMT of pulses production targeted for the rabi crop by the Indian government is realized, that would create a new production record of 26.7 MMT.

Ultimately, if pulse crop production in India stays about 25 MMT, then supplies will likely continue to be hefty, and thus the reliance on imports will continue to diminish.

Lentil Exports Not Bad But…

On that note, while we know lentil exports to India have certainly dragged, new markets in Africa, other parts of Asia, and even Mexico are starting to pop. While they’re not big 50,000 MT panamaxes getting shipped out, the business is welcome.

On that note, through Week 10 of the 2018/19 crop year, the Canadian Grain Commission says that there have been 105,700 MT of Canadian lentil exports.

This includes the 3,100 MT that was shipped out in Week 10, which was technically down nearly 78% from last week’s shipments and 79% worse than the same week in 2017/18.

Lentils Prices Dip Slightly

With the slower exports came lower lentil prices.

Large green lentils prices delivered to Saskatchewan elevators this week were sitting at 18¢ CAD per pound, down 2% week-over-week and down nearly 13% month-over-month. Compared to last year, lentils prices are down 55%.

Medium green lentils this week saw prices climb nearly 3% week-over-week to 17¢ CAD per pound. Medium green lentil prices are now up 8% month-over-month but down nearly 51% compared to last year.

Small green lentils saw prices of 16¢ CAD per pound, down 1.5% week-over-week. Compared to last year, this week’s prices are down 51%.

Red lentils are sitting at 15¢ CAD per pound, down 12% week-over-week and down slightly compared to the same time last month. Compared to last year, red lentil prices are down nearly 29%.

Any Bullish Headlines For Lentils?

Last week, the USDA came out with their updated production estimates in the October WASDE. There were no changes though from the September WASDE for lentils.

In that report, the USDA pegged American harvest lentils acreage at 758,000, down 29% year-over-year. However, with better yields, total U.S. lentil production jumped 17.5% year-over-year to 398,600 MT.

Overall, the market well-supplied, the market continues to look for a bullish demand headline. This could be a policy change in India, or potentially an improvement in the Turkish Lira. Without it though, we would expect prices to trend sideways going forward.

 

To growth,

Brennan Turner
CEO

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306-715-4540 (cell)

b.turner@farmlead.com

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FarmLead – North America’s Grain Marketplace

GrainCents

 

 

Oct. 7 – Higher Lentil Prices in India Means What?

Oct. 1 – Waiting on the Lentil Harvest

Sept. 23 – Green Lentils Prices See Slight Bump

Sept. 19 – StatsCan’s Satellites Update Lentil Yields to 22 Bushels

Sept. 16 – Australian, US Lentils Crop Surprise

About the Author
Brennan Turner

Brennan Turner is the CEO of FarmLead.com, North America’s Grain Marketplace. He holds a degree in economics from Yale University and spent time on Wall Street in commodity trade and analysis before starting FarmLead. In 2017, Brennan was named to Fast Company’s List of Most Creative People in Business and, in 2018, a Henry Crown Fellow. He is originally from Foam Lake, Saskatchewan where his family started farming the land nearly 100 years ago (and still do to this day!). Brennan's unique grain markets analysis can be found in everything from small-town print newspapers to large media outlets such as Bloomberg and Reuters.