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‘Need More Free Trade’
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As the cost of production goes up, so will the cost of doing business, says Siraj Chaudhry, chairman of food producing and marketing company, Cargill India. Excerpts from an interview with BW’s Chitra Narayanan:
How is the monsoon scenario going to affect industry?
It obviously has a bearing on commodities, food, inflation… The problem of irrigation and water deficit will have a direct bearing on industry. It won’t necessarily translate into a problem immediately, but it is a risk you live with for the next 12 months, because the government makes choices between supply for drinking water, agriculture and industry. Also, the current monsoon shortfall is creating a lot of uncertainty. Uncertainty is bad for trade and business.
What are your fears?
I don’t see scarcity of food being a problem. We have free import of edible oils and pulses. But affordability is a factor. Prices will go up. Everything is linked to imports.
That can be addressed by making more food available in the system — through imports and by improving food distribution. The locked up grain needs to get channelled into the distribution system. What creates a problem is non-availability. It creates a mindset that there is shortage.
The other concern is that a lot of noise gets made. Agriculture is a state subject so states take action. The reality is that what creates the most food inflation are fruits, vegetables, milk, meat, poultry — none of which is traded on the futures exchange, and none of which can be hoarded. Therefore, we still come up with 20th century responses to 21st century problems. The important thing, at least in the public domain, is to not create a crisis. What has made this monsoon deficit worse is that it has come at a bad time. Resources that should be going into bridging (financial) deficit, will go into dealing with this problem.
Then the global commodity scare is there. The economy has weakened our currency so the cost of imports is higher. This is a deficit monsoon we could have lived without. For us the worry is that the next step of food inflation is lower demand and lower consumption. Obviously the farmer starts spending a disproportionate amount on food, and curbs his other expenditure. All this creates uncertainty in the mind of a farmer as a consumer, and he starts saving more, which affects demand.
How can the food pricing issue be fixed?
The whole food price table has gone up globally. There are a few elements to this. One is that fuel is being produced from grain. There is financialisation of commodities, which means everyone is investing in commodities. A 100 million people have gone above the poverty line so consumption and demand have moved up. So the low-price cycle has finished. This is the
level at which prices will have to remain. What we should do is eliminate inefficiencies that create price discrepancies. This can be done through smooth flow of goods.
Changing weather is another factor, and not just in India. From February till now, some 100 million tonne of crop has been wiped out in the US, South America, India and Ukraine. This is, in a way, nature forcing nations to improve the free flow of commodities and reduce barriers.There has to be more free trade and movement of commodities.
What do you think will happen to edible oil prices?
Oil prices have already gone up. Our challenge is to keep prices in this range; a challenge, as we are moving from a slow-consumption season to a peak season (the festive season). The important thing would be to maintain availability. That is not a challenge as palm oil and various derivates are available in Malaysia and Indonesia, and they are building stock. The challenge is that if water availability is lower, then plants don’t run, and our input costs go up. Currency is anyway high. We would have to look at fine measures then. There are a lot of gaps in policy which, if addressed, could unknot the gap in availability.
What about efficiencies at your own end?
In the case of edible oil, 85-95 per cent of cost is raw material cost, and that is driven by the market. So the scope for innovation lies only in the remaining 10 per cent — packaging and marketing. We have opted for pouches instead of bottles to cut costs. But, how do you cut the variable cost of production — water, power, coal, etc.? My concern is how much my cost will go up. And that cost obviously gets passed on to the consumer. The cost of doing business goes up. So, as I said earlier, my biggest concern is inflation.
(This story was published in Businessworld Issue Dated 13-08-2012)