Report No. 15677-IN India The Indian Oilseed Complex: Capturing Market Opportunities (In Two Volumes) Volume II: Annexes July 31, 1997 Rural Development Sector Unit South Asia Region LVo4um at me wor man ABBREVIATIONS & ACRONYMS CACP Commission on Agricultural Costs & Prices CSIR Council for Scientific Industrial Research CSS Centrally Sponsored Schemes CV Coefficient of Variation DOA Department of Agriculture DOC De-Oiled Cake DRC Domestic Resource Cost EC Act Essential Commodities Act FAQ Fair Average Quality FC(R) Forward Contracts (Regulation) FFA Free Fatty Acids FMC Forward Market Commission f.o.b. free on bord - fob GATT General Agreement on Trade & Tariffs GCA Gross Cultivated Area GDP Gross Domestic Product GOI Government of India 1HVOC Hindustan Vegetable Oils Corporation ICAR Indian Council of Agricultural Research IFPRI International Food Policy Research Institute IPO Integrated Policy for Oilseeds and Edible Oils ITC Indian Tobacco Company MIO Market Intervention Operation MOA Ministry of Agriculture NABARD National Bank for Agriculture and Rural Development NAFED National Agricultural Cooperative Marketing Federation NCA Net Cultivated Area NDDB National Dairy Development Board NODP National Oilseeds Development Program NPC Nominal Protection Coefficient OGCP Oilseed Growers Cooperative Project OPP Oilseeds Production Program OPTP Oilseeds Production Thrust Program PDS Public Distribution System RBD Refined, Bleached, De-odorized RBI Reserve Bank of India SSI Small Scale Industry STC State Trading Corporation STE State Trading Enterprise TMO Technology Mission of Oilseeds TRIP Trade Related Intellectual Property UNCTAD United Nations Conference on Trade and Development URA Uruguay Round Agreement WTO World Trade Organization INDIA THE INDIAN OILSEED COMPLEX: CAPTURING MARKET OPPORTUNITIES Volume II Table of Contents Annex 1. The Policy Environment A. Genesis of an Import Substitution, Infant Industry Strategy B. External Trade Policies C. Central Government Programs to Support Rapid Technological Change D. Domestic Price & Trade Policies Price Support & Stabilization Policies Public Distribution of Edible Oils Industrial and Domestic Trade Regulatory Policies Credit Policies Taxation Policies Forward Trading Policies Health Safety & Standards Regulations Annex 2. Production & Consumption: Recent Performance & Prospects A. Production of Oilseeds Recent Production Trends and Performance India's Comparative Advantage in Oilseed Production Oilseed Production Has Become Much More Stable B. Demand Patterns: Recent Trends & Future Prospects Vegetable Oil Consumption Trends & Patterns Demand and Supply Balance Prospects in Edible Oils Demand Patterns for Oil Cakes & Meals Future Demand Prospects for Oilseed Meals Annex 3. Marketing Structure & Organization of the Oilseed Complex A. Marketing of Oilseeds B. The Oil Processing Industry Structure of the Vegetable Oil Processing Industry Marketing of Vegetable Oils Marketing of Oilseed Meals Oil Cake Exports C. Storage of Oilseeds and Oilseed Products D. Domestic Transportation and Shipping Domestic Transportation and Handling Handling and Shipping of DOC Exports Handling and Transport of Edible Oil Imports Annex 4. Marketing Performance: Assessment & Key Determinants A. Physical Exchange: Performance and Key Determinants Principles of Commodity Trading Measuring Market Performance in the Exchange of Commodities over Space Measuring Market Performance in the Exchange of Commodities over Time Constraints to Efficient Commodity Allocation over Apace and Time B. Quality Standards and Market Information: Performance and Key Determinants Market Information C. Performance of the Market in Exchanging Risks Principles of Crushing Margin Hedging Indian Oilseed Crushing Industry Competition and Marketing Performance Annex 5. Technical & Economic Performance in Oilseed Processing A. Technical Competitiveness Indicators & Sources of Data A Bird's Eye View Soybean Expanders and Solvent Extraction Soft Seed Expellers Solvent Extraction Mustardseed and Groundnut Expellers The Economic & Technical Consequences of Small Scale Industry Reservation Oil Refining Key Conclusions B. Costs Comparisons Field Costs Factory Cost C. International Comparisons of Extraction Rates & Crushing Margins Extraction Rates Gross Crushing Margins - International Comparisons D. Nominal & Effective Protection in the Oilseed Complex Methodological Note E. Efficiency Gains from Improved Marketing & Processing Performance Improvement Scenarios Results Annex 6. The Oilseed Complex & the GATT A. Implications of GATT on Trade of Agricultural Products B. Implication of the GATT on Oilseed Trade India's Current Tariff Levels and GATT Commitments State-Trading Enterprises and the GATT Domestic Support Measures for the Oilseed Sector Export Subsidies Trade Restrictions for Balance of Payments Provisions Safeguards Measures C. Trade Regime, UR Trade Rules and Management of World Price Risks How Volatile Have Oilseed and Edible Oil Prices Been? India's UR Commitments and Management of Price Risks Impact of Selected Tariff Based Price Stabilization Mechanisms Tariff Variability under Different Scenarios Price Variability under the Different Scenarios D. Impact of the Uruguay Round Agreement on World Oilseed & Vegetable Oil Markets GATT Impact on Oilseed Prices GATT Impact on Trade Evaluation of "Large Country Effects" Annex 1 Page 1 of 20 Annex 1 The Policy Environment A. Genesis of an Import Substitution, Infant Industry Strategy AL.I Starting in the mid-70s, major imbalances were unfolding in the Indian oilseed complex. The growth in demand for edible oils was out-pacing domestic supply, imports were rising rapidly and foreign exchange costs escalating (Figure AlI., Table AL.1). While annual oilseed production growth was stagnating (1% per annum between 1968 and 1981), domestic demand for edible oils was accelerating, reaching almost 16% growth per annum between 1965 and 1975. By 1979-80, edible oil imports accounted for 32% of total domestic supply (Figure A1.L). Projections made by the World Bank in 1981 estimated that "by 1990, filling the gap through imports would mean spending between US$ 3-4 billion (6-8% of total imports) and absorbing between 8-10% of total projected world exports of vegetable oils."' A1.2 This widening gap FigureA1.1 between supply and Domestic Production and Imports of Edible Oils for Human Consumption in demand becamne a major India, 1971-72 to 1993-94, million mt policy concern. Increasing million mt amounts of scarce foreign exchange had to be 5 diverted to satisfy domestic 4 krport demand. By the early 3- 1980s, the cost of edible oil imports amounted to over 21D $650 million, nearly half of ~ total food imports, and 4 to o 5% of the value of total - * c co co 0 °) 0 merchandise imports s co co OD c c CD aZ (Table AL.1). Furthermore, _ _ CD _ _ _ _ _ the increasing reliance on E0Prodn o hports imports was considered | undesirable from a food Source: A. Gulati, A. Sharma and D. Kohli, "Self-Sufficiencyand Allocative security and price stability Efficiency: The Case of Oilseeds in India," draft mimeo, January 1996. perspective. World Bank, 1981, "India: Demand and Supply Prospects for Agriculture," Staff Working Paper, No. 500. Annex 1 Page 2 of 20 A 1.3 Following the success of Table Al.l the green revolution in wheat and Edible Oil Imports in Value and Percent of Food and Total Imports rice, GOI shifted its policy Ara Yalue of -EdiblePiOit lue ove attention to the oilseed sector in Years . Edible fi iimports, tFood Import r imports the early 80s. GOI's main i980/81-1982/83 $rillion __49.7%_^_4.6 1980/1-192/83655 49.7% 4.6% objective was to achieve self- 1983/84-1985/86 693 47.4% 3.6% sufficiency and food security in 1986/87 1988/89 564 47.2% 1.30% the edible oil sector. The import- 1990/91-1992/93 113 19.4% 0.2% substitution strategy consisted of 1993/94 53 9.6% 0.2% promoting technological change Source: Economic Survey, various issues. in oilseed production and processing, while shielding the sector from international price competition and instability. Policies governing the oilseed complex gradually evolved from a narrow focus on production and processing technology under highly protective trade barriers (1979-80 to 1985-86), to a more comprehensive coverage of marketing and price policy considerations (1985-86 to 1993-94). Increasingly, the management of price incentives in terms of levels and stability was recognized as a major impediment to the rapid and sustained technological progress in oilseed production and processing. A1.4 Reforms implemented since 1994 have radically transformed the policy landscape of the Indian oilseed complex. Major vegetable oils can now be freely imported under modest tariffs (20%) exposing for the first time the oilseed complex to foreign competition and international price volatility. Market Intervention Operations (MIO) to stabilize domestic prices have been disbanded and domestic controls on movement of seeds and oils are progressively and selectively being relaxed by some state governments. Al1.5 The remainder of this chapter briefly describes the policy instruments governing the oilseed complex in India, and their evolution over time. The various policy instruments, and their evolution over time, are summarized in Table A1.2. In Section Two, we review external trade policies. Section Three summarizes the government programs to support technological change in oilseed production and processing. Section Four reviews domestic price and trade policies, including: price support and stabilization, food distribution, credit and taxation policies, and the legal and regulatory environment governing movement, storage, forward and futures trading practices, and the processing of oilseed commodities. B. External Trade Policies Al.6 A Virtually Closed Trade Regime Prior to 1994. Until 1994, India protected its oilseed complex by quantitative restrictions on both imports and exports (Table Al.3). In a situation of excess domestic demand for edible oils, non-tariff barriers played a crucial role in setting the domestic price level in the oilseed complex. Specifically, all edible oilseed, oil and meal imports were canalized through the State Trading Corporation (STC) and the Hindustan Vegetable Oils Corporation (HVOC). HVOC's main occupation remained limited to the packaging of oils (mainly palm olein) imported by STC. All vegetable oil imports were then Annex 1 Page 3 of 20 channeled to state governments for sale in the Public Distribution System (PDS) at administrative prices. Table A1.2 Government Interventions in the Oilseed Complex, April 1997 PolicJes Status Remwrks Implemendng Agency Trade Policies * Import: Seeds Canalized Soybean special program in 95 Min Commerce - STC Oils Free Tariff: 20% Min Commerce Meals Restricted - Min Commerce * Export :Seeds Restricted Free: Groundnut HPS; rapeseed & sunflower Min Commerce in 1995 Oils Restricted - Min Commerce Meals Free - Min Commerce Price Policies * Price Support Yes Price support well below market prices NAFED * Stabilization No MIO under IPO disbanded in 1994 MIO -NDDB * PDS Yes Since IPO (1989), small vol & price Min of Food & C.A. - differential Empowered Committee * Storage Lifted Cooperatives exempted; lifted in 1997 Min of Food & C. A. * Movement Yes Periodic; Cooperatives exempted State govemments * Working Capital Lifted Lifted in October 96; Cooperatives RBI exempted . Forward Trading Ban Permitted up to 11 days Min Food & C.A. - FMC - Futures Trading Ban Allowed for castorseed Min Food & C.A. - FMC Agro-Processins Policies * Small Scale Reservation Yes Expelling of rapeseed-mustardseed and MinIndustry groundnut, crushing equipment. Investment ceiling raised to Rs. 30 million in 1996. Cooperatives exempted * Vanaspati Industry No Price & movement controls lifted in 1989 Min Food & C.A. Food & Health Safety - Veg. Oil Products Order, 1947 Yes Used to control vanaspafi industry Min Food & C.A. * PFA Act, 1954 Yes 1992: blending of 2 oils allowed Min Health * S.E. Oil Order, 1967 Yes 1991: Licensing req. removed Min Food & C.A. • Pack'd Commodities Order, 1971 Yes 15kg tins exempted Min Food & C.A. i Blended Edible Veg. Oils Min Food & C.A. * Grad'g & Mark'g Order, 1991 Yes Define grade, marking, packaging Min Rural Development * Weights & Measures Act Yes 1992: volumetric packaging of edible oils Min Food & C.A. allowed Technology Programs Crop Research & Development Yes Under TMO, mini-mission I ICAR - DOR Crop Technology Dissemination Yes CSS; since 85/86: NODP, OPTP, OPP MOA - DOA Cooperatives Yes OGCP since 1979/80 NDDB Processing Technology Yes Under TMO, mini-mission 11 CSIR Note: PFA Act: Prevention of Food Adulteration Act; S.E. Oil Order: Solvent Extracted Oil, Deoiled Meal and Edible Flour (Control) Order. Min Food & C.A.: Ministry of Food and Consumer Affairs 2 An issue price is fixed by the Central Ministry of Food & civil Supplies, at which canalized imports are sold by STC to State governments for distribution in the PDS. In 1988/89, canalized imports were subjected to customs duty (65% for palm oil, 45% for soybean and rapeseed oils) and STC's service charges (22% of CIF price). Actual distribution of the edible oils through the fair price shops is the responsibility of the State governments, under maximum retail prices recommendations issued by the central government. Annex I Page 4 of 20 Table A1.3 Major Agricultural Products: Import Tariffs and Trade Policy Status, November 1996 Existing TariffB Uruguay Quantitutive-ictions omC odityApi 1995, Round Bmnding (%) (%) ~~~~Exports*uot Oilseeds 40/50 100 Mostly restricted Canalsed Oil cakes, meals, & flours 50 150 Free Restricted Soya, rapeseed, mustardseed, olive, & colza oils 20 45 Mostly restricted Free Other edible oils, incl. coconut & palm oils 20 300 Mostly restricted Canalised Notes: "Mostly restricted" means that most products or product varieties in the category are free of licensing or other non-tariff controls. "Canalised" indicates a parastatal trading monopoly; i.e., that only a designated state agency is allowed to import export. Source: Indian Trade Policies since the 1991/92 Reforms. Garry Pursell & Anil Sharma, Mimeo, World Bank, February 1996. A1.7 Until 1995, exports of all edible oilseeds and oils were banned, while that of oilseed cakes were permitted, but subjected to export licensing, registration requirements and other controls. In fact, exports of oilseed cakes, the production of which exceeds domestic demand, were promoted by a variety of export incentive schemes3 established by GOI throughout the 80s and early 90s in an effort to generate foreign exchange. Al.8 Protection Levels Were High and Directed at the Oilseed Processing Industry, Not at the Farm Level. In practice, only vegetable oils were imported by the STC; seeds were never imported. Until 1994, domestic vegetable oil prices were not linked to international price levels. The quantitative restrictions on the volume of canalized vegetable oil imports and their PDS price, both set by the Central Food & Civil Supplies Ministry, determined the domestic price level of vegetable oils. The volume of canalized imports was set administratively to meet some specified target for domestic demand. As a result, domestic prices of most vegetable oils were maintained at levels more than double world market prices throughout the 80s (Table Table A1.4: Nominal Protection Coefficients A 1.4). in the Oilseed Complex (Importable Hypothesis) Al.9 In contrast, domestic I9868 1 /90 194 oilseed production was much Groundnut 1.20 1.41 0.88 Rapeseed/ 1.06 1.44 1.19 less protected. In the absence Mustardseed of rice oilseed imports, Soybean 0.89 0.96 0.89 oilseeds derive their Sunflower 1.25 1.27 1.13 oilseeds derive their ~Groundnut Oil 1.87 1.88 1.34 protection level from that Mustard seed Oil 2.41 (a) 2.60 1.88 granted to the Indian oilseed Soybean Oil 2.50 1.96 Sunflower Oil 2.47 1.96 (b) crushing industry through Coconut Oil 2.97 3.07 2.36 canalized imports or tariffs I I_I_I on edible oils. Oilseed export Source: Oils - Self-Sufficiency and Allocative Efficiency, Case of Oilseeds in Inda, A. Gulati, A. Sharma & D.S. Kolki, January 1996. Oilseeds - Trade restrictions further provide Policies and Incentives in lndian Agriculture. Background Statistics and additional protection to the Protection and Incentive Indicators, G. Pursell & A. Gupta, mimeo, World Bank. local processing industry Note:: NPC estimates are adapted and differ from the above sources as a result from exe c. of different assumption regarding the reference point (see Annex 5). 3Fom external compeatsion. 3For exarnple, a 10% cash subsidy export incentive program which was discontinued in 1991. Annex 1 Page 5 of 20 The less efficient the domestic oilseed processing industry, the less oilseed growers would receive for given domestic oil and oilseed meal price levels. In practice, export restrictions were largely irrelevant until the early 90s since domestic prices remained above world prices for all oilseeds except soybean (Table Al .4). A1.10 Consumers Bear the Brunt of the Import-Substitution Strategy. Consumers had to bear most of the costs from the high protection level to the oilseed commodity system which reached its highest level in 1986/87 (see Figure A1.2 oils NPCs in Table AA.4). In addition, Wholesale Price Indexes for Edible Oils and All Food consumer edible oil prices rose much - Commodities, 1970-71 Base Year. faster than general food prices between 800 WPI 1986/87 and 1990/91 (Figure A1.2). 700 This rapid increase was provoked first 600 by poor harvests, then by a deliberate 600 and sharp drop in the volume of edible 500 oil imports (Figure Al.I) under the 400 Integrated Policy on Edible Oilseeds and l300 Oils (para Al.23) and scarce foreign 200 exchange situation. Since 1986/87, 100 Indian oil prices have declined sharply 0 l l and consistently relative to world price > t - ) M i r a) - X LO levels as a result of rapid production o Go co co Co 0 cnN ) increases and the Rupee devaluation. . . . . | Edible Oil - All Food A 1.11 Dramatic and Rapid l___ l Liberalization of Vegetable oil Source: GOI, Ministry of Finance, Economic Survey, various issues. Imports Since 1994. The recent global endorsement of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT),4 the economic liberalization program, and inflationary pressures prompted GOI to reduce most import restrictions on vegetable oils. In March 1994, palm olein oils --by far the largest-- were permitted to be imported under Open General License (OGL) with a duty rate of 65 percent (Table A1.3). At the same time, STC and the National Dairy Development Board (NDDB) were allowed to import vegetable oils at the concessional rate of 20 percent. On March 1, 1995, all vegetable oils -- except for coconut oil, RBD palm oil and palm stearin which remain canalized-- were placed under OGL at import tariff rates of 30 percent; STC and NDDB continue to benefit from the 20% concessional tariff rate. In 1996, the new budget announced a further cut in import tariff to 20%, ending the preferential treatment to STC & NDDB. A1.12 Vegetable Oil Imports Resume Despite High World Prices. During marketing year 1994/95 (October to September), total vegetable oil imports was expected to reach as much as 500,000 mt --about 8% of domestic consumption-- with palm olein accounting for 380,000 mt.5 STC is reported to have imported around 90,000 mt of vegetable oils --all palm olein-- and the NDDB has imported 80,000 mt of oils --30,000 mt of soybean oil, 10,000 mt of sunflower seed oil, 10,000 mt of cottonseed oil, and 30,000 of palm olein. Due to high international prices, and 4See Annex 6 for a more detailed description of India's commitments to the Uruguay Round Agreement. s Source: Oilseeds and Products Annual Report, 1995, USDA/FAS. Annex I Page 6 of 20 tariff differentials, the private sector delayed its purchase decisions. Private trading companies are estimated to have contracted between 100,000 and 150,000 mt of oils, mostly palm olein. The competition from imports further contributed to bringing domestic oil prices in line with the 65% import tariffs by 1994/95, except for groundnut oil whose price fell even below. The combination of higher domestic production, Rupee devaluation, and free imports contributed significantly to the remarkable drop in the protection level of edible oils, to the great benefit of Indian consumers. A1.13 Soybean Imports Allowed Temporarily in 1995. In February 1995, GOI allowed, on a temporary basis, the duty-free imports of soybean by private crushers subject to meal re-export conditions; all other oilseed imports remain canalized by the STC and HVOC. This policy change was in response to industry concerns that capacity utilization and meal exports would decline following the poor 1994 soybean harvest. In response to this policy, about 30,000 mt of soybeans have been imported so far, against import licenses for approximately 970,000 mt.6 Bureaucratic delays, high world soybean prices, and onerous phytosanitary requirements --a 45 day grow-out period imposed by the Ministry of Agriculture-- have limited actual imports under this program. Al.14 Exports of Sunflower and Rapeseed-Mustardseed Seeds Allowed in 1995. In May 1995, quota restrictions on exports of sunflower seeds and rapeseed-mustardseed were lifted, but have been maintained for other oilseeds. Exports of vegetable oils, except groundnut oil, remain restricted to consumer packs of up to 5 kg; in practice, no significant exports take place due to high prices of Indian oils and the limited foreign market opportunities for packaged oil. Exports of oil meals were already allowed, and the remaining registration requirements were abolished in May 1995. Exceptions include niger seed which are canalized through three state agencies, and exports of de-oiled groundnut cakes containing more than 1% of oil. Al.15 India's GATT Commitments for Oilseeds, Meals and Edible Oils. The current trade regime for oilseeds, oils and meals is consistent with India's commitments to the Uruguay Round of the GATT. India has committed to tariffy its non-tariff barriers7 and to adhere to the tariff ceiling bindings it has submitted. India's ceiling bindings for edible oils and oilseeds are high --ranging from 45 to 150 percent-- and far above current tariff levels (Table Al.3). This leaves India with the option to raise its tariffs up to the ceiling bindings at any time. India also retained the right to register the STC and HVOC as state trading enterprises, giving GOI the option to re-introduce the import canalization of all edible oilseeds and oils at any time. If canalized imports are re-introduced, there is no GATT-related constraint on the extent to which domestic prices can rise above world prices. The URA also does not prohibit the existence of concessional tariffs to some importers. C. Central Government Programs to Support Rapid Technological Change A1.16 Oilseed Growers' Cooperative Project Launched to Modernize Marketing & Processing, 1979/80 - 1996. Progress made by NDDB in increasing domestic milk output under Operation Flood encouraged GOI to duplicate that approach to increasing oilseed production. It 6 Source: same as footnote 5. 7See Annex 6 for a detailed discussion of the implications of the GATT for Indian Agriculture. Annex 1 Page 7 of 20 resulted in the NDDB managed Oilseed Grower's Cooperative Project (OGCP) launched in 1979-80. Following the principle of Operation Flood, a network of oilseed growers' cooperatives was to be established to provide a market outlet for farmers' output and serve as a medium for delivering farm inputs and support services, such as credit, improved seeds, fertilizer and extension. Proceeds from the sale of edible oil donated by the Cooperative League of the United States and the Cooperative Union of Canada financed the investment costs of cooperative infrastructure. A1.17 In addition to the above efforts, the OGCP also aimed at modernizing the oilseed marketing channel and processing industry. Presently covering the nine major oilseed producing states,8 the project helped establish 5,513 oilseed grower's societies with about 1 million members, affiliated with 18 unions. By 1994-95, an oil crushing capacity of 3,310 mt per day, a solvent extraction capacity of 1,980 mt per day, and refining capacity of 733 mt per day have been established under cooperative management under the OGCP. Cooperative storage capacity under the project reached 170,000 mt for oilseeds and 277,000 mt for oil during the same period. According to NDDB, it was felt that, through 1986-87, the OGCP was successful in influencing market prices, farmers' investments in technology and in creating the first modern processing capacities in India. However, it did not contribute to a stable market and failed to sustain a high level of farmer loyalty to the cooperatives. A1.18 National Oilseed Development Project, 1984-85. The modemization Centtal Table A l S effort of the OGCP was hampered by the Centrally Sponsored Plan Schemes for Oilseeds absence of a coherent strategy for (Rs. Million at current prices) developing and diffusing appropriate Cetral Sector CSSTtl technology at the farrn level. To remedy a 1985-86 a2.50 322.31 324.81 this situation, the National Oilseeds 1986-87a °°° 1 14044 Development Project (NODP), initiated in 1987-88 a 0.00 326.85 326.85 1984-85 and launched in 1985-86, 1988-89 a 0.00 512.71 512.71 consolidated and re-oriented the 1989-90 a 0.16 490.66 490.82 numerous and scattered centrally- 1990-91 a 4.21 546.58 550.79 sponsored schemes for oilseed 1991-92 a 235.25 582.41 817.66 development under a single scheme. The 1992-93 157.18 729.30 886.48 NODP and its successors are Centrally 1993-94 a 203.07 946.52 1149.59 Sponsored Schemes (CSS) financed 1994-95 310.31 1004.00 1314.31 predominantly (75%) by the Ministry of 1995-96 406.00 1040.00 1446.00 ArclueMO ofteGIan Note: a - actual expenditures; re - estimated. Agriculture (MOA) of the GOI, and Source: Central Government Budget Documents implemented by the state governments' Departments of Agriculture (DOA) under strict central guidelines (Table Al.5). Under the NODP, the four major oilseeds --groundnut, rapeseed-mustardseed, soybean, and sunflower-- were given priority in potential areas in 12 states. Another component of the NODP, the IODP was targeted at sesame, niger seed and safflower in areas not covered by special projects of the four major oilseeds referred to above. The NODP was later extended to 180 districts in 17 oilseed growing states. The two main objectives of the NODP --and its successors-- were to: (i) ameliorate oilseed crop technology by developing improved cropping practices, and improved or sThe states include: Andhra Pradesh, Gujarat, Kamnataka, Maharashtra, Madhya Pradesh, Orissa, Rajasthan, Tamil Nadu, and Uttar Pradesh (National Dairy Development Board, 28th Annual Report, 1993-94). Annex I Page 8 of 20 hybrid seed varieties with higher yields, shorter crop duration, better tolerance to drought, pests and diseases, adaptable to a greater variety of agro-climatic situations; and (ii) accelerate the diffusion of the new crop technology ainong farmers by subsidizing packages of inputs (mini- kits which included improved seeds varieties, rhizobium cultures, fertilizers, plant protection chemicals, and irrigation equipment) along with providing extension activities. Al.19 Technology Mission on Oilseeds, 1986. The Technology Mission on Oilseeds (TMO) launched in 1986, and established in the Ministry of Agriculture, represented a decisive step by GOI towards the consolidation of government programs designed to support rapid technological change in oilseed production and agro-processing. It was also the first attempt at addressing domestic price volatility with the introduction of producer price support operations. To achieve its stated self-sufficiency objective in edible oils by 1990, GOI initiated four mini-missions (Table Al.6). The first mini-mission focused on the coordination and acceleration of varietal and agronomic research on oilseed crops, with the Directorate of Oilseed Research, Hyderabad as the nodal agency. The second mini-mission centered on technological improvements in oilseed processing, with the Council for Scientific and Industrial Research as the nodal agency, and the promotion of both cooperative and private sector involvement in oilseed processing activities. The third mini-mission sought to improve the delivery of inputs and support services, particularly extension services for improved production technologies, to farmers. The fourth mini-mission focused on oilseed market development and price support operations. The National Agricultural Marketing Federation (NAFED) was given the implementation responsibility of the price support operations. A1.20 As part of Mini-Mission III, a three-year CSS scheme called the Oilseed Production Thrust Project (OPTP) was initiated in 1987-88 covering 246 districts in 17 states. In 1990-91, the NODP and OPTP were eventually merged under a single program called the Oilseed Production Program (OPP). In 1992/93, the OPP covered 324 oilseed-growing districts spread over 21 states. Table A1.6 Technology Mission on Oilseeds, 1986 Mii-Mlisiont I C,, 'Mini-MissionX aI P i'&' iI0 Mhuii aist:u°.=l Cra Proution Tectnlogy. Post Hrvest, Technolg mpr6' Iu a pt Developmen"t ~ '~~DeveloPMetSrieDleyDeeomn ,,ev.el laiptoved varieties nmpro' edvSe .- e :.;i - - flic; e cy of . g:g;:: . S*engthen eSensio -syte. Cre..e .a ...... wit hghe ieds hghr ilprcesig hrug te s-ofStealie producion nd poWMW .l.g.Jilte iAnth cOfttent. .hre goig moe.negae ds.bt.no.e.scoprtv sco. .durai.:troe-'isWe:.::lhoa,' improved resistance'Jyd technologies............................-:--'-''-:g::::. an imrvn Str.. eamlie supl an,d - nr0eff o 'f t-.disease, pest and mois ,Uf,ture.0tp: e:-ffiacincy' of ghans and .oil:0.: ::d'.istributn of uts p at.t-.. . . . 1tress expeller units inii private and rove esedit delivery hupro'rc price eD nati, o Imleenig.eny: ad nnetnatioalOi- taes Dpatsen Modernizemaretn ,revc res processin Annex I Page 9 of 20 D. Domestic Price & Trade Policies Al.21 Domestic policies governing the oilseed commodity system cover a wide range of instruments, including price support and stabilization, food distribution, industrial and trade regulatory, taxation, and forward and futures trade policies. Price Support & Stabilization Policies A1.22 Except for a Short Spell under the MIO (1989-1994), Price Support and Stabilization Policies Have Been Largely Non-Existent. The Agricultural Prices Commission and later the Commission for Agricultural Costs and Prices (CACP) have announced support prices for major oilseeds since the early seventies. The National Agricultural (Cooperative) Marketing Federation (NAFED) was designated as the nodal agency for undertaking price support operations for five years starting in 1985-86 under the TMO. Price support operations covered six major oilseeds --groundnut, rapeseed-mustardseed, soybean, sunflower, and safflower-- on the basis of the support price recommendations issued by the Commission on Agricultural Costs and Prices (CACP). However, these announcements did not have any direct impact, since market prices were always higher than the announced support prices. A1.23 The Integrated Policy for Oilseeds, 1989-1994. The volatility of domestic prices in the oilseed complex, and the management of oil imports under increasingly scarce foreign exchange conditions, prompted GOI to adopt an Integrated Policy on Oilseeds and Edible Oils (IPO) in January 1989. The IPO completed the coverage of GOI interventions in the oilseed complex. It was perceived that while developmental activities pertaining to oilseed crop and processing technology were well integrated under the TMO, the commercial operations in the oilseed complex remained un-coordinated. The fast deteriorating foreign exchange situation also demanded a coordinated approach to the management of imports and distribution of edible oils. The IPO recognized the need for an improved management of price incentives in terms of both level and stability. It did so by: * Introducing Market Intervention Operation (MIO); * Reducing the differential between the open market price and the Public Distribution System (PDS) price of edible oils, and sharply curtailing the volume of oil imports; * Transferring the administrative control of the TMO to the Empowered Committee on Oilseed Policy, chaired by Cabinet Secretary. A1.24 Market Intervention Operations, 1989-1994. The MIO, implemented by NDDB from April 1989 to April 1994, was the first major attempt of the GOI to directly stabilize oilseed and edible oil prices within a pre-determined price band. The price band policy sought to fix the procurement prices of groundnut and rapeseed-mustardseed "at least 40% above the present levels recommended by the CACP".9 The NDDB was to achieve this by means of buffer 9 Shenoi, P.V. (1989); Oilseeds Situation in India, Department of Agricultural Research and Education, Ministry of Agriculture, Government of India, New Delhi. Annex I Page 10 of 20 stocking operations of seeds and edible oils from both domestic and imports sources "when the prices of groundnut and rapeseed-mustardseed went outside their prescribed price bands."10 A1.25 The Empowered Committee on Oilseed Policy set the wholesale price bands for groundnut oil and rapeseed-mustardseed oil in 1989-90, and for groundnut oil in 1990-91.11 In the subsequent years, no price bands were set by the Empowered Committee. Instead, the NDDB aimed at stabilizing wholesale groundnut and rapeseed-mustardseed oil prices within a 30% and 45% price band, respectively. Groundnut oil prices in Bombay and rapeseed- mustardseed oil prices in Delhi were used as indicators for judging the performance of the MIO. To maintain the price band, NDDB bought, stocked and sold oilseeds, groundnut and mustardseed-rapeseed oils for achieving the intended stabilization. A1.26 The NDDB was allocated an initial market intervention fund of Rs. 3 million to operate the MIO. A special line of credit at concessional rates from the Reserve Bank of India and NABARD was provided to finance the MIO. NDDB also relied on canalized imports at pre- determined prices to maintain the ceiling price during the lean months and offset possible losses on account of the MIO. Al.27 NDDB also created the National Oil Grid and its own edible oil brand, Dhara, to assist in achieving the MIO objectives. Modem oil tank farms with a capacity of 40,000 mt at Kandla and 100,000 mt in Delhi were set up, in addition to storage facilities in both producing and consuming centers to backstop the oil grid. NDDB marketed its own brand of edible oil, Dhara, through a network covering 24 states and three Union Territories. Dhara sales reached a peak of about 132,000 mt in 1992, but the volumes have almost halved since the closure of MIO in 1994. A1.28 NDDB's MIO Ended In 1994 in Considerable Operating Losses and Controversy. During the period 1991-93, NDDB reported accumulated losses of about Rs. 2.72 billion.'2 The Empowered Committee on Oilseed Policy directed NDDB to cease its procurement operation in June 1993 and to liquidate its existing stocks by March 1995. Government funding of MIO ended in April 1994. Two successive committees appointed by GOI reviewed the workings of the MIO. No decisions arose out of the first committee appointed in 1990 by the Deputy Prime Minister. In 1993, a second committee was appointed under the chairmanship of P.V. Desai. Its mission was to look into the differences between NDDB and GOI about the magnitude of the operating losses under the MIO and the admissibility of NDDB's claim for reimbursement, notably under its Dhara operations. An agreement on compensation was eventually reached between GOI and NDDB. In 1994, GOI announced that NDDB would be allowed to import 150,000 tons of edible oils at a concessional tariff rate of 30%. 10 Ninan, K.N. (1995); "Oilseeds Development & Policy: A Review," Economic & Political Weekly, pp. A.14- A.20, March 25, 1995. Meeting with NDDB; May 1995. For 1989-90, the wholesale price bands for groundnut and rapeseed-mustard seed oils were set at Rs. 17,000 - 23,000 per mt, respectively; and in 1990-91 at for groundnut oil. NDDB procured rapeseed-mustard seed seeds at Rs 5,800 per mt in 1989-90. See also P.V. Shenoi, "Oilseed Development: Role of Market Intervention and Policy Support," National Seminar on Oilseeds Research and Development in India: Status and Strategies, Indian Council of Agricultural Research, Hyderabad, August 2-5, 1993, pp. 27-33. 12 Rachna Burman, "Ministry favors 4 lakh tonnes duty-free oil import by NDDB," Economic Times, August 5, 1995. Annex 1 Page 11 of 20 Public Distribution of Edible Oils A1.29 Edible Oils Introduced on the PDS List in 1974. The Public Distribution System (PDS) is a safety net program of the GOl designed to improve food security for consumers in India by subsidizing rations of essential items such as rice, wheat, sugar, edible oils, kerosene, soft coke, and standard cloth through about 430,000 retail outlets spread all over the country.13 Edible oils became part of the basket of items included in the PDS in 1974 following the 1972- 74 drought and its attendant shortages and politically costly price spikes. Prior to 1974, only soybean oil received under PL 480 from the United States were occasionally distributed. A1.30 Until 1988/89, PDS Edible Oils Accounted for a Quarter of Domestic Supplies. The PDS operates as a general entitlement scheme providing equal access to all segments of the population For edible oils, a level of availability of 6.5 kg per capita per year has been fixed.14 The supply of edible oils through PDS, however, never actually reached this target; even at their peak (Table A1.7), total per capita PDS supply of edible oils was only 1.8 kg in 1988. In spite of low absolute levels, the share of total domestic availability of edible oils handled by the PDS until 1988/89 was high --ranging between 20 and 35%. A1.31 Unlike foodgrains and sugar, the Table A.7: Public Distribution of Edible Oil in Selected States, PDS distribution of edible oils is entirely 1986/87 (percentages) supported by imports, exclusively State h i- All- n , undertaken by the STC. The STC u 6. u Distr'n arranged for the further refining of the North imported crude oils and the subsequent Haryan'a 1 .1Y .' 97.'2 Himachal Pradesh 1.1 2 packaging and distribution of the refined Jammu MKashir 0.5 849 oils to the states, as directed by the Punjab ".71.5 60:1 Departnent of Civil Supplies. Packaging Uttar Pradesh 1.5 95.7 East of the oils into I kg lpackages or into 15 .As.sam 0..2 kg tins is undertaken by the HVOC or Bihar'' 1............... ''''''........... ''''''i.0..................'''''''''''''9'5'.'9''''''''''''' o.ther State-owned companies. The Ori'ssaa'''''''''''''''''''''0.8 8'''''''7.''''''3'6'.3''''''' IIVOC, a GOI-owned enterprise, is West Bengal 13.4 77.9 ~~~~~~~~............................................. .................................. mainly a manufacturer of refined edible 2Center MadhyaPradesh 2~.... .7..... 619.......... oils and hydrogenated oils. PDS -Rajasthn 0.6...... ......696 ....... products, including edible oils, are "sold" West Gujarat ~~16.1 33.9 to the States at a uniformn "issue price." GuJ:arat..' i6.i ' . . Mahiarashtra . 20.9 45.8 The States in turn cover transportation South and handling costs and sell to the 13.1 32.4 consumers through a network of fair price Karnataka 69 53. Kerala i 2.5 59 .6 shops. Tamil Nadu 8.3 56.2 All India 100 54.6 A1.32 Subsidized PDS Consumer Note: All-India distribution through PDS = 0.817 million mt. Prices. Until 1989, PDS edible oil prices Leakage column is calculated as quantity distributed minus remained well below market levels -- quantity actually purchased. remained well below market levels -- Source: D. Ahluwalia, 1993, "Public Distribution of Food in India," Food Policy 13 Coarse grains, such as sorghum and millet are also distributed in some states, by their volumes are negligible. 14 The prescribed level of 6.5 kg per capita per year was derived from the recommendation that between 10 to 15 percent of total caloric intake (equivalent to a minimum of 2000 Kcal) should come from fats, with allowance made for invisible fats received from milk and other foods. Annex 1 Page 12 of 20 between 40% to 80%. The implementation of the IPO in 1989 reduced the difference between market and PDS prices to a much smaller level (between 15 to 20%). A1.33 In addition to the PDS of edible oils, between 1978 and 1988, the vanaspati industry was also allotted imported oils at concessional or commercial rates well below market price levels. Price Control Orders, first statutory under the Essential Commodities Act, and then on a voluntary basis with the consensus of the industry, were imposed upon the vanaspati industry to ensure that the benefits of cheap imports reach the vanaspati consumers. The supply of cheap imported oils to the vanaspati industry was stopped in 1989 as part of the IPO. A1.34 Depressing and Destabilizing Price Effects of PDS Oil Supplies. Numerous evidence accumulated point at the perverse side-effects of the management of PDS oil supplies on the performance of the oilseed complex. The large differential between PDS and free market prices encouraged massive diversions of PDS edible oils to the free market. It has been estimated that during 1986-87, as much as 55 percent of the edible oils channeled through the PDS were illegally diverted to the free market where it was used for blending with other oils (Table A1.7). The large PDS allocations to the surplus oilseed producing states (e.g., Gujarat, Maharashtra, Andhra Pradesh, Tamil Nadu) further promoted the incentives for leakages and adulteration. Another concern was that the poor timing of imports and distribution --concentrated around market arrival of the kharif 5 oils-- which further depressed and destabilized producer prices. Al.35 Since 1988/89, PDS Supplies Have Dwindled to Insignificant Levels. The above concerns, combined with the fast deteriorating foreign exchange situation, motivated GOI to curtail and improve the management of its edible oil imports under its Integrated Policy on Oilseeds and Edible Oil (IPO) in January 1989. Since 1989, PDS oil supplies have dwindled to insignificant levels, letting domestic supply and demand conditions set the price level (Figure A1.3). Between 1988-89 and 1991-92, domestic prices initially rose much faster than food prices, but declined afterwards as domestic production increased rapidly (Figure A1.2). Industrial and Domestic Trade Regulatory Policies Al.36 The Essential Commodities Act, 1955, the Small-Scale Industrial Reservation Policy, the Reserve Bank of India's (RBI) credit guidelines, taxation policies, and forward trade regulations are the main regulatory instruments of the domestic trade and processing policy regime which help shape the marketing and processing structure and performance of the oilseed industry. Al.37 Essential Commodities Act, 1955. The Essential Commodities Act, 1955 (EC Act) aims at ensuring the availability at reasonable prices of essential mass consumption items, including oilseeds and edible oils , by providing GOI with considerable powers to control and regulate the production, supply and distribution of these commodities. The EC Act provides GOI with considerable powers including: i5 The kharif season covers the monsoon months which lasts from about May to October, depending on the state. The rabi season covers the "winter" months, from November to April. 16 Other items covered by the EC Act include wheat, paddy, cereals, pulses, sugar, cotton, tea, milk and milk products, and meat and meat products. Annex 1 Page 13 of 20 * issuance of licenses and permits for the production, trading and processing of specific crops; * setting of buying and selling prices; * regulation of storage, transport, and distribution of commodities within and across states; * prohibition of withholding from sale; * regulation or prohibition of any commercial or financial transactions considered detrimental to the public interest; * forced sale of inventories to the government, its agents or representatives. Al.38 The EC Act authorizes the central government impose duties on state governments, and also to delegate the powers of central government to the state governments. As a result, Control orders and Notifications may be issued by both central and state governments, or by officers authorized by the central and state governments. All authorities/licensing officers empowered by the central or state governments have large inspectorates to implement these Orders and Notifications. In general, the actual monitoring and enforcement of the EC Act and the Control Orders are performed by the state governments, usually by their Civil Supplies Departments. The intensity of enforcement of the EC Act, however, remains at the initiative of state govermnents. The states cannot formally relax any provision of the Control orders, although state governments can, with the concurrence of the central government, make them more stringent if the situation warrants it. Figure Al.3 Edible Oil Imports and Total and State PDS Allocations 700,000 Total allocation of edible oils by PDS 600,000 Total edible oils delivered to States under PDS 500,000. . . . . l/ . Total imports of edible oils 400,000 . . .. ... . 1 ... (ton°.°°° .0 ... . . 200,000 100,000 *JLiEJ 89/90 90/91 91/92 92/93 93/94 94/95 Al.39 The central government has the supervening power, i.e. the delegation of power to the state governments is at the discretion of the central government. The delegation could be specific to a commodity or all commodities, or to a particular geographical area. The delegation may also be given under satisfaction of certain conditions --conditional delegation-- by the central government. The principal power rests with the central government even though they have been delegated to state governments. Accordingly, the central government can rescind or modify any control order passed by the state governments which it has used in the past. Annex I Page 14 of 20 Table A1.8 Stock Limits under the Pulses, Edible Oil Seeds Etc. (Storage Control) Order, 1977 Edible Oilseeds Category 'A' Cities 1500 100 AllEdible oilseeds other than including groundnut in Category 'B' Cities 1000 75 mustard seed seed/rapeseed shell but excluding Other Areas 500 50 i For groundnut kernel or seeds mustard seed 75% limits specified shall seed/rapeseed. apply ~~~~~~~~~~~~~~~~~~~~~~~~~~.............................................................................. MustardseedlRapeseed. Category A Cities 4500 300 Category 'B' Cities 3000 225 Other Areas 1500 150 Edible Oils including Category 'A; Cities 600 20 Aledibleoils including hydrogenated vegetable Category 'B' Cities 400 12 hydrogenated vegetable oils. oils. Other Areas 250 8 ................................................. .... .. ............. .............................. ...... .. EdibleOils including jCategory A Cities 800 25 All edible oils including hydrogenated vegetable Category 'B' Cities 600 15 hydrogenated vegetable oils. oils. Other Areas 350 I10 i Source: "Essential Commodities Act, 1955," Law Publishers (India) Pvt. Ltd., 1994 A1.40 Three central Control orders under the EC Act are of particular relevance to the oilseed sector; these include the Pulse, Edible Oilseeds, and Edible Oils (Storage Control) Order, 1977; the Solvent Extracted Oil, De-Oiled Meal and Edible Flour (Control) Order, 1967; and the Vegetable Oil Products Control Order, 1947. A1.41 The Pulse, Edible Oilseeds, and Edible Oils (Storage Control) Order, 1977 was introduced by GOI to prevent the speculative hoarding of pulses, edible oilseeds and oils. It extends to the whole country. The Order defines: * Licensing requirements. All firms engaged in oilseeds and edible oil trade holding stocks exceeding a small, specified level are required to obtain a license. * Stocking Limits. Stock limits for pulses, edible oils and oilseeds by wholesalers and retailers are specified, based on the category of the city. Limits have been specified for producers, wholesalers dealers and retailers, separately (Table A1.8). Stocking limits are changed occasionally, as recently as 1993 under the Pulses, Edible Oilseeds and Edible Oils (Storage Control) (Second Amendment) Order, 1993. Individual state governments have been empowered by the central government to fix more stringent limits for these commodities by a notification in the Official Gazette (e.g., 2.5 mt for retailers in Punjab). Stocks held by oilseed processors (crushers and refiners) are also limited; oilseed stocks should be no greater than one-eighth of maximum past annual oil production (or annual installed capacity for new plants); edible oils --including refined oils-- stocks should be no greater than one-twelfth of maximum past production (or annual installed capacity for new plants). Al.42 State owned enterprises, such as the STC, HVOC, and cooperatives are exempted from stocking limits.'7 Solvent-extracted oils, de-oiled cake for export, imports of vegetable oils and 17 The exemption of the NDDB and other cooperative oilseed federations was confirmed in 1995 by the Central Government, following the litigation between NDDB and the state government of Gujarat. Annex 1 Page 15 of 20 oilseeds are also exempted from storage restrictions. GOI does not restrict stockholding of solvent extracted oils, on the premise that such oils require further refining for human consumption. The 1997/98 Budget Speech announced that the lifting of the implementation of the Order would be invoked only in well-defined emergency situations. A1.43 The Vegetable Oil Products (Control) Order, 1947. This GOI Order regulates trade in vegetable oils. According to this Order, vegetable oil products mean any hydrogenated vegetable oils, or mixed with any other substance for edible purposes. The Order empowers the state-level Vegetable Oil Products Controller to: * Specify packaging and labeling requirements of vegetable oil products; * Specify the types of permits required for the transport of vegetable oil products by road, rail or water; * Prescribe maximum or minimum limits of usage of vegetable oils in the manufacture of vegetable oil products or to halt processing; * Set maximum prices that manufacturers could charge and allot quotas for different classes of transactions; and - Prohibit or restrict the manufacture, storage, or sale of vegetable oil products, taking into account availability of vegetable oils. A1.44 Until 1989, this Order was used primarily to regulate the price, storage and movement of hydrogenated oil by the vanaspati industry, since the vanaspati industry was then benefiting from access to imported oils at concessional or commercial rates well-below market prices. The Order was designed to ensure that these benefits were passed on to consumers. A1.45 Solvent Extracted Oil, De-Oiled Meal and Edible Flour (Control) Order, 1967. This GOI Control Order was designed to regulate the oilseed solvent extraction and refining industry to ensure consumer health and safety. Key features of the Order are: * Licensing of all firms engaged in oilseed solvent extraction'8 or subcontracting of oilseed processing with solvent extraction firms; * Regulation of the manufacture, storage and sale of solvent extracted oils and edible flours;19 * Specification of quality standards of solvent extraction products and by- products; * Monthly reporting to the Controller of production, stocks, sales and returns and government authority to search the plants and seize stocks if warranted. A1.46 Controls on the Movement of Edible Oilseeds and Oils Implemented by State Orders. Movement controls are imposed by state governments through Orders or Notifications under the power conferred by the ECA. These movements controls can be imposed at any time, for any length of time, in an ad-hoc, opportunistic fashion with limited advance warning to traders and processors by the state governments whenever concerns about price increases arise. In Gujarat, for example, the inter-state movement of groundnut oil was banned seven times 18 The type of license issued varies according to the type of operation, for example, pure solvent extraction, solvent plants with pre-cleaning and expelling, solvent plants with refineries, etc. 19 According to the Third Schedule of the Order, the manufacture, sale and storage is permitted it the oils of standard or refined grade; these activities are prohibited for sub-standard solvent extracted oils. Annex 1 Page 16of20 between 1990 and 1995. Andhra Pradesh exercised the same powers in 1992. The central government has, so far, never intervened to prevent the restrictions imposed on inter-state trade and commerce, by using its supervening power under the ECA. A1.47 The New Industrial Policy, 1991 Maintains the Small-Scale Reservation in the Oilseed complex. The Small-Scale Industry (SSI) reservation policy was formulated in 1977, in conjunction with the Industrial Licensing Policy, 1977. It exclusively reserved the manufacturing of over 3,500 commodities to small-scale and cottage industries. In the oilseed complex, the SSI policy applies to oilseed crushing equipment manufacturing, and to groundnut, rapeseed/mustardseed and sesame oil expelling, except solvent extraction. Safflower crushing was already reserved for cottage industries or ghanis. Small-scale enterprises, as defined by the Policy, are enterprises with investments of Rs. 500,000 to Rs. 7.5 million. Industrial units operating prior to 1977 were permitted to continue operations, but barred from expanding their processing capacity. The only exceptions to the SSI Policy are the cooperative processing units. This SSI policy has been a major force in shaping the structure and composition of the oilseed processing industry. A1.48 The New Industrial Policy, announced in 1991, maintained the small-scale reservation for the commodities listed above. The New Industrial Policy removed the registration --with the DGTD-- and licensing requirements in the solvent extraction and refining industry. In 1996, the investment ceiling for plant and mercenaries of SSIs was raised to Rs. 30 million. Credit Policies A1.49 Additional Private Storage Restrictions through Selective Credit Control Policy, 1977. The Selective Credit Control Policy does not fall under the EC Act, but represents an additional policy instrument for GOI to regulate storage activities by the private sector. It is implemented by the Reserve Bank of India (RBI) which issues, at least twice a year, new guidelines to the banks, and more often if the situation warrants it. The Selective Credit Control Policy limits the access to trade credit for the storage of essential agricultural commodities, including oilseeds and their vegetable oils. Specifically, the Selective Credit Control sets: * the rate of interest (up to 1994); * the level of credit ceilings; * the minimum margins against stocks which the borrower has to self-finance; and * the exemption from level of credit, minimum margins and rate of interest. A1.50 The Selective Credit Control Policy applies to most oilseeds (groundnuts, rapeseed- mustardseed, linseed, castorseed, cottonseed, and all imported oilseeds) and vegetable oils (groundnut, rapeseed-mustardseed, linseed, castor, vanaspati and all imported oils), but not to soybean, sunflower and safflower. It applies to all stocks, including stocks secured against warehouse receipts, held by both processing units and any other economic agents. Minimum margins are generally lower for processing units than for others. It is worth noting that stocks secured against warehouse receipts cannot attract more favorable terms --rates of interest, credit ceilings, and/or minimum margins-- than unsecured stocks. On October 18, 1994, minimum margin requirements for oilseeds and vegetable oils were set at 60, 75 and 60% for mills/processing units, others, and warehouse receipts, respectively. The level of credit ceiling was based at 85% of stock held in the three years ending November 1992 - October 1993. The Annex I Page 17 of 20 RBI announced the lifting of the Selective Credit Control Policy for oilseeds and vegetable oils in October 1996. A1.51 Cooperatives are exempted from minimum margins requirements as well as credit ceilings for both oilseeds and vegetable oils. Some state governments, all public procurement, storage and distribution agencies, and commodities meant for exports --under additional conditions-- are exempted from minimum margins and credit ceilings. Taxation Policies A1.52 Central and State Taxation Policies. GOI is empowered to impose a central sales tax on inter-state trade and consignment of goods. Similarly, state governments are empowered to charge state sales (or purchase) tax on trade within states (Table Al .9).20 Value-added taxes have not yet been introduced in India. Local governments also levy entry taxes or Octroi and Pathkar on goods entering a local area for consumption, use or sale. Local and state governments also levy Toll Duty for the maintenance of roads, bridges, ferries. The Octroi, Pathkar and Toll Duty are collected at entry points. Finally, agricultural commodities sold in the regulated markets are subjected to a market cess levied by the Regulated Market Committee whose level varies across states; in some states (e.g., Punjab) an additional rural development tax is levied together with the market cess. A1.53 Oilseed Products are Subjected to a Multi-point, and Non-Unitary Taxation Regime. Oilseeds and their derivatives are subjected to multiple taxation. For oilseeds, these include a market cess and a purchase tax. Edible oils, oil meals and de-oiled cakes are subject to sales tax and a surcharge on the sales tax. For inter-state trade, traders and dealers of oilseeds and their derived products are subject to a turnover tax, entry tax or octroi, and central sales tax. For items transported over long distances, octroi fees can range from 0.5 to 1 percent of the product value. The frequency of collection of octroi indirectly increases marketing costs. For products transported over long distances, truckers often assume the added financial cost of arranging credit with specialized local agents to pay octroi fees, to avoid the security risk of drivers carrying large amounts of cash for making payment at each octroi post. A1.54 Tax rates vary across states (Table Al.9), but also from one oilseed to another with no apparent justification. The multiplicity of taxes, and the non-unitary nature of the taxation regime is inimical to an efficient allocation of resources in the Indian oilseed complex, and the development of truly common domestic market. It also encourages large-scale tax evasion. Industry sources estimate that as much as 70 percent of edible oil trade occur without payment of taxes. It is reported that the cost of tax evasion in the form of bribes amount to 1.5 to 2 percent of the product value. In some states with high taxes, the problem of "phantom" inter-state trade has arisen. Companies, in order to avoid paying the high taxes in one state, create subsidiaries in neighboring state who "purchases" the products and "transports" them out of the high tax state and thus generates savings by only paying the Central Sales Tax. 20 Under the Sales Tax Act, Administrators are empowered to prescribe the points where products may be taxed. The Sales Tax and Excise Inspectors also have the authority to undertake physical verification. Annex I Page 18 of 20 Table A1.9: Sales Tax Rates on Oilseeds, Oilcakes, Deoiled Cakes, Extraction, Vegetable Oils, and Vanaspati Applicable in Different States of India as of June 1995 Oili Andhra Sa a 2Sales Tax 4/ 3% 4% 4% 4% 2% Pradesh Prds ,........ ....... ................... ........ 1; Assa;nm Sales Tax 8% T 8S;i Nil 1 8i 8% 8 i 8/ 8%i ............~~~~~~~~~~~~~~~~~~~............ - ;;; Bihar i Sales Tax 4% i 5% 5% GN-9%, Ms-2% i Add'l Tax 1% I % GN-I/., Ms-Nil Surcharge on ST i - i 5-10% 5-10% 5-10% - Delhi @ Sales Tax 3% Nili 5% t % 5 t 5% Gu3arat SalesTax G.N I /o 2/,. ; 5/. . 20i; ;. -----.-... 3°7; .-. 8%.i. Rapeseed 2% 2%! all DOC Soybean 2% i 2%i ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~N......4................ Haryana i Sales Tax i Nil i 2%(Pur ) , Nil i 6% i 6% . _....1% Surcharge on ST 10% 10% 10% 10% ............ ........................... .................. ............. .......... ....... ........... :7 ............:0 Karnataka Sales Tax 2% 2% Nil 2% i. 2% i 2% . 3% Surcharge on ST 15% 15° i 15% IS 3 15% i NA Kerala SaiesTax i4%/ 5% 3% GN-5% 3% 8% 1 8% GNOM-2% oth-8% oth-3% i Surcharge on ST 5-10% 5-10% 5-10% 5-10% 5-10% i 5-10% 5-10% Madhsya i Sales Tax 4%/ 4% 4% 2% i 2% i 2% , 4% Pradesh i Purchase Tax SB-l% - SBM-2% - . - . - i Maharahtr Saes Tax 2%i 2%i N;i 15%i ;15%i i 15%i 1i5; Turnover Tax 15% 1.25% Orissa t Saes Tax t 4/,0 4%i Nil t 4;i 4%o/ 4%i 8%i ~~~~~...... . .... ..... .......... ...... .... ................_.; __ _;._.._.. Punjab I Sales Tax Nil 2% Nil 8% 8% 6% E 4% Purchase Tax 2%/ Surcharge on ST 10/ . o10/ 10/o 10% 1o% Rajasthan Sales Tax 4%/ i 2% Nil 6% 6% 6% i *----------~~~~~~~~.-...... .... - .----------------- .... -r .... -----+1.. A ...........**Ss Tamil Nadu ; Sales Tax ; 3/ i 3/ i 3%/ i 3/0 i 3.o 3% i 5% Surchargeon Nil . 15%in . 15%- 15%- 15%- 15% -Mofussil 15%- Sales Tax iMofussil 20%i Mofussil Mofussil Mofussil 20% - Madras Mofuissil in Madras 20%/- 20% - 20% - city 200/. - city Madras Madras Madras Madras city city city city UttarPradesh t SalesTax t 2/i. 7 1/oj; , Nil 2... 2°/; . 6%o T 6;i; Surcharge on ST Nil 25% Nil 25% i 25% 25% 25% Purchase Tax i1% 1% ~~~~~~~~~~~~~~........................... ......_... .... ..... ;/ ....;.... ;; ; West Bengal i Sales Tax ; 4% i Nil ; Nil i 3% i 3/. i 7% i.15% ; Surcharge on ST -10% 10% 10% 10% i 10% 001I iCentral Sales na na 2% 3% 4% 3% ina _ _ i Tax i_i_i_i_ i NOTE: 1. ST - sales tax; Ms - mustard seed, GNOM -ground nut oil millers, SB - soybean, SBM - soybean meal, DOC -De-oiled cake, na - not available 2. Information published in this statement is based on the information received from SEA members and various Associations. Though all efforts have been made to ensure corrections, the Association shall not be responsible for any omission, deficiency or ermr. As the current information on the Sales Tax in Kerala, Haryana, Orissa, Delhi and Bihar has not been received, hence last year information is repeated. Source: Solvent Extractors' Association of India A1.55 Numerous Tax Incentives Further Distort the Allocation of Resources. State governments offer a number of attractive tax incentives to encourage investments, including in oilseed processing. -- in industrially backward areas. It has encouraged the establishment of plants where efficient operations are not likely to be sustainable. State governments have offered deferments or complete exemptions from these taxes to encourage private investrnents. Annex I Page 19 of 20 Forward Trading Policies A1.56 The Forward Contracts (Regulation) Act, 1952 Bans Futures Trading in the Oilseed Complex. Futures trade in oilseeds, oils and meals was introduced in India in 1926, and were actively traded until the early 1960s. All futures contracts were banned gradually during the 1960s, and the last two remaining futures contracts -- castorseed and linseed-- were disallowed in 1977. The ban on futures trading of oilseeds, oils and oilseed meals stems from the Forward Contracts (Regulation) Act (FC(R) Act), which was introduced in 1952 to regulate forward and futures trading in India. It is only in the case of castorseed --a non-edible oilseeds-- that futures (hedge) contracts have been allowed to be traded since 1982 in four recognized associations (Delhi, Ahmedabad, Bombay and Rajkot). 21 A1.57 In addition to the ban on futures trading, the FC(R) Act also restricts "forward" trade to "ready" or spot contract which provide for the delivery of goods and full payment within 11 days after signature of the contract. Forward trade contracts involving the delivery of a commodity of a specific grade, at a specified future date and place, and at a pre-determined price between two parties --defined as Non-Transferable Specific Delivery contract (NTSD) by the FC(R) Act-- are either prohibited or suspended for all oilseeds, oils and oilseed meals. A1.58 An Active, Illegal Forward Trading in Oilseed Products. Despite the burden imposed by government interventions, there is a large interest for risk management tools by the oilseed community in India. The risk management needs has spawned an active, illegal trading in oilseed futures contracts, notably for groundnut oil --in Rajkot, Dhoraji and other centers-- and mustard seed oil --in Delhi, Hapur, and Agra. According to a 1986 study,22 it was found that some 60 operators actively traded in oil futures in Rajkot, closely resembling formal exchange operations, with standardized trading rules and open outcry. Most of the business served the risk management needs of genuine groundnut oil traders, millers and wholesalers; speculation was relatively unimportant. This illegal trade worked quite efficiently, with rules for cash-settlement, weekly margin payments, and significant investment in tele-communications. Most offices in the market were linked through internal telephones, with each office having at least six telephones. The market also had 30 telex machines. About 70,000 calls were reportedly made each working day between this exchange and other main cities. A1.59 The 1994 Kabra Committee Report Recommends the Re-introduction of Futures Contracts. The September 1994 report of the Committee on Forward Markets,23 chaired by Professor Kabra, recommends the introduction of futures contracts in a number of commodities, including a number of oilseeds --groundnuts, rapeseed/mustardseed, cottonseed, sesame seed, sunflower, safflower, coconut, soybean, linseed and rice bran-- and their oils, and major oilseed cakes. 21 For a detailed exposition and analysis futures trading in India, see World Bank, 1996, "Managing Price Risks in India's Liberalized Agriculture: Can Futures Markets Help?", Report No. 15453 IN. 22 Reported in V.P. Gulati and S.J. Phansalkar, Oilseeds and edible oil economy of India, Delhi 1994. 23 Ministry of Civil Supplies, Consumer Affairs & Public Distribution, 1994, "Report of the Committee on Forward Markets," (Kabra Committee Report). Annex 1 Page 20 of 20 Health Safety & Standards Regulations A1.60 Numerous Legislation Govern Edible Oil Quality and Safety Standards. More encompassing GOI legislation complement the Solvent Extracted Oil, De-Oiled Meal and Edible Flour (Control) Order, 1967 and the Vegetable Oil Products (Control) Order, 1947. These include the Prevention of Food Adulteration Act, 1954; the Weights and Measures Act; the Packaged Commodities Order, 1971; and the Blended Edible Vegetable Oils Grading and Marking Rules, 1991 under the Agricultural Produce (Grading and Marking) Act, 1937. A1.61 Prevention of Food Adulteration Act, 1954. The Prevention of Food Adulteration (PFA) Act, governs quality control in the manufacture and packaging of edible oils and other food products. This legislation was enacted by the GOI in 1954 to ensure consumer health safety; its implementation rests with the GOI Ministry of Health & Family Welfare, and is enforced by the central and state-level food inspectors. The PFA Act defines the standards for each category of edible oils. Under the PFA Act, all types of edible oils can be sold unrefined, with the exception of cottonseed oil. In some ways, the PFA Act is more stringent than the Vegetable Oil Products Control Order, 1947. The blending of oils finally allowed 1992, but limited to the blending of two oils --one conventional and one refined oil. Amendments to the Act in 1992 require the specification of the composition --including the percentages-- of blended edible oils.24 A1.62 Blended Edible Vegetable Oils Grading and Marking Rules, 1991. The Agricultural Produce (Grading and Marking) Act, 1937, also known as AGMARK, establishes the rules and regulations for the grading and marking of agricultural commodities for the purpose of making available quality agricultural produce to consumers. In 1991, the GOI passed the Blended Edible Vegetable Oils Grading and Marking Rules which defines the grade designations and marking, method of packaging and marking. A1.63 Packaged Commodities Order, 1971. In 1971, the GOI passed the Defense and Internal Security of India Rules designed to ensure standardization and the availability of packaged products to protect consumer interests. From this arose the Packaged Commodities Order, which defines how commodities are packed and the accompanying information to be provided, such as contents, manufacturing and expiration dates, name of manufacturer, etc. The sale of 15 kg tins of vegetable oils are exempted from this order. A1.64 Weights and Measures Act. The Weights and Measures (WM) Act establishes the standards of weights and measures in India. It provides the guidelines for verification and stamping of weights, Prior to 1992, the WM Act prohibited the volumetric packaging of edible oils. The enforcement responsibility of the WM Act falls with the Ministry of Civil Supplies, Consumer Affairs & Public Distribution. 24 Under the PFA Act, other characteristics, such as the acid value and moisture and volatile matter in the oils also have to be specified. Annex 2 Page I of 24 Production & Consumption: Annex 2 Recent Performance & Prospects A. Production of Oilseeds A2.1 The oilseed complex has registered dramatic changes over the last 15 years. The most striking and well-known development has been the doubling of oilseed production since 1980. Much less known, but as vital from a food security policy perspective, is the 75% drop in production instability which has accompanied this formidable production performance. The doubling of oilseed production has not come without concerns. There is an active debate about the appropriateness of India's past import substitution strategy in oilseeds until 1994, its implications about the capacity of the sector to compete under an open and less protected foreign trade regime. A2.2 In this section, we first review the recent production performance of oilseed crops, and identify the sources of that growth. We then review some of the available evidence about India's comparative advantage and allocative efficiency in oilseed production. Finally, we will provide the evidence about the increased stability in oilseed production instability, and identify its causes. Recent Production Trends and Performance A2.3 Oilseed Production Figure A2.1 More Than Doubles Since Total Oilseed Production, Area Cultivated, and Average Yield 1980. The production of the 1949-50 to 1993-94. nine oilseedsI jumped from nha ,nt nt/a less than 10 million mt in Qso 1980 to more than 21 million 25 0.8D mt in 1993/94 (Figure A2.1). 070 At 5.8% per annum, oilseed 20 060 crops registered the fastest 15 0.50 annual growth rate of all 0.40 major crops in India between 10 0.30 1981/82 and 1993/94 (Table 5 0.20 A2.1 in Appendix), Q1O contributing for 22% to all- l ,lllllll 00 0 C' COW 0) C'J Lt O .0 F~- 0 0) CO 0) N' India crop growth during the LO Lo ' 9 ' N 9 . C a? C? ° 0I same period. The average L Wt N 0 co - p O ^ c 0 N annual rate of growth in A l-- oilseed production was more I than double the annual rate Source: Directorate of Economics and Statistics, Agricultural Statistics at a Glance, of growth of foodgrains various issues and Ministry of Finance, Economic Survey, various issues. (2.8%) and far exceeded the annual rate of growth of all cereals (3.0%), fibers (3.4%), sugarcane Nine oilseed include the five major oilseed (groundnut, rapeseed-mustardseed, castorseed, sesamum, and linseed), soybean, sunflower, safflower and nigerseed. Annex 2 Page 2 of 24 (2.9%) and fruit and vegetables (4%). This recent production performance contrasts sharply with the virtual stagnation (1% per annum) in production of the initial post-green revolution period (1968-1981). Rapid growth in oilseeds has also meant a more balanced agricultural growth across regions, particularly favorable to the rainfed regions. This stems from the fact that oilseeds remain predominantly grown under rainfed conditions. A2.4 Technological Change as the Major Source of Growth in Oilseed Production. An examination of the growth in oilseed production indicates a typical adoption pattern of new technology. An initial phase, between 1979/80 and 1986/87, corresponds to the introduction of new oilseed crop technologies and its up-take by early adopters. The following period, from 1986/87 until 1993/94, corresponds to the rapid adoption of the new, improved technology by an increasing number of growers across regions and seasons. The decomposition of sources of growth in total oilseed output into pure yield and pure area expansion effects clearly illustrates these two distinct phases (Table A2.1). Between 1979/80 and 1986/87, the growth in yields accounts for almost two-thirds of the then modest total output growth (30%), while area expansion under oilseed accounts for only a third of that growth. Since 1986/87, oilseed growth accelerates and its sources reverse dramatically. The new technology quickly spreads to new areas as suggested by the rapid area expansion which now explains more than half of total output growth; pure improvements in Table A2.1 yields play a more modest role in Sources of Oilseed Production Growth explaining total output growth Peid (% 1) il Ae rodtt (34%). This adoption pattern of 5(* ° ON N N N N N 00 ~~~00 00 00 00 a, achievement in self- F 0 0 0 0 00 0 0% 0% o % sufficiency has theref orienc om hatsgrea Imports ..E) Prodn -- . Consumption therefore come at great costs to consumers already burdened by Source: USDA and Gulati, et al. 1996. edible oil prices at least twice world price levels. A2.43 Import Liberalization Will End Stagnation in Consumption. Free edible oils imports at 30% tariffs will drive down domestic oil prices relative to other goods. As evidenced by price elasticities and composition of demand for edible oils, the decline in oil prices will spur domestic consumption, in particular in rural areas and among the poorest segments of the population which account for the bulk of domestic consumption. 14 See Policy Annex for a more detailed description of the Weights and Measures Act Annex 2 Page 15 of 24 A2.44 Continued Rise in Incomes May Spur Greater Supply Imbalance. The overall economic reform program is accelerating economic growth, boosting incomes. As evidenced by expenditure elasticities across income groups and significant jump in per-capita consumption across income groups, rising domestic per capita incomes will boost even further demand for edible oils in the future. A2.45 Edible Oil Demand Projections to Year 2020. IFPRI (1996) recently estimated demand food balances for India to the year 2020, including for edible oils. Ultimately, food balances critically depend on several factors: changes in population growth, growth in per-capita income, rate of urbanization, changes in livestock feeding practices, and the pattem of future Table A2.8 growth on poverty Consumer Demand Projections, 1990 to 2020 reduction. The results Under Alternative Scenarios for edible oils under (million mt) contrasting assumptions Comdity 2020 Baseline Poverty Removed are reported in Table 1990 ______ ________ A2.8. These Actua 3% per 5.5% per 3% pera 5 per: projections do not take - Income- Capita Capita . -- ICnaFitae : into account the - Growth Growth Growth consumption effects of the relative decline in Edible Oils 4.15 12.46 20.23 13.61 22.13 price of edible oils. Source: G.S. Bballa, P.B.R. Hazell, 1996 "Prospects for Balancing Food Needs with With 3% per annum per Sustainable Resource Management in Indian To 2020", draft mimeo, International c i Food Policy Research Institute capita income growth, demand for edible oils will more than double by the year 2020, and more than treble if per capita income growth accelerates further to 5.5% per annum. If poverty is removed, demand for edible oils would grow even faster. Demand Patterns for Oil Cakes & Meals A2.46 Domestic Demand for Oil Meals & Cakes is Poorly Valorized and Maintained Artificially Below Potential. About 70% of oil cake production is consumed domestically. Its valorization on the domestic market is poor however. Oil cakes are primarily used in India for Financial Incentives TablenA2.9 Finacia Inentvesfor Intensification in the Indian two purposes: animal feed and fertilizers/soil Livestock Industry are Poor. improvers. A substantial amount of oil cakes are (Price of Livestock Feed Relative to Livestock Product- 1990-93) used as fertilizers for plantation crops, such as Rei ce1990 1991 1992 199 rubber and banana, in Southern India. Oil cakes Feed Milk India 0.41 0.26 0.26 US 0.32 0.30 0.34 are consumed as animal feed directly or through Feed-Broiler India 0.21 0.19 0.21 0.20 compound feeds using de-oiled cakes (DOC). The us 0.18 0.13 0.16 0.14 compound feed industry increased its output from Feed-Egg India 0.39 0.39 0.39 0.36 only 39,000 tons in 1964 to over 2.2 million tons us 0.38 0.32 0.31 0.38 in 1990. The capacity for the manufacture of CoU-Beef nSdia 0.05 0.04 0.03 - compound feeds is estimated at around 4 million Source: World Bank, India - Livestock Sector Review: Key tons. Domestic demand for compound feed by the Issues for Enhancing Growth & Development, Report No. livestock industry, however, has remained much 14522-4N. smaller than one would expect, given the Annex 2 Page 16 of 24 extremely large size of the cattle, buffalo and poultry population in the country.'5 A2.47 Limited Financial Incentives for Domestic Use of Oil Cakes by the Livestock Industry. In large part, this low effective demand for oil meals and cakes by the livestock industry reflects the poor financial incentives in using them. These poor financial incentives are the result of low livestock product prices and/or low average productivity of the Indian livestock population. Indeed, prices of livestock feed relative to livestock product prices tend to be higher in India than internationally, in particular in the poultry industry where demand has been rising fast (Table A2.9). In the case of dairy, milk producer prices in India are kept below world prices as a result of foreign trade restrictions and domestic processing inefficiencies. In the case of beef, cultural factors help explain the low domestic demand and therefore low prices. A2.48 Growth in the Fast Growing Poultry Feed Industry Hampered by Small-Scale Reservation Policy. The Small-Scale Reservation Policy of the poultry feed industry is hampering its technological development, keeping poultry feed prices higher than otherwise necessary. The Small-Scale Reservation policy prevents the poultry feed industry from taking advantage of the sizable economies of scale which prevail elsewhere in this type of industry, and from adopting the sophisticated technology to meet the demanding quality standards of the poultry industry. A2.49 Limited Domestic Demand Encourages Exports. Limited domestic demand for oil cakes and meals has made export markets much more financially attractive. Special export incentives of the 1980s and 1990s, and the 1991 devaluation of the Rupee have improved further the financial attractiveness of the export markets. The international competitiveness of Indian meal exporters has been supported even further by India's policy of supporting high domestic vegetable oil prices. A2.50 Significant Export Development in the Late 1980s. Oilcake exports have increased significantly from 71,000 mt in 1987 to 3 million mt in 1993, accounting for 3 percent of the value of total exports (Figure A2.10). The rapid diversification of oil meal exports away from groundnuts meals, and Figure A2.10 towards soybean and Oil cake exports, Volume (million mt) and Value ($ million), 1970-93 rapeseed-mustardseed, has million mt S million played a critical role in this export performance. Most of 3.00 | 600.00 the recent growth has been 2.50 500.00 driven by soybean and, rapeseed oil cake exports and 2 400 to a smaller extent by 1.50 300.00 sunflower exports, 1.00 I glA200.00 commodities where there is J 10000 less quality problems. 05 Soybean exports increased, 0.00- 0.00 from about half a million mt Q , q %0 oo o X 0 00 < 0% 0% 0% 0% 0 0% 0% co 0%0 00% 0% in 1986 to 1.9 million in a - a a, a a, a, Cs 1993, while EF_Volume +.- Value rapeseed/mustardseed cake exports increased from Note: Export figures include groundnut, cottonseed, rapeseed-mustardseed, safflower, sesame, soybean and sunflower oil cake exports. Source: FAO. 5 280 million cattle and buffaloes, 110 million goats, 47 million sheep, 11 million pigs and around 300 million poultry birds. Annex 2 Page 17 of 24 207,000 mt to about 750,000 mt during the same period. The EU ban on imports of oil cakes contaminated with aflatoxin seriously hurt India's groundnut meal exports --where aflatoxin Figure A2.11 Export Volumes of Different Oilseed Cakes, 1970-1993, 000 mt. 2000 1800 c 1600 1400 1200 100 800 600 200 o es , 0 Go 0 x o 0 0 C x I- o- o. _ _- 00 00 co a ,_ | ~ COTTON CAKE ..3. GRNDNUT CAKE .. RAPESEED CAKE | SESAME CAKE . SOYBEANS_CAKE ..>..SUNFLOWR CAKE Source: FAO Trade Yearbook. contamination has been and continues to be a major problem-- which used to dominate Indian meal exports until the early 80s (Figure A2. 11). A2.51 This remarkable export performance has transformed the oilseed complex from a net user of foreign exchange until the mid-80s to a net earner of foreign exchange in the early 90s. Future Demand Prospects for Oilseed Meals A2.52 Livestock Sector Will Be A Major Force Determining Future Oil Cake Demand. Growth in the livestock industry will be a major force driving future demand for oil cakes. With highly income elastic demand for milk and milk products, meat, eggs, and fish, the accelerating growth in income will be a major factor that will boost domestic demand for livestock products in the future. It is expected that the increased demand for livestock products will promote a large scale shift towards improved animals or crossbreeds, and improved management and feeding practices (e.g., feed stalling for dairy, etc.). Intensification in the livestock industry will require a larger proportion of concentrate feed in their diet. This will raise the demand for feeds, in particular on cereal feeds, but also on oilseed meals which are an important component for livestock feeds. A2.53 Oil Meal Demand Projections to Year 2020. IFPRI (1996) 6 recently estimated the range of possible additional demand for livestock feed, including meals, which would arise from population growth, income growth, and technological change in the domestic livestock industry - 16 G.S. Bhalla, P.B.R. Hazell, 1996, "Prospects for Balancing Food Needs with Sustainable Resource Management in India To 2020", draft mimeo, Intemational Food Policy Research Institute. Annex 2 Page 18 of 24 -reflected by changes in Indian feed coefficients which are low by international standards. The demand for oil meals was estimated under (i) two different assumptions on the annual rate of per capita income growth --3% and 5.5%, and (ii) three different scenarios of feed demand: Indian, Chinese and Indonesian feed coefficients. The results of these simulations are summarized in Table A2. IO. A2.54 Maintaining Indian feed Table A2.10 coefficients, meal demand would Meal Demand Projections under Different Feed increase significantly from the base Coefficient Scenarios and Income Growth Assumptions year (1990) level of 1.97 million mt to Feed Coeff.cici 2020 periinome 7.4 million mt if per capita income Scen&io 1990 3% 5.50% grows at 3% per annum, and even milo mt milio mt mi mt higher to 16 million mt if income Indian 1.97 7.99 16.81 grows at 5.5% per year. While using Chinese 0.36 1.30 2.40 Chinese feed coefficients produce a Indonesian 3.49 15.64 37.03 modest increase in meal demand over ------------- time, Indonesian feed coefficients Source: IFPRI, 1996. result in a near doubling of meal requirements by 2020 compared to current Indian feed coefficients. Future meal requirements will eventually fall somewhere within this extremely wide range. The policy implications are clear: rising incomes will be a major force that will drive the increased domestic demand for meals. A2.55 Summary. Rising incomes and liberal trade policies in the oilseed complex will have large repercussions on the consumption levels of both edible oils and oil meals. This creates formidable opportunities for a market-led growth of the Indian oilseed complex industry. Recent performance on the production front suggests that the industry has the capacity to capture and benefit from these opportunities. Capturing them will require GOI to establish a policy environment that is conducive to an efficient and sustainable growth in the oilseed complex industry. Annex 2 Page 19of24 Appendix Table A2.1: 'Trend Growth Rates of Production of Major Crop Groups, Pre- and Post-Green Revolution, percent per year WigJt in Pre-Greeft Post-Green Post Geen Sinficant, Percent T Index of Revolution Revolution Revolution Change between Contributioato Item Agricultural Period I Period H PeriodI &it A11Indo re 4|0; :0000 000 l < >x, 00S. 20 Haidwani Yes* Nandyal Hyderabad Yes* Rajkot Bombay Yes* Yes* Yes* Madras Yes* Yes* Delhi Calcutta Yes* Yes* i~apseedOU rapur Kip ~ Mg Delhi Yes* Yes* Yes* Calcutta No Yes* Yes* Sunflowerow.~ Vi3da Khamgaon Yes* Note: Null hypothesis was that markets are not integrated in the long run. * significant at 0.1 %, ** - significant at 5%. See Appendix A4.3 for computed values. Source: Computed. A4.15 Markets Across Oilseed Products Are Well Integrated at the Regional Market. The degree of long-run vertical market integration across oilseed products was tested in selected markets. In Rajkot the groundnut and groundnut cake markets are integrated in the long run, but the groundnut and groundnut oil markets are not (Table A4.5). In contrast, the groundnut and groundnut oil markets in Bombay are integrated, but the groundnut and groundnut meal markets are not. All the pairs of rapeseed and rapeseed oil and rapeseed and rapeseed meal markets are integrated in the long run. In general, however, in all pairs Annex 4 Page 7 of 20 of markets, rapeseed and rapeseed oil markets exhibit stronger levels of market integration than the rapeseed and rapeseed meal markets. Measuring Market Performance in the Exchange of Commodities over Time A4.16 Seasonal price behavior is a regularly repeating price pattern that is completed every twelve Figure A4.5: Seasonal Price Index, Groundnut months, resulting from a seasonality in demand or in Rajkot supply and marketing or a combination of both. In the ____________________ _____ -- case of oilseeds and oilseed products, it largely reflects the 1.25 seasonality of production and marketing, since consumption would tend to be uniform all year round. 1.15. | Seasonal price indexes provide a rough measure of 1.05 1 seasonal price patterns and can be used as an indicator of whether the seasonal price increases allow adequate room 0.95 for covering storage costs during the year. The following 0.8s section presents the results of the seasonal price analysis for selected oilseed and oil markets. v .a . fi , A4.17 Seasonal Price Behavior Varies Z Considerably Across Oilseeds and Across Markets.9 Jan85/Dec88 .Jan 89-Apr 93] The seasonal price behavior varies considerably across - _________ different oilseeds (Appendix A4.3 presents figures of Source: Computed seasonal price indexes for selected markets). For example, the seasonal price rise is less sharp in groundnut markets and they tend to dip twice, around March and (much less in) September (Figure A4.5). These seasonal patterns reflect (i) the improved distribution of supply across seasons as a result of new technologies which allow both rabi and kharif production (Rajkot market) and (ii) greater regional diversification of production and sources of supply (Bombay and Delhi markets). In contrast, there is greater seasonality in rapeseed prices in view of the fact that rapeseed/mustard is generally only grown in one season. Rapeseed prices reach their lowest point at about February-March and reach their peak at about October-November. The degree of seasonality varies across markets for soybeans. The Indore market exhibits almost no seasonality at all, while the Haldwani market exhibits a distinct dip during November, rising thereafter and reaching a peak in August. Sunflower prices continue to exhibit a distinct seasonality, with prices reaching their lowest point around March and rising until it reaches a peak around July-August. The impact of the kharif crop is not as evident as it is in groundnuts. A4.18 Oilseed Seasonal Price Increases Offer Little Incentive for Storage. A comparison of the percentage seasonal price increase with the cost of working capital per year provide an indication of private storage incentives.10 Taking 15 % as the reference interest rate on working capital loans, the percentage seasonal price increase in different oilseed markets was less than the cost of capital (Table A4.6). During the 1990s, the only exceptions were the groundnut in Villapuram and the sunflower markets in Madras and Bidar. What this implies is that in general there is limited incentives to store commodities and if private traders do, it will be for only a very short period of time during the year. 9 These markets were selected largely on the basis of data availability. 10The cost of capital generally accounts for the largest share of storage costs. Annex 4 Page 8 of 20 A4. 19 Seasonal Behavior of Table A4.5: Is the Oilseed Complex Integrated in the Long Run? Edible Oil Prices Closely (Results of the Johansen Vector Auto-Regressive Cointegration Model) Mimic Oilseed Price Seasonal Groundnut R .ko t B Hyderabad Behavior. The seasonal Oilseeds and Oil No Yes* Yes** behavior of edible oil prices in Oilseeds and Oil Meal Yes* No Yes"* all markets tend to mimic closely Rapeseed Ve3" au : the behavior of the seasonal Oilseeds and Oil Yes* Yes* Yes* Yes* behavior of the oilseed prices. Oilseeds and Oil Meal Yes** Yes* Yes"* Yes For example, in groundnut Source: Computed. markets where the impact of kharif and rabi arrivals are evident in the seasonal behavior of prices, the same can be observed in the groundnut oil prices. A4.20 Edible Oil Seasonal Price Table A4.6: Percentage Seasonal Price Increase in Selected Oilseed Markets Increases Also Offer Little Financial Mrt J =5 a D8 i.. i} _ s; Incentives for Storage. The seasonal -rng deIe price increases in the edible oil markets Nandyal 16Y__o 12Y offer little financial incentives for Rajkot 11% 6% storage, since they are generally less Villapuram 17% 17% than the cost of working capital (Table 3 'eSd __.e___se A4.7). Although the seasonal price rise Hapur 9% 9%11% tended to be higher in the late 1980s, Mga 6% especially for groundnuts, they further scyioan e______ _ ___ __e declined during the early 1990s. To Indore 3% some extent, this may reflect both the Haldwani 10% effects of increased domestic -- ~ ~ ~ ~ ~ ~ __________ .______ Madras___ 29%/e production as well as the improved Bidara 20% timing of imports. Source: Computed. A4.21 Late 1980s and Early 1990s Characterized by Slight Table A4.7: Percentage Seasonal Price Increases in Selected Edible Oil Markets Reduction in Seasonality over q 4 i ; U # 3"W Previous Period. For the markets for Bombay 16% 5% which the price series for the period Nandyal 17% 12% 1985 to 1993 were available, the Rajkot_ 15% 5% Madras 10% 90% seasonal prices indexes during the Delhi 9% 4%0o two periods were estimated and Calcutta 8% plotted to examine whether seasonal Hydrabad 18% 4E price behavior changed during the Hapur 10% 8% two periods. Plots of the seasonal Delhi 8% 9% price indexes during these periods are Moga 6% 12% presented in the Appendix. Visual Calcutta 8% comparison of the plots indicate that Shivapuri 6% there was a change in the behavior of 3OOO O i S ______i ^_ prices, not only in terms of degree of Madras 5% Bidar __ _ _ _ _ _ _ _ _ _ 12% seasonality, but also price movements Source: Computed. during the year. Calculation of the Annex 4 Page 9 of 20 coefficient of variation (CV) of the indexes indicate that with the exception of groundnuts in Bombay, the CVs for all markets for both oilseeds and oils on average declined by 2-3 percentage points, indicating a slight reduction of the seasonality in prices. The reduction in price seasonality could in part be attributed to the Market Intervention Operations, although it could also be attributed to the growth in the processing sector and the corresponding increase in competition in the oilseed market which is bidding prices up during the harvest season and the improved timing of edible imports which poses a cap on the price rise. A4.22 Incidence of Price Instability is Low. To measure the degree of instability in oilseed and oilseed product prices, the seasonal, trend and cyclical components were filtered out of the oilseed and oilseed product prices in selected markets. The coefficient of variation of the random components were estimate and the results are presented in Table A4.8. The analysis shows that with the exception of rapeseeds in the late 1980s, groundnut, soybean, sunflower, groundnut oil and rapeseed oil exhibited only a small degree of instability. To a large extent, this could be attributed to increased diversification of production over seasons, regions and states. Table A4.8: Instability in Selected Oilseeds and Edible Oil Markets Coefficient of Variation of Detrended, Deseasonalized Prices for Selected Year Groundnut Rapeseed Soybean Suiamiwer Gmdiuit Oil R-peS_edOi Nandyal Hapur Indore Khargaon Hyderabad . a.-r 1985 0.5% 4.8% 1.3% 2.2% 1986 2.4% 2.8% 3.0% 1.9% 1987 1.6% 6.0% 1.2% 1.4% 1988 2.0% 5.6%0_ 2.3% 3.1% 1989 2.2% 7.0%0o 0.9% 1.7% 1990 1.6% 2.6% 1.3% 1.3% 1991 1.9% 3.1% 2.1% 2.4% 1.2% 2.0% 1992 1.20/o 3.4% 1.4% 2.1% 1.4% 2.3% 1993 1.9% 2.3% 1994 0.9% 2.8% 85-92 0.3% 1.3% 0.4% 0.5% 91-94 0.5% 0.9% Source: Computed. A4.23 Imports over Last Four to Five Years Had Limited Distortive Effects on Prices. By importing edible refined oils into the country, the STC could disrupt the price behavior of such oils over time. However, the cautious approach observed over the last four to five years in limiting the amount and better scheduling of such imports does not seem to have resulted in noticeable disruption of domestic oil prices. The uncertainties created by the unpredictability of STC and NDDB imports at preferential tariffs, compounded by the absence of market-based hedging instruments, also risk creating misleading signals for private sector management, which cannot distinguish between losses caused by the effects of market intervention, and those caused by improper open positions taken by management. With the liberalization of trade, price seasonality observed on the international markets will be reflected in the domestic prices. A stronger seasonal pattern would facilitate storage and give significant competitive edge to Indian products during some periods of the year, while foreign products would complement demand in the other periods. Annex 4 Page 10 of 20 Constraints to Efficient Commodity Allocation Over Space and Time A4.24 Several factors constrain the optimal allocation of oilseeds and oilseed products over space and time in India, most of which derive from government policies and regulations which impinge on the operations of the private sector. How these factors influence the efficiency of marketing is discussed in the following section A4.25 Central and State Government Regulatory Barriers to Intra-State and Inter-State Trade. Two key government policies which hinder the movement of oilseeds and oilseed products within and between states are the state imposed movement control, and the central and state tax policies. The imposition of movement controls prevents traders from responding to supply and demand signals as reflected in prices. Moreover, the intermittent enforcement of these regulations imposes considerable uncertainty and reduces the efficiency of marketing operations of private traders. For example, movement controls have been enforced by state governments at various times with limited advance notice to traders. In Gujarat, for example, the transport of groundnut oil was banned seven times between 1990 and 1995. Andhra Pradesh exercised the same powers in 1992. The poor and declining groundnut market performance during the 90s lends testimony to the detrimental effects of these movement controls. The need to get official permission to transport oilseeds or oilseed products further increase transaction costs: e.g., the obligation to get permission from the District Controller to ship oilseeds to other states. In addition, the multiple taxation of commodities as commodities are transported add a further burden to traders. A4.26 Limited Stockholding in the Private Sector. Due to direct (i.e. stock limits on oilseeds and oils) and indirect restrictions on storage (i.e. storage credit limits of the RBI and forward and futures market restrictions), storage activities and investments in the private non-cooperative sector have been limited. Storage on-farm is negligible. With the exception of cooperatives and a few of the larger private processing units, no bulk storage of seeds is currently available along the marketing chain. The low storage limits set by the ECA for traders and processors creates a lack of flexibility in normal commercial operations, and especially in the management of risks related to price fluctuations during storage. Faced with these constraints, little real investment has been made by the private sector in modern storage facilities for edible oilseeds and oils. Storage is therefore scattered over a multitude of small operators, traders and or processors, who are active for only a few months of the year. Storage limits have also had a downstream impact on processors, because they limit the capacity of oilseed suppliers to purchase, store and mix seeds of differing oil content to achieve the precise quality requirement of the processors. The only exception lies in the support provided to farmers by building storage facilities at mandis, to be used for only a few days until the actual sale of the products. Such godowns are financed by the mandi fees collected in the same state. A4.27 Storage and Movement Controls Impose a Major Barrier for Arbitrage Trade. The absence of efficient storage infrastructure, as a result of the various restrictions imposed on oilseed and edible oil wholesalers, the low legal limits (a maximum of 11 days) on forward trading and movement controls do not leave much leeway for traders to make trade-offs between buying and selling, storage and forward sales, to be able to undertake arbitrage. Under these constraints, arbitrage is mainly limited to operations which result in the actual shipment of products from one location to another within the 11 day forward trading ceiling to take advantage of price differentials higher than the transportation costs PJj transaction costs. A4.28 The Poor Quality And Poor Dissemination Of Information On Prices. With the exception of a few key reference markets, it remains relatively difficult to gain access to detailed price information, even Annex 4 Page 11 of 20 though detailed statistics are collected, on a daily basis, at each mandi. Price data are reported regularly in local and national newspapers for only a few important locations. The limited success of arbitrage in achieving price stabilization over space might also come from the poor reliability of the prices that are reported. Although such reliability is difficult to assess, it appears to be viewed in quite a good light by most local oilseed traders. Also, it is evident that many of the larger oilseed processors each day determine the prices offered by their buyers on the basis of the quotations reported daily in one or two major urban centers, such as Bombay and Delhi. The NDDB, however, questions the reliability of the prices that are reported by the Bombay Oilseeds and Oils Exchange.11 A4.29 The Small Scale Of Operations In The Crushing Industry (in particular, in the groundnut and mustardseed sectors, as a result of Small Scale Industry Reservation) does not give the necessary incentives to processors to organize slhipments of seeds from other regions to fulfill supply requirements and permit factories to reach full capacity. Oilseed crushing, therefore, remains a highly localized activity, in which processors do not fight hard to get access to seeds from other regions to reduce their unit fixed costs. A4.30 Lack of Hedging Instruments to Offset Risks of Price Fluctuations During Storage. Forward and futures trading in oilseeds and oilseed products are heavily restricted in India. As a results, traders have very limited options for hedging their price risks nor do they have access to a long-term future price reference to guide operational decisions. The current pricing system for edible oilseeds and oils is based on cash sales for immediate or very short term delivery (with a maximum of 11 days). Market information systems operating in India only report cash prices for spot delivery, since, in common with forward trading, futures trading is not permitted for edible oilseed products2. The legal constraints on forward and futures trading force the few agents authorized to store edible oilseeds and oils to keep an open position, and, therefore, be at risk. Price fluctuations within and across crop years are such that, even if storage constraints were eased, the absence of hedging instruments with which to insure against price fluctuations would still constitute a significant barrier to the development of large scale commercial storage, similar to that found in many other countries. This is because speculative risks would still be too high to persuade the private sector to undertake such storage activities. If the legal constraints to forward trading are removed, several existing commodity exchanges, experienced in futures trading for castorseed and with a history of trading edible oilseed futures in the past, would be in a good position to start operating and become a major center of hedging activities and source of price reference for India and maybe for other countries in the region, too. B. Quality Standards and Market Information: Performance and Key Determinants A4.31 Indian Markets Are Not Efficient in Reflecting Quality Differentials. The Indian markets currently do not efficiently reflect through prices differences in product quality. For example, the price differentials between different qualities of refined oils display relatively large fluctuations and are sometimes even negative. Poor price translation of quality is mainly traced to a lack of a nationally recognized quality standards and their weak enforcement as well as the confusing web of overlapping regulations governing quality control. 11See below the discussion on market infonnation. 12The Bombay Oilseeds and Oils Exchange trades castorseed futures. Castorseed does not belong to the list of edible oilseeds: futures trading is therefore pernitted. Annex 4 Page 12 of 20 A4.32 Price differentials between different qualities of refined oils display relatively large fluctuations. Price differentials for different types of refined oils, as reflected by the prices reported at the Bombay Exchange fluctuate widely. Figure A4.6 presents the price margin between soybean and rapeseed refined oils. In the case of soybean oil, some of the volatility may be result of shocks that the Indian market may have received from a temporary shortage of domestic supplies. In general, price differentials between the main types of refined oils have not stabilized. Consumers do not seem to switch easily from one category of oil to another. Figure A4.6: Price Premium of Refined Soybean Oil Over Refined Rapeseed Oil, Bombay Commodity Exchange 350 - 300 - - -_ _ _ __ _ _ _ _ _ _ _ _ _ _ _ 250. _-lll 200 -oo___l _- 150. * 100 ___ 50- Jul-88 Dec-94 Source: Bombay Commodity Exchange. A4.33 Weak Enforcement of Quality Standards, Particularly With Respect to Blended Oils. The blending of two pure oils is now permitted under the Prevention of Food Adulteration Act, and consumers have to be informed on the label of the package. Vanaspati, by nature a blend of different refined oils, which is then hydrogenated, is sold to consumers with an obligation to indicate the raw materials used in the process; however, the labeling does not give any indication of the actual percentage of each oil. Edible oils are one of the few exceptions to the PFA rules of 1955, Article 32, which states that every label has to specify the names of the ingredients used in the product in descending order of their composition by weight or volume. Among the few exceptions to this rule, "... class titles may be used, namely: 'edible fats', 'edible oils',.. ." There are widespread claims that amounts of high quality vanaspati (with a color close to white) are sold for adulteration with ghee, a much more expensive dairy product popular with Indian consumers. There were also persistent allegations that castor oil, an industrial oil, is widely blended with other oils sold for edible purposes. These allegations are surprisingly precise: it is said that castor oil accounts for 2 % of the edible oil consumed in India, and that the proportion ranges up to 10 % in extreme cases of adulteration. The current organization and facilities of the Government agencies responsible for preventing food adulteration do not seem to be adequate to stop such practices. Annex 4 Page 13 of 20 A4.34 Lack of and Weak Enforcement of Regulations Have Adverse Consequences on Consumer Safety. The health hazard associated with the existence of aflatoxin in groundnuts or of erucic acid and glucosinolates in mustard and rapeseed is not adequately being addressed in India. In other countries, these problems have resulted in significant changes in the choice of varieties and post-harvest techniques. There no indication from either the Government or private sector, that they saw action in these directions as a high priority. It is claimed that the relatively low per capita consumption of oils reduces the potential health hazards for the average consumer. It is also reported that, the strong pungent taste of raw mustard oil that consumers prefer in northern regions, is correlated with the presence of erucic acid, with a widespread belief that the use of the oil in the cooking of fish neutralizes the harmful effects of the erucic acid. No research has been reported into ways of catering to consumer preferences for pungent oils in several regions in India, while also reducing the health hazard resulting from the presence of erucic acid. A4.35 Poor Quality Control Especially with Respect to Aflatoxin and Glucosinolates in Oil Cakes Have Hurt Exports. The presence of glucosinolates and aflatoxin in protein oilseed cakes (including DOC destined for export markets) is, to a large measure,13 at the heart of the large discounts paid by foreign buyers for mustardseed and groundnut meal of Indian origin. Food inspection is currently based upon a punitive approach, with limited results in this respect. This can be contrasted with a prevention and educational approach, under which each producer and distributor would be in charge of guaranteeing the quality of the product and of informing its consumers about it. Then, quality control would fully become a private sector concern, with private inspection agencies certifying the quality of the product and the State agencies in charge of controlling the quality and the validity of such certification. In such a large country, with a extremely large number of small processing and marketing units, the evasion of quality control is pervasive. A review of the role, facilities and procedures of quality control should be undertaken, having in mind a more effective management of quality, the simplification of the supervision process, the right to contest quality control in the courts to avoid bribery, and the privatization of certain tasks (e.g., the quality inspection of imported edible oils). In addition, a review of the basic issues related to the intrinsic quality of seeds and oils should be made in relation to the best practices in foreign countries. A4.36 Storage Restrictions Indirectly Impact on Quality Management by Processors. The ECA restrictions on stock-holding make it uneconomic for traders to develop the capacity to store and mix different seed qualities to meet the differing oil quality demands of processors. Although most medium to large scale processors are able to buy seeds in terms of their oil content, local traders are not equipped to store and mix, on a large scale, different qualities of seeds in order to achieve the precise quality that processors would expect. Such adjustments in the quality of products in response to market needs is one of the services that wholesalers, when properly equipped with laboratories, multiple cell silos, scales and conveyor belts, can achieve. These services are not offered by the private sector in India, and cooperatives only do it for their own operations. A4.37 Grading is Hardly Enforced in Oilseed Marketing Which Disadvantage Farmers. Oilseed grading is generally undertaken in an unscientific manner in nearly all markets. In the regulated markets or mandis, grading by traders continues to be done by visual means (in terms of color, dust, moisture and foreign matter). A high moisture content and deterioration of oilseeds is an issue only during the kharif season, and some traders use moisture meters to measure the true moisture level during the season. Buyers claim that they are able to assess, without the use of any special equipment, the oil content of the seeds. In 13Other reasons exist for the discounts suffered by Indian meal exporters, as explained in Annex 3. These include the very slow pace of the loading of vessels in the ports and the disruptions often observed in the supply of such products to the ports. Annex 4 Page 14 of 20 practice, unless supplies are low, they tend to be conservative in their estimate of the oil content and in their pricing as well, since the oil content is the main element sought by their industrial clients. An attempt has been made by the cooperative sector to apply more scientific techniques to the assessment of the quality of the seeds delivered by the local farmers, and to pay accordingly for the product. This could eventually have a beneficial educational impact upon producers but, so far, the small share of the market held by the cooperative sector has not resulted in the emergence of a similar approach by private traders, nor in improved payment practices based on scientifically assessed quality elements. In principle, edible oilseeds are traded on the basis of a fair average quality (FAQ), the definition of FAQ can differ from region to region and from year to year. The grading of oilseeds is based mainly on the presence of foreign matter in each lot offered for sale, and, in the case of groundnuts, on the quantity of seeds actually obtained from the pods. Traders start to discount the price of seeds when foreign matter exceeds a certain level, which is commonly 1 % for groundnuts; and 0.5 % for soybeans. Traders and processors state that the oil content is often not an issue per se, since they have a good understanding of the normal oil content at each local market. Therefore, they price the seeds on the basis of the average content which they believe to be representative of each specific mandi. A4.38 Overlapping Legislations on Quality Standards Complicate Quality Enforcement. In addition to the Vegetable Oil Products Control Order, 1947 and the Solvent Extracted Oil, Deoiled Meal and Edible Flour (Control) Order, 1967, which both regulate the quality and packaging of edible oils to ensure consumer health and safety, other subsequent and more encompassing GOI legislations, such as the Prevention of Food Adulteration Act, 1954, the Weights and Measures Act, the Packaged Commodities Order, 1971 and the Blended Edible Vegetable Oils Grading and Marking Rules, 1991 under the Agricultural Produce (Grading and Marking) Act, 1937, also govern edible oil quality and safety standards. The multiplicity of legislations on quality and the subsequent overlapping jurisdictions of enforcement agencies and inspections only serve to increase the transaction costs for traders and processors. Inspections by these agencies are perceived by the private sector as a form of harassment, which create opportunities for rent-seeking. Although the GOI is aware of the overlapping regulations and enforcement responsibilities of several agencies, it has not taken any measures to rationalize the quality control system for edible oils and their products. A4.39 Conditions for Allowing Quality Improvement while Protecting Consumer Safety. Promoting quality improvement in India entails both providing the enabling environment for the private sector to respond to market signals for quality while instituting regulations to protect consumer welfare. Private firms on their own may enforce and maintain quality standards through quality control systems during the manufacturing and distribution process, product labeling, and consumer information campaigns. However, public welfare considerations requires an important role for the state in terms of providing the legal and regulatory framnework for setting the minimum quality standards to ensure consumer health. In India, the removal of price controls will contribute considerably to creating the market incentives for product quality improvement. But at the same time, there is a need to: (i)eliminate regulations which hinder quality diversification in response to consumer preferences (e.g. limits on the number of oils which could be blended); (ii) strengthen the enforcement of quality standards (e.g. aflatoxin contamination); and (iii) eliminate disincentives for improving product quality (e.g. unreasonable restrictions on packaging.) A4.40 Market Driven Incentives Can Play a Major Role in Addressing Quality Management Issues. The private sector has the ability to adjust its practices in response to market-driven improvements in the quality of oil and cake, and improved health standards and controls. While the market shares of refined oils in the overall edible oil sector are small, it seems that quality management and quality enhancement, as exemplified by the fast rising demand for refined oils at the expense of filtered expeller Annex 4 Page 15 of 20 oils, are likely to remain largely demand-driven. The development of product differentiation strategies, in particular for refined oils, will play a significant role in this process. In this regard, significant efforts are underway on the part of several large enterprises, to improve i) the quality of the raw oils purchased for final processing, notably lowering their FFA content, ii) conditions of delivery and inspection, and iii) the settlement of disputes. Such efforts from major purchasers of oils create new incentives for raw material suppliers to adapt their practices all the way along the marketing chain from the farrners, in order to be able to meet the customers' requirements at the minimum cost. Hindustan Lever Ltd. published in May 1991, a 24 page booklet (the "yellow book") listing and describing the current set of general terms and conditions for its purchase of vegetable oils and fats. Such developments by private sector should be encouraged and support should be provided to suppliers to help them to adjust to these new circumstances. Private trade associations and cooperatives would be in the best position to take a lead in these efforts and collaborate with governmental institutions in this initiative. Market Information A4.41 Market information by private sector and state agencies is collected extensively, but poorly disseminated. The oilseed sector is characterized by an very extensive network of markets, on which the collection of data (mostly related to prices) is undertaken thoroughly on a daily basis. State Government agencies and private traders on the main commodity exchanges are doing a commendable and useful job in this regard. The dissemination of information also benefits from two large conferences (the kharif and rabi conferences) organized by an active, although poorly equipped, industry-wide organization in the area of oilseeds and oils: the Central Organization for Oil Industry and Trade, which prepares its own forecasts of the supply/demand balance within the sector. The information gathered within the sector and released at these conferences receives worldwide attention and is reported thoroughly in India and in foreign oilseed journals. A large number of newspapers and, in particular, the economic and business press, report the key market prices for prompt delivery for the main edible oilseeds and oils and for DOC on a daily basis in the major centers of production and consumption. Specialized commodity exchanges in several states also provide well organized market information on oilseeds and their derivatives and disseminate daily market prices. The publications of the Bombay Oilseeds and Oils Exchange are widely cited in this respect, and are given a significance as a reference source, which reflects Bombay's large consumer market and export shipments. The Bombay Exchange performs excellent work in the dissemination of general market information and price statistics. A4.42 Within India, as a whole, three main deficiencies have been observed in the flow of information. They are: * The absence of information on the volumes traded on the various market centers. They are collected each day in the mandis; but, are not collected for the main commodity exchanges. As a result, the significance of the prices reported on these markets is reduced, since it is not known whether they result from the trading of small quantities (which would threaten to give rise to narrow markets, which would not be representative of the balance of overall supply and demand); * The lack of information on the number of market participants reporting prices to the main commodity exchanges and whether they are truly representative of trading conditions. Several companies in the cooperative sector and among leading end-users claim that the prices published by the Bombay Exchange are not representative of the terms on which actual trading is occurring. Nevertheless, there is firm evidence that large processors and traders in several regions of India believe otherwise, and use Annex 4 Page 16 of 20 Bombay prices to determine their daily strategy regarding the purchase prices at which their buyers make their offers at the mandis. This issue of the representative nature of the prices published at the major markets could be resolved by inviting a representative of the cooperative sector and of other vital interest groups, such as industrial end-users, to contribute to the daily reports. If forward trading becomes legal, some commodity exchanges could develop open trading floors where more clarity would be secured; and * The poor dissemination of most of the prices collected at the mandis. It is not known what is done with all of the valuable information collected on a daily basis by mandi officials and then submitted on a daily basis to State and Central Government Ministries. Even the Bombay Exchange, which offers to fax and mail its daily prices, has a very small number of subscribers. However, the leading international specialized videotext systems, such as Reuters and Knight Ridder, are now collecting and disseminating this information in real time on their networks. C. Performance of the Market in Exchanging Risks Principles of Crushing Margin Hedging A4.43 Why are International Crushing Margins So Low and Volatile? The international oilseed industry is characterized by crushing margins that are typically low, highly unstable and sometimes negative. The peculiarities of the oilseed complex explain this unusual situation. The prices of individual oils are highly correlated with one another, by virtue of the substitutability between different oils, and the same is true for meals. Since crushing margins are determined as the comparatively small gap between different oil and meal on the one hand, and the prices of oilseeds on the other, their values are derived as the result of the interaction of three quite different markets: (a) the market for oils and the position of the individual oil in the entire constellation of other oils; (b) the market for meals and the standing of the relevant meal in the much broader market for livestock feed; and (c) the supply and demand conditions in the individual oilseed sector in question. A4.44 High Technical Efficiency and Risk Management Techniques Enable Oilseed Processors Worldwide to Operate in an Environment of Low and Volatile Crushing Margins. In order to survive financially, crushers operating in open international markets have to operate according to two distinct objectives. First, they have to maximize their technical and economic efficiencies--by economizing on their use of inputs per unit of output; by minimizing the extraction of losses of oil during processing; and by holding down their production costs. Second, they need to take full advantage of the few moments when crushing margins are favorable by employing risk management techniques. A standard technique is through hedging techniques on futures markets. Specifically, they have to ensure that when margins are profitable, they lock in forward crushing margins by using futures and forward sales as forms of hedging, so that they are assured of several weeks or months of future profitable activity, untroubled by the day-to-day fluctuations in seed, oil and meal prices. In the meantime, they look out for other windows of opportunity, when they lock in crushing margins for another few weeks. Hence, on average, such processor's margins are better than the simple annual arithmetic mean. . This expertise in futures trading, far from the technical expertise about processing technologies per se, is so important that, since the 1970s, the restructuring of the oilseed crushing industry in a number of large producing countries has occurred primarily under the lead of large international commodity trading firms. Their trading expertise, as well as the benefits from the integration of new flows of products into their trading activities, became key elements in the restructuring of crushing enterprises which were often chronic loss-makers. Another complementary technique is the flexibility in the sourcing of raw materials, either on the domestic or the international market. Flexibility Annex 4 Page 17 of 20 allows a processor to acquire its raw material needs at the Figure A4.7a: Frequency Distribution of Real Monthly best price. Processors, therefore, usually locate their Crushing for Groundnut in Rajkot, Jan 88 to Dec 1992 facilities in a port where large sea vessels could deliver large and uniform quantities of imported seeds, when the 6 use of domestic products become less profitable. This is 5 crucial for the success of this important element of the oilseed marketing chain. To protect farmers from the 4 adverse effects of price instability, some countries operate L partial price stabilization programs (see Text Box 1 in 3 Chapter 3). 2 Indian Oilseed Crushing Industry A4.45 Crushing Margins in India are Also Highly o Volatile and Exhibit Negative Values. Like their foreign S0 8- O counterparts, oilseed processors in India also face a high Rupees degree of crushing margin volatility. Figures A4.7a and A4.7b present the frequency distribution of the theoretical Figure A4.7b: Frequency Distribution gross crushing margins (1990 rupees) in selected markets of Real Monthly in India (Appendix A4.4 presents the crushing margins for Rapeseed Crushing Margins, Kanpur groundnut in Bombay and Hyderabad, for rapeseeds in Jan 1988 - Dec 92 Moga, Hapur, Kanpur and Delhi).14 In groundnuts, the 25 gross crushing margins (GCM) are highly unstable and in many cases exhibit negative values (Table A4.9). Rajkot 20 market displayed the highest instability with a coefficient l of variation of 76 %, with absolute values of GCM ranging a 15 from Rs -441 per 100 kg to Rs 509 per 100 kg . The 10 Hyderabad and Bombay markets exhibit lower CVs of 51 , 10 and 39 % respectively. They also exhibit negative GCMs, but unlike the Rajkot market only reach Rs-30 per 100 kg. The spread between the highest and lowest GCMs in all the 0 markets are also very large: Rs 895 in Hapur, Rs 424 in -25 25 75 125 175 225 Hyderabad, and Rs 420 in Delhi. Rupees Source: Annex 4 These markets were selected solely on the basis of data availability. The gross crushing margins for groundnut and rapeseed was calculated using the following formulas: Groundnut: Crushing Margin Without Shell = (Oilcake Price * 0.57) + (Oil Price * 0.41) - Oilseed Price Crushing Margin With Shell = (Oilcake Price * 0.57) + (Oil Price * 0.41) - (Oilseed Price* 1.428) Rapeseed: Crushing Margin = (Oilcake Price * 0.60) + (Oil Price * 0.37) - Oilseed Price Annex 4 Page 18 of 20 Table A4.9: Crushing Margin Statistics in Selected Markets A4.46 The real gross crushing margins of ia<-e Hau K ;: 000 . ^tanpur Eh rapeseed are also highly volatile, but unlike CV 0.88 0.27 0.18 groundnuts, remain consistently positive. Of Mean, Rs/100 kg 143 93 172 the markets analyzed, the GCM of the Hapur Max, Rs/100kg 240 173 257 market displayed the highest degree of Min. Rs/100 kg 71 31 85 instability with a CV of 88 %, in contrast to -V -ll=6:<*6 - - :f; R 039 Kanpur (27%) and Delhi (18%). The spread Groudnu Rajot iydeaba Bomay ogabetween the maximum and minimum GCM CV 0.76 0.51 0.39 0.27 values in the markets are also large: Rs 169 in Mean, Rs/100 kg 242 171 213 276 Hapur, Rs 142 in Kanpur and 172 in Delhi. Max, Rx/100kg 509 386 390 557 Min. Rs/100 kg 441 -38 -30 120 A4.47 Government Policies and Source: Computed Regulations Inhibit Indian Processors from Effectively Coping with Crushing Margin Instability. Government policies and regulations inhibit Indian processors from effectively responding to the considerable uncertainty in their processing operations by imposing constraints on their ability to improve their technical and economic efficiency and increase their operational flexibility to respond to price risks. First, government policy, in particular the Small-Scale Industry Reservation Policy, prevents processors from adopting the optimal size and type of processing technology. Second, storage and movement controls and access to risk management instruments (the Forward Markets Regulations Act, only allows forward sales of oilseeds and oilseed products up to 11 days in the future) foster economic inefficiencies in processing. For example, forward or futures trader would at least enable processors to lock into profitable crushing margins far in advance. Even if profitable crushing margins exist in the market, processors' capacity to accumulate stock is restricted by storage limits under the Pulse, Edible Oilseeds and Edible Oils (Storage Control) Order and caps on working capital loans under the Selective Credit Control Policy by the Reserve Bank of India. Third, flexibility in sourcing of inputs as another means of coping with crushing margin risks is constrained by import controls and multi-point, non-unitary taxation imposed on intra and inter-state trade. A4.48 Absence of Instruments Coping with High Crushing Margin Instability Have Several Adverse Consequences. The limited options processors have in coping with crushing margin instability are major factors contributing to higher crushing margins overall and the creation of incentives for processors to adopt "creative methods" to assure profitable operations. Due to the high degree of crushing margin instability, processors are forced to incorporate a higher risk premium in their margins to cover for such risks. Crushing margin instability also encourages some processors to pursue creative methods to improve profitability. including both legal--taking advantage of export performance incentives-- and illegal means --tax evasion, adulteration of products and export commodity switching. These alternative sources of profits are discussed below. A4.49 Alternative sources of profits, derived from financial and fiscal operations, have been discovered by the industry to make up for losses on their high risk and low margin processing, and trading activities. Due to the limited options for hedging against price risks, processors have been obliged to find alternatives and to develop financial and fiscal strategies to offset these problems. The existence of strict foreign exchange control in India has created a separate market for foreign exchange that results in significant benefits for those, such as oilseed crushers, who are able to export oil cake. There are several ways in which the foreign exchange regime boosts the returns from export sales. The first arises as a direct result of the incentives which are provided to companies which earn foreign exchange. Companies which earn foreign exchange are classified into trading houses, export houses, star trading houses and superstar Annex 4 Page 19 of 20 trading houses, according to their export earnings. As they move up this scale, they receive improved access to import licenses. This access has its own premium value in an economy in which foreign exchange is firmnly regulated. For those companies which do not attribute a high implicit shadow exchange rate to access to import licenses, there is a second way in which export sales can generate special benefits to the DOC producer. The company can sell its export contracts to other companies, who want to secure proof of foreign earnings. The resulting premium which is paid, over and above the official exchange rate, is known as "export performnance". In 1995, it tended to average 3 to 4 % of the reported export price, which translates into a bonus for the producer of DOC. A4.50 Rupee-Ruble Escrow Accounts Provided Another Opportunity for Obtaining Additional Export Revenues. Another avenue for generating extra revenues is through DOC export sales (or any other export product) to Russian trading companies within the framework of the Rupee-Ruble escrow account. This escrow account is part of the inter-government agreement to ensure that there is a balance in trade between the two countries. Russian traders use the escrow account's Rupees to pay for Indian exports, which do not necessarily have to be delivered to Russia, but which can also be delivered to third countries. The typical situation is one in which Russia has an underlying trade surplus with India. Therefore, Russian buyers enjoy a premium exchange rate when they purchase Indian export products. The actual escrow account premium has been in the range of 5 to 8 % in 1995. This figure is somewhat higher than that for export performance for three main reasons: (a) the exporters in such contracts are obliged to accept the LIBOR rate on their Rupee receipts, and are not allowed to earn the forward premium for the Rupee against the US dollar (which other exporters are permitted); (b) the exporter is not given access to pre-shipment credit, and therefore pays a commercial rate of up to 13 % on such short term finance, as against concessionary rates of 8.5 % which applied in mid- 1995 on other export sales; (c) the organization of export sales under this scheme is more time-consuming and more fraught with risks. The premium over the export performance bonus reflects the higher risks associated with these trades. A4.5 1 Increased Incentive for Other Illegal Actions to Overcome Highly Uncertain Environment The highly uncertain environment in oilseed processing has fostered the adoption of other illegal practices. It is well recognized that tax evasion is occurring in India as a means of compensating for poor margins. Illegal transactions have also been undertaken in DOC export sales. There exists a sizable blocked Rupee escrow account, accumulated during the period of past imbalances in the trade between the two countries, and this is meant to be used solely on exports destined for Russia. In 1992, India's protocol with Russia covered a debt of Rs 120 billion which will be repayable over 40 years without interest, and a Rupee escrow account liability totaling Rs 240 billion, which carries 2% annual interest and is repayable in ten equal installments. The GOI set iitself the target of liquidating the latter account rapidly by making exports of Rs 30 billion each year under the escrow arrangements. Cases have arisen in which exports have been discovered to have been made, ostensibly under this scheme, but in which the cargoes were sent to third countries; this is known as "switch trade". The premium which is offered for illegal switch trades is over 30 %, divided equally between the Russian trader and the Indian exporter. In late 1994, one shipment of soybean DOC was discovered to have been shipped to Singapore and the Philippines, without having received the Soybean Processors' Association registration certificate, as required by Reserve Bank of India guidelines. SOPA subsequently refused to register any other contracts by the same exporter, but the company in question approached the Ministry of Commerce, which requested that SOPA to register the company's next export contract. The Ministry of Commerce has tried to prevent any further switch trades of this sort by requiring a new 10 % bank guarantee for such Rupee escrow exports. Annex 4 Page 20 of 20 Competition and Marketing Performance. A4.52 The improvement in the performance of the edible oiseed and oil marketing chain did not accompany the surge in oilseed production. The spectacular development of oilseed production, in particular in rainfed areas, materialized in spite of the obstacles created by an inefficient marketing and processing system. The efficient allocation of oilseeds over space, time and quality, is disrupted by numerous constraints, both legal and technical (including constraints to private sector physical exchange of products and inadequate infrastructure and facilities). The legal framework of the 1950s, when the Central Government, with the support of State Governments, was i) planning and controlling the allocation of products over time, space and quality; and ii) managing foreign trade behind strict quantitative barriers, is still largely in effect. Although the enforcement of these laws has been significantly lessened, at any moment they can be revived, as they are from time to time. They create a potential threat to investors in the marketing chain. The low level of investment in improving the marketing of edible oilseeds and oils, while resulting, to a large extent, from the provisions of the ECA, has been acknowledged by the Government of India, and the task of improving the efficiency of marketing has been and is still entrusted primarily to the cooperative sector and to the NDDB through its market intervention operations. In effect, market failure, mostly caused by Central and State Government intervention, is expected to be alleviated, if not solved, by the NDDB. Not only is it dangerous to place a large part of a country's industrial and commercial strategy in this vital sector in the hands of a single agency which is still a parastatal, but, to achieve this difficult task, this agency has been given special permission to operate under less restrictive and more favorable conditions than private enterprises. Consequently, this policy creates unfair competition for the private sector. An alternative way of improving market performance would be to base the implementation of this policy in the private sector itself, with the proper incentives and surveillance by a State agency. A4.53 The easing of barriers to domestic commerce has not accompanied the continuing lifting of trade barriers. In view of a) the gradual reduction in trade barriers for edible oils and the growing competition from imported oils, and b) the exposure of India to world movements on the export markets for protein cake, domestic marketing and processing enterprises are increasingly having to contend with only a limited degree of insulation from world price trends. Accordingly, they have to try to shift the burden of their relatively high marketing and processing costs, and their need for larger margins to make up for unhedgeable price risks, onto farners, which inevitably results in lower farm-gate prices. This is in stark contrast to the normal objectives of competition. Annex 4 Appendix Page 1 of 16 Appendix A4.1 Correlation Coefficients Between Oilseed, Oil, and Oil Meal Markets Appendix Table A4.1a: Groundnut Market Correlation Coefficients of Monthly Prices Bombay& Boinbay& BMas& Hyderabad&dt 13[ R.jkot ffyderabad Nandyal Nondyal i derabad cldyalir- 1985 0.00 0.12 0.184 0.909 0.207 0.670 0.569 0.725 1986 0.65 0.87 0.648 0.903 0.837 0.978 0.885 0.955 1987 0.92 0.64 0.771 0.794 0.722 0.891 0.891 0.958 1988 0.73 0.59 0.646 0.657 0.577 0.728 0.665 0.444 1989 0.85 0.62 0.916 0.352 0.823 0.149 0.945 0.945 1990 0.78 0.09 0.514 0.176 0.762 0.215 0.887 0.848 1991 0.73 0.63 0.559 0.636 0.415 0.579 0.896 0.317 1992 0.38 0.34 0.600 0.655 0.495 0.728 0.711 0.816 1993 0.81 0.90 1994 0.26 0.65 1995 0.33 0.53 85-95 0.92 0.95 85-92 0.90 0.94 0.944 0.924 0.946 0.928 0.971 0.967 Source: Computed Appendix Table A4.1b: Groundnut Market Correlation Coefficients of Monthly Prices Differences Bombay&IiBombay& Bombay& Hyderabad& a Md*..'s& Madad;& ,--. z Raa ~ jkot 1*jyderabad Naxiyal, Naaxiyal Bo"*a 1~ 1985 0.975 0.973 0.987 0.990 0.980 0.984 0.981 0.985 1986 0.231 0.569 0.014 0.765 0.503 0.921 0.800 0.829 1987 0.426 0.529 0.381 0.277 0.425 0.582 0.323 0.667 1988 -0.377 0.405 -0.265 0.209 0.110 0.574 -0.032 -0.008 1989 0.266 -0.292 0.628 -0.214 0.670 -0.313 0.801 0.825 1990 0.038 0.035 -0.018 0.557 0.142 0.648 0.599 0.517 1991 0.367 0.577 0.503 0.605 0.420 0.485 0.863 0.126 1992 0.425 0.289 0.388 0.609 0.504 0.549 0.489 0.489 1993 0.498 0.683 1994 0.326 0.405 1995 -0.602 -0.140 85-95 0.171 0.426 85-92 0.531 0.684 0.585 0.674 0.680 0.700 0.783 0.699 .Source: Computed. Annex 4 Appendix Page 2 of 16 Appendix Table A4.1c: Rapeseed Market Correlation Coefficients of Monthly Prices Delhi&s Del D-o liE& I&k Hapur& H.,. S t C t 1985 0.516 0.551 0.451 0.590 1986 0.953 0.965 0.956 0.960 1987 0.990 0.959 0.795 0.711 1988 0.760 0.865 0.626 0.625 1989 0.937 0.929 0.869 0.944 1990 0.981 0.979 0.976 0.990 1991 0.981 0.967 0.563 0.819 0.601 0.271 -0.450 -0.474 1992 0.801 0.891 0.348 0.850 0.463 0.268 0.817 0.916 1993 0.915 0.948 0.901 0.974 0.850 0.696 0.908 0.897 1994 0.954 0.900 0.808 0.959 0.852 0.683 0.935 0.884 1995 0.887 0.703 -0.028 0.724 -0.144 0.143 0.807 0.736 85-95 0.947 0.645 0.617 0.337 0.234 91-95 0.801 0.945 0.657 0.694 0.756 0.422 0.914 0.016 0.047 Source: Computed. Appendix Table A4.1d: Rapeseed Market Correlation Coefficients of Monthly Price Differences Delhi &VDehi& Delhi& i& H & aD 1985 0.983 0.992 0.961 0.977 0.992 1986 0.490 -0.011 0.078 0.521 -0.183 1987 0.900 0.640 0.755 0.857 0.475 1988 0.703 0.909 0.418 0.162 0.199 1989 0.801 0.897 0.710 0.663 0.663 1990 0.586 0.607 0.850 0.837 0.817 1991 0.383 0.892 0.342 0.416 0.323 -0.190 0.605 -0.027 -0.246 1992 0.954 0.937 -0.051 0.900 0.841 -0.019 -0.261 0.758 0.942 1993 0.528 0.592 0.165 0.822 0.519 0.189 -0.304 0.296 0.454 1994 0.854 0.835 0.166 0.629 0.776 0.470 -0.323 0.733 0.743 1995 0.824 0.553 -0.002 0.566 0.839 -0.057 -0.028 0.440 0.375 85-95 0.544 0.174 0.109 0.002 0.010 91-95 0.445 0.783 0.177 0.498 0.410 -0.128 0.485 -0.013 -0.085 Source: Computed Annex 4 Appendix Page 3 of 16 Appendix Table A4.1e: Soybean Market Correlation Coefficients of Monthly Prices and Monthly Price Differences - MonthlyPices Monthly Price Differences Year Indore &Jlaldwani . Idorte & Haldwani. 1991 0.488 0.880 1992 0.741 0.574 1993 0.733 0.254 1994 0.678 0.111 1995 0.273 0.201 91-95 0.850 0.770 Source: Computed. Appendix Table A4.1f: Rapeseed Market Correlation Coefficients of Monthly Prices and Monthly Price Differences Monthly Prices Monthly Pce. 0Differences 'Year Bidar&Khamgaon 7Bida&Khamaonr' 1991 0.643 0.980 1992 0.768 0.623 1993 0.743 0.321 1994 -0.641 -0.268 1995 -0.688 -0.971 91-95 -0.080 0.041 Source: Computed. Appendix Table 4.1g: Groundnut Oil Market Correlation Coefficients of Monthly Prices NandyAl Bombay & Bombay & Bombay & a & Ma Year Hyderabad Hyderabad Nandyal Raikot Hyderabad Nandy7l H lNundyu) 1985 0.759 0.607 0.811 0.551 0.542 0.711 0.503 0.822 1986 0.975 0939 0.966 0.929 0.966 0.955 0.635 0.713 1987 0.985 0.933 0.919 0.943 0.966 0.963 0.901 0.892 1988 0.860 0.952 0.927 0.970 0.827 0.793 0.163 0.346 1989 0.697 0.741 0.920 0.915 0.672 0.963 0.045 0.223 1990 0.935 0.976 0.955 0.911 0.960 0.921 0.846 0.913 1991 0.838 0.758 0.810 0.835 0.579 0.791 0.401 0.300 1992 0.904 0.969 0.861 0.752 0.890 0.839 0.404 0.258 1993 0.940 0.922 0.823 0.801 1994 0.955 0.631 0.895 0.380 1995 0.682 0.701 -0.231 0.658 85-95 0.986 0.967 0.962 0.910 88-92 0.986 0.986 0.986 0.982 0.974 0.983 0.936 0.932 Source: Computed. Annex 4 Appendix Page 4 of 16 Appendix Table A4.1h: Groundnut Oil Market Correlation Coefficients of Monthly Price Differences . N0007Nan ;ga& Bombay & 7- Boay& a & Madra& Cal ._ ;Y4a Hyeaa Hydelbad Nada akt Hyder .7.;<. : aba Nan,dyal '.Hydraa Nandyid 1988 0.988 0.985 0.962 0.980 0.979 0.974 0.980 0.994 1989 0.303 0.113 0.373 0.453 0.332 0.764 -0.023 0.010 1990 0.215 0.790 0.402 0.624 0.723 0.236 0.050 0.367 1991 0.810 0.681 0.758 0.206 -0.375 -0.097 0.670 0.730 1992 0.951 0.848 0.816 0.777 0.757 0.678 0.092 0.085 1993 0.736 0.580 0.276 0.537 1994 0.477 0.530 0.393 -0.058 1995 0.382 0.273 0.446 0.340 88-95 0.920 0.769 0.235 0.679 88-92 0.912 0.875 0.844 0.854 0.224 0.259 0.754 0.749 Source: Computed. Appendix Table A4.1j: Rapeseed Oil Market Correlation Coefficients of Monthly Prices f~~~eh &$F Del=it .. D elhi-3p§ 5 & Calcutt & Calcutta &2 Cakz 3etts 1985 0.802 0.557 -0.040 0.688 0.722 0.537 1986 0.940 0.985 0.982 0.936 0.97 0.990 1987 0.991 0.976 0.981 0.873 0.849 0.867 1988 0.789 0.676 0.491 0.724 0.849 0.621 1989 0.901 0.919 0.758 0.824 0.943 0.775 1990 0.985 0.989 0.981 0.984 0.981 0.973 1991 0.949 0.984 0.716 0.840 0.802 0.870 1992 1993 0.971 0.748 0.945 0.840 1994 0.206 0.397 0.866 0.931 1995 0.777 0.853 0.713 0.904 85-95 0.930 0.792 0.973 0.834 85-92 0.979 0.985 0.877 0.970 0.965 0.856 Source: Computed. Annex 4 Appendix Page 5 of 16 Appendix Table A4.1k: Rapeseed Oil Market Correlation Coefficients of Monthly Price Differences Delhi & Delhi & Delhi & Calcutta & Calcutta& Caldutta& Year Hapur Kanpur Moga Hapur Kanpur Moga 1985 0.995 0.989 0.981 0.985 0.989 0.990 1986 0.263 0.913 0.729 0.263 0.575 0.856 1987 0.885 0.810 0.831 0.442 0.577 0.312 1988 0.874 0.899 0.083 0.111 0.137 0.059 1989 0.757 0.810 0.524 0.679 0.805 0.622 1990 0.729 0.777 0.538 0.745 0.693 0.662 1991 0.768 0.919 0.353 0.798 0.671 0.542 1992 0.645 0.767 0.354 0.730 0.474 0.026 1993 0.711 0.090 0.674 0.220 1994 -0.110 0.563 0.24 0.718 1995 0.630 -0.519 0.467 0.148 85-95 0.383 0.140 0.685 0.252 85-92 0.820 0.892 0.421 0.732 0.728 0.335 Source: Computed. Appendix Table A4.11: Sunflower Oil Market Correlation Coefficients of Monthly Prices Monthly Prices Montily Price Differences Year Bidar& Madras Bidar&Madras 1991 0.450 0.993 1992 0.227 -0.059 1993 0.842 0.404 1994 0.675 -0.150 1995 0.993 0.990 91-95 0.902 0.932 Source: Computed. Appendix Table A4.1m: Groundnut Meal Market Correlation Coefficients of Monthly Prices Bombay & Bombay & Year Rajkot Hyderabad 1988 0.740049 0.92505 1989 0.725017 -0.45223 1990 0.768749 0.473505 1991 0.541136 0.833519 1992 0.744447 0.781863 88-92 0.84536 0.80159 Source: Computed. Annex 4 Appendix Page 6 of 16 Appendix Table A4.1n: Groundnut Meal Market Correlation Coefficients of Monthly Price Differences Year RRajkot Hyderabad `198802322 0.53791 1989 0.22608 -0.03065 1990 0.294729 0.192379 1991 0.154292 -0.01291 1992 0.637424 0.661608 88-92 0.344892 0.266345 Source: ComPuted. Appendix Table A4.1o: Rapeseed Meal Market Correlation Coefficients of Monthly Prices Year Mogal0 K|pu Kanpurs tS.E 1988 0.547814 0.573013 0.325403 1989 0.732452 0.582146 -0.04179 1990 0.965594 0.856495 0.874896 1991 0.528368 0.851174 0.825797 1992 0.542512 0.733527 -0.14147 88-92 0.901456 0.917307 0.733131 Source: Computed. Appendix Table A4.1p: Rapeseed Meal Market Correlation Coefficients of Monthly Price Differences 0 Xi ;.. Delhi & Delh i & Calcutt'a &E Yea MPt- 0 oga;t Kanpur Kaur K 1988 -0.23197 0.28596 0.481058 1989 0.752352 0.610792 0.047205 1990 0.598882 0.020456 0.098799 1991 0.11072 0.446504 0.147342 1992 0.419826 0.508374 0.545551 88-92 0.413846 0.412689 0.218901 Source: Computed Annex 4 Appendix Page 7 of 16 Appendix A4.2 Johansen Vector Auto-Regressive Cointegration Analysis: Maximum Likelihood Ratios Groundnut Nandyal Hyderabad Rajkot Boimbay Madras Villapuram: Nandyal $yderabad 30.2 A*kot Bombay 55.8 98.4 72.6 Madras:. 68.78 37.01 62.16 Viapuam_ 113.5 Rapeseed Hapur Kanpur Sinhind Moga Hindaun Hpur_ Igampur 114.91 Sihi--- :: S -66.86 Mogs : T ~ -~ - 77.79 lirdaun Deihi 7 - -94.83 68.75 9.51 5.35 Calcutta 173.67 32.86 Suttflowcr Bidar Khamgaon 53.96 Soybea. Indore Haidwai X 35.96 3mund ant Oil Nandyal Hyderabad Rajkot Nandyal Hyderabad 39.85 Rhjkot-'"_ .om .ay 70.95 96.8 23.35 Madras 68.59 48.42 :'i -l Calcutta- 7- 40.26 43.26 Rapeseed Oil Hapur Kanpur Moga Delhi 29.61 123.67 98.45 Calcutta 5.89 99.52 106.65 Sunflower Oil Bidar Khamgon 56.86 Olseed Complex Groundnut Rajkot Bombay Hyderabad Oilseed and Oil 10.31 34.61 17.649 Oiiseed and Meal 24.698 9.88 16.138 Rapeseed Delhi Kanpur Hapur Moga Oilseed and Oil 32.256 63.93 57.858 48.779 Oilseed and Meal 15.894 22.652 15.588 36.431 Note:Critical Values are 13.338 - 10%, 15.197 - 5%, 19.31 0 - 0.1% Annex 4 Appendix Page 8 of 16 Appendix A4.3 Groundnut and Groundnut Oil Seasonal Price Indexes Appendix Figure A4.3.1: Seasonal Price Appendix Figure A4.3.2: Seasonal Price Index, Index: Groundnuts, Bombay Groundnut Oil, Bombay 1.25 1.25 1.20 1.20 1.15 1.15 1.10 1.10 1.05 1.05 1.00 1.00 0.95 0.95 0.90 0.90 0.95 - 0.85 0.80 -0.80 0.75 0.75 X, :E t a e Bz Jan Mar May Jul Sep Nov -| Jan85/De88 Jan 89-Apr 93 |-0 | Jan85/Dec88 - Jan 89-Apr 93 Source: Computed. Source: Computed. Appendix Figure A4.3.3: Seasonal Price Index, Appendix Figure A4.3.4: Seasonal Price Index, Groundnut, Nandyal Ground Oil Nandyal 1.25 1.25 1.15 1.15 1.05 1.05-- 0.95 0.95 0.85 0.85 0.75 X Z t R t 0 Jan Mar May Jul Sep Nov |0Jan85/Dec88 -_--Jan 89-Apr 93 -||J -Jan85/Dec88 -Jan 89-Apr 93 Source: Computed. Source: Computed. Annex 4 Appendix Page 9 of 16 Appendix Figure A4.3.5: Seasonal Price Index, Appendix Figure A4.3.6: Seasonal Price Index, Groundnut Rajkot Ground Oil Rajkot 1.25 1.25 1.15 1.15 1.05 1.05 0.95 ' 0.95 0.85 0.85 0.75 i II 0.75 0 S t 0 @ t Jan Mar May Jul Sep Nov |- Jan85/Dec88 _Jan89-Apr93 -- Jan85/Dec88 -_--Jan 89-Apr 93 Source: Computed. Source: Computed. Appendix Figure A4.3.7: Seasonal Price Index, Appendix Figure A4.3.8: Seasonal Price Index, Groundnut, Villapuram Groundnut Oil, Madras 1.25 1.25 1.15 1.15 1.05 1.05 0.95: 0.95 0.85 ~~~~~~~~~~~~0.85 0.75S0.75 li 0a t 0 < 0.7 Jan Mar May Jul Sep Nov |o Jan85/Dec88 -- Jan 89-Apr 93 --- Jan85/Dec88 -_-Jan 89-Apr 93 Source: Computed. Source: Computed. Annex 4 Appendix Page 10 of 16 Appendix Figure A4.3.9: Seasonal Price Index, Appendix Figure A4.3.10: Seasonal Price Index, Groundnut Oil, Delhi Groundnut Oil, Calcutta 1.25 ___________________1.25 1.15 1.15 1.05 1.05 0.95 s 0.95 - 0.85 0.85 0.75 l l l l l l l l l l 0.75 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov - Jan85/Dec88 Jan 89-Apr 93 -0--Jan851Dec88 Source: Computed. Source: Computed. Appendix Figure A4.3.11: Seasonal Price Index, Groundnut Oil, Hyderabad 1.25 1.15 1.05 0.95 0.85 0.75- Jan Mar May Jul Sep Nov -|--Jan85/Dec88 -U-Jan 89-Apr 93 Source: Computed. Annex 4 Appendix Page II of 16 Rapseed and Rapeseed Oil Seasonal Price Indexes Appendix Figure A4.3.12: Seasonal Price Appendix Figure A4.3.13: Seasonal Price Index, Rapeseed, Hapur Index, Rapeseed Oil, Hapur 1.25 1.25 1.20 1.20 1.15 1.15 1.10 110 1.05 1.05 1.00 1.00 0.95 0.95 0.90 0.90 0.85 0.85 0.80 0.80 0.75 0.75- t R - 0 A - 0 z ~ - Jan85/Dec88 -n- Jan 89-Apr 93 O |Jan85/Dec88 Jan 89-Apr 93 Source: Computed. Source: Computed. Appendix Figure A4.3.14: Seasonal Price Appendix Figure A4.3.15: Seasonal Price Index, Rapeseed, Hindaun Index, Rapeseed Oil, Delhi 1.25 1.20 1.25 1.15 1.15 1.10 1.05 1.05 1.00 0.95 0.95 0.90 0.85 0.85 0.80 0.75 10.75 fi @ i a~o z B, Z [~~~91f/S 95 |~--3Jan85/Dec88 Jan 89-Apr 93 Source: Computed. Source: Computed. Appendix Figure A4.3.16: Seasonal Price Appendix Figure A4.3.17: Seasonal Price Index, Rapeseed, Moga Index, Rapeseed Oil, Moga 1.25 1.25- 1.15 1.15 1.05 1.05 0.95 - 0.95 0.85 -0.85 0.75- 0.75- 1 i ~~~~ 0 ~~~~~~~~~z lJa 1/&-0- -Jan85/DeM88 - Jan 89-Apr 93 Source: Computed. Source: Computed. Annex 4 Appendix Page 12 of 16 Appendix Figure A4.3.18: Seasonal Price Index, Rapeseed Oil, Calcutta 1.25- 1.15 1.05 0.95 0.85 0.7s- ~~~ ~z 4jOj088Oc8]92 Source: Computed. Soybean and Soybean Oil Seasonal Price Indexes Appendix Figure A4.3.19: Seasonal Price Appendix Figure A4.3.20: Seasonal Price Index, Soybean, Indore Index, Soybean Oil, Shivapuri 1.25 1.08 1.20 1.06 1.15 1.04 1.10 1.02 1.05 1.00 1.00 09 0.95 0.9 0.90 0.96- 0.85 0.94 0.80 0.92 0 .75 l l l l 0 l0.90- - 0 z z S oJo91/Sct95 i Cmuan9o/Ou: t5 LSource: Conmputed. Source: Computed. Annex 4 Appendix Page 13 of 16 Appendix Figure A4.3.21: Seasonal Price Index, Soybean, Haldwani 1.25- 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 ---|Jan91/Sep95 Source: Computed. Sunflower and Sunflower Oil Seasonal Price Indexes Appendix Figure A4.3.22: Seasonal Price Appendix Figure A4.3.23: Seasonal Price Index, Sunfllower, Madras Index, Sunfllower Oil, Madras 1.25 1.25 - 1.20 1.20 -1.15 1.15 - 1.10 1.10 1.05 1.05 -1.00 1.00 0.95- 0.95 0.90 0.90 08 0.85 0.85 0.80 0.75 0.75~ ~~~. - | Jan9l/3p9 |Jan91/S&p9S | Source: Computed. Source: Computed. Annex 4 Appendix Page 14 of 16 Appendix Figure A4.3.24: Seasonal Price Appendix Figure A4.3.25: Seasonal Price Index, Sunfllower, Bidar Index, Sunfllower Oil,Bidar 1.25 1.25 1.20 1.15 1.15 1.10 1.05 1.05 1.00 0.95 0.95 0.90D o.ss 0.85 0.80 0.75 0.75- - Jan91/Scp95 -I -Jan91/&P95I Source: Computed. Source: Computed. Annex 4 Appendix Page 15 of 16 Appendix 4.4 Oilseed Crushing Margins: Groundnuts Appendix Figure A4.4.1 : Frequency Appendix Figure A4.4.2: Frequency Distribution of Real Groundnut Crushing Distribution of Real Groundnut Margins, Rajkot Crushing Margins, Bombay Jan 1988 - Dec 92 Jan 1988 -Dec 92. 10 10 9 9 8 8 7- ~~~~~~~~~~~~7- 6-5 3- 2- 2 I1 1* ~~~~~~~~ ~~~0 A 0 'r> ° 0W *- 8 e. -W Rupees Rupees Source: Computed Source: Computed Appendix Figure A4.4. 3: Frequency Distribution of Real Groundnut Crushing Margins, Hyderabad Jan 1988 - Dec 92. 14 - 12 1 10 8 4 2- 0 '0 *'+ 0 .. ... .... 0 HA H > WX Q Q -n 0 'A C7 ' Rupees Source: Computed Annex 4 Appendix Page 16 of 16 Rapeseed Appendix Figure A4.4. 4: Frequency Appendix Figure A4.4.5: Frequency Distribution of Real Rapeseed Crushing Distribution of Real Rapeseed Crushing Margins, Moga Margins, Hapur Oct 1991 - Mar 95 Jan 1988 - Dec 92 25 25 20 20 15 15 10~~~~~~~~~~~~ 5 5 0~~~~~~~~~~~~~~ 5 | 11 1 11 114 0 ):.::{.;:0:N O S m (S g~~~~~~~e t, CO 4 'S t- .r. O 'r o r. 0 r. 0 r. (t . ~ _ > Sr.t >~~C VE Q ( ~4 "~ f4 0 N r. C-4 0 N * _' "( 4 (s sS - Bin Rupees Source: Computed. Source: Computed Appendix Figure A4.4. 6: Frequency Appendix Figure A4.4.7: Frequency Distribution of Real Rapeseed Crushing Distribution of Real Rapeseed Crushing Margins, Kanpur Margins, Delhi Jan 1988 - Dec 92 Jan 1988 -Dec 1992 25 25 20 - 20 5~~~~~~~~~~~~~~~~~~~~~~~~~ 0 ~~~~~~~~~~0 0A Rupees Rupees Source: Computed. Source: Computed. Annex 5 Page 1 of 49 Technical and Economic Performance in Oilseed ,Axnnex Processing A. Technical Competitiveness Indicators & Sources of Data A5. 1 Evaluating technical efficiencies in the Indian oilseed processing sector. In this section we assess the technical efficiency of India's oilseed processing industry. The technical efficiency analysis is undertaken for (a) soybean solvent extractors; (b) non-soybean (soft seed) solvent extractors, (c) mustardseed expellers, (d) groundnut expellers and (e) vegetable oil refiners. The data on the technical efficiency of crushing and refining plants are analyzed in terms of electricity, steam and hexane use per tonne of oilseeds or oils processed. A5.2 The definition of international norms and best practice. The international standards of technical efficiency against which the performance of Indian processors' performance has been compared were derived from major international crushers and refiners who provided data on the normal operating performance of their West European and North American factories, and from China. The Indian averages were derived as weighted averages of data from the sample, using rated capacities as the relevant weights. The comparisons have relied upon four different sources of data: from a large number of field visits in early 1995 in India; from information provided by leading processors in Europe and North America; from a 1993 field trip to China; and from production cost estimates prepared by LMC International. A Bird's Eye View A5.3 Economies of scale are most important in the use of solvents; they are moderate for steam, and small in respect of electric power. In general, there appear to be scale advantages for hexane use in solvent extraction. For refiners and groundnut expellers, larger scale plants tend to be more efficient in their use of steam. Only mustardseed expellers show any economies of scale for electricity usage. The economies of scale in labor intensities are reviewed for expellers alone. A5.4 Low agricultural yields and poor infrastructure reduce the optimal size of processing factory. The low agricultural yields of Indian oilseed crops by international standards mean that a larger area has to be planted to oilseed crops to provide the needs of a given oilseed processing capacity. The larger the supply area, the higher are the costs of delivering seeds to a factory. In the case of India, these costs are raised by the poor road infrastructure. Therefore, the costs of delivering seeds to processors limit the optimal scale of processing capacity. Informed estimates suggest that the limit is in the region of 1,200 tons of oilseeds per day, if a factory is to operate at close to full utilization. A5.5 Legal and credit constraints help to explain a poor technical performance: Legal and credit controls over the oilseed processing sector provide a partial explanation of the poor performance of the Indian industry. Laws reserving the operation of groundnut and mustardseed expellers to Small Scale Industries prevent firms from taking advantage of economies of scale, and from integrating different stages of oilseed processing with one another. Credit controls applied by the Reserve Bank of India (RBI) establish precise limits to the amount of credit which can be advanced by commercial banks for the financing of oilseed processing capacity, with the limits determined as a Annex 5 Page 2 of 49 function of capacity alone. This has led to a willingness by many processors to adopt inefficient technologies, whose main merit is their low capital cost. A5.6 The poor performance is compounded by the waste caused by erratic electric power supplies: A further external obstacle to greater operating efficiencies in the Indian processing sector is the persistent dislocations to electric power supplies in factories. Power cuts cause potentially serious losses of efficiency throughout the production process, and encourage firms to resort to batch methods of operation, even when it is generally accepted that continuous methods would be more appropriate and more economic if power supplies could be trusted. A5.7 A side-effect of the inefficiencies and poor productivity in the use of inputs in Indian oilseed processing plants has been a failure to come close to international environmental standards. The main pollution and environmental problems associated with oilseed processing are (a) the losses of hexane to the atmosphere; (b) the failure to control emissions from boilers; and (c) poor treatment of liquid effluent. Indian factories fare very poorly in all three respects. Hexane losses are exacerbated by intermittent electric power cuts and by the small scale of Indian factories, and are compounded by the biases created by RBI credit controls in favor of false economies in expenditures on capital equipment. Soybean Expanders and Solvent Extraction A5.8 Indian soybean processing efficiencies lag behind EU and US standards, and are slightly behind those in China, too. Co-operatives perform worse than privately-owned factories. Table 1 describes the efficiencies achieved by Indian soybean expanders and solvent extraction factories, distinguishing between private factories and co-operatives. Cooperatives have a lower average capacity than private firms, and tend to be less efficient, using more inputs per tonne of beans. The Indian data are compared with normal operating efficiencies for West European and North American factories, and also with the typical best practice expected of new factories in those countries. The table highlights the very much smaller capacity of Indian factories when compared with international norms. Because Indian processors often economize on equipment, and accept a poor level of efficiency in return for a smaller investment outlay, the country has a much higher hexane use than the international norm, using nearly three times as much per tonne of beans. The poor performance in this respect is compounded by the lack of concern about the environmental harm caused by solvent releases to the atmosphere, and by the losses which occur during frequent electric power breakdowns, when operations cease. Indian factories are also somewhat less efficient users of electricity and steam than their counterparts in the EU and US, although to a much lesser extent. A5.9 To see how far differences in efficiency between the Indian industry and international standards - in Europe and North America, and also in China - can be attributed to economies of scale, we have compared data on an individual plant level within India. In each of the followin figures, international norms (the penultimate column in Table A5. 1) are represented by the extreme right-hand point, with a processing capacity of 2,000 tonnes per day. The Chinese data represent the averages of information gathered in 1993, and indicate that Chinese efficiencies were typically somewhat better than in India, once account is taken of the small size of Chinese factories. Higher capacity utilization in China is undoubtedly one important factor in explaining the difference. Annex 5 Page 3 of 49 Table A5.1: Comlparison of Indian Efficiencies and International Norms in Soybean Expanders and Solvent Extraction Factories EU & US Pertormance INDIA as % of Indian:Average Technical Data/Tonne of Input Units Cooperative Other Private Average NORM IBEST Capacity Tonnes/Day 286 418 334 2,000 3,000 Electric Power Kwh/Tonne 49 43 46 86% 75% Steam Kgs/Tonne 597 474 541 55% 46% Hexane Kgs/Tonne 6.3 5.5 5.9 17% 12% Source: Field visits, LMC data A5. I0 Few signs of economies of scale exist in soybean processing in electric power or steam use, but they are significant in the use of hexane. Figure A5. 1 summarizes the data on electric power use by Indian soybean crushers, in relation to factory size. The data indicate a wide spread in factory efficiency, with little indication of any economies of scale. A similar pattern emerges from Figure A5.2, which relates to steam use. The majority of factories in India process less than 500 tonnes per day, and vary widely in the amount of steam used per tonne of beans. Economies of scale are more apparent in hexane use, as shown in Figure A5.3. Factories with larger throughputs use fewer litres of hexane per tonne of beans. In part, such economies help to explain the particularly large difference between Indian use of hexane and intemational norms, noted above. Figure A5.1: Electric Power Use in India, by Scale of Soybean Factory 560 =_ __ = ___ 52-____ __ _ _0 _ _ _ _ _ _ _ 3 8 - _ _ l _ _ _ _ _ _ _ _ _ -China 40 20 40 Go0 8 1,000 :200 1,400 1,8_00 1,800 2,000 Tonnes per Day of Processing Source: Field visits, oMC data Annex 5 Page 4 of 49 Figure A5.2: Steam Use in India, by Scale of Soybean Factory 800 700 - _ _ _ ~ _ _ _ _ _ _ _ _ _ _ 60 200 400 600 800 12,, 2!~~~~~~~~~~~Tne ChinaofPrcssn 0300 _0__ , -_ _ I 200 ____ --____ _______ ~~~~~~~~International Norm 100 I 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 Tonnes per Day of Processing Figure A5.3: Hexane Use in India, by Scale of Soybean Factory 8 i--__ 0 Chi O!a 3- _ Intemnational Norm, 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 Tonnes per Day of Processing Annex 5 Page 5 of 49 Soft Seed Expellers Plus Solvent Extraction A5.11 Indian soft seed processing efficiencies are adversely affected by Small Scale Industry (SSI) Reservation. Table A5.2 presents the comparable data for the soft seed (non-soybean) solvent extraction industry, showing the average level of inputs used by Indian factories and those expected in Europe and North America with existing factories and under international best practice. Small Scale Industry Reservation plays a major role in determining the structure of the soft seed processing, since the use of expellers for the processing of groundnuts and mustardseed/rapeseed is reserved for SSIs among enterprises outside the co-operative sector. Co-operatives are exempt from these restrictions. The inability to integrate expellers with solvent extraction for the two main soft seeds means that integrated plants are to be found primarily in three areas of operation: among co- operatives, in the processing of oilseeds such as sunflowerseed, and where processors have installed expanders (which are employed mainly in the processing of soybeans, and are not really adapted for use in groundnut and mustardseed processing, but which lies outside the scope of SSI Reservation). The small sample of factories for which we have data means that it is not useful to distinguish between co-operative and private factories in Table A5.2. A5.12 Economies of scale are important for solvent use in soft seed factories, but are not significant for electric power and steam. The small scale of Indian crushers is again apparent: while the normal size of a soft seed expeller plus solvent extraction plant in the EU or the US would be around 2,000 tonnes per day, Indian crushers process on average 233 tonnes per day, and the industry's own target is for a factory size of only 450 tonnes per day, which is less than 25% of the international norm. As with soybean processing, hexane is used much more heavily on soft seed solvent extraction in India than is implied by international standards. We have again tried to assess how much of the greater international efficiency can be attributed to the larger plant size. The international benchmark is represented by the point to the far right of the figures. For soft seed crushers, we could only obtain data on electricity and steam use for a few factories. Figure A5.4 does not contain enough information to allow us to speculate on the existence of economies of scale in electricity use. However, these economies would appear not to exist in the case of steam use (Figure A5.5), since Indian factories operating at below 500 tonnes a day use the same level of steam as international factories operating at 2,000 tonnes per day. The data relating to hexane use are again limited. However, it does appear that, as in the case of soybean crushing, there are some economies of scale, with larger factories using fewer litres of hexane per tonne of seed (Figure A5.6). Once again, Chinese factories compare well with similar sizes of Indian plants in their efficiencies. Annex 5 Page 6 of 49 Table A5.2: Comparison of Indian Efficiencies and International Norms in Integrated Soft Seed Expellers/Expanders and Solvent Extraction Factories Capacity Tonnes/Day 233 2,000 3,000 Electric Power Kwh/Tonne 76 66% 53% Steam Kgs/Tonne 415 72% 60% Hexane Kgs/Tonne 6.7 19%/o 10% Source: Field visits, LMC data Figure A5.4: Electric Power Use in India, by Scale of Integrated Soft Seed Factory 80 __i_ ___V 70 _ - 65 - __ _ _ _ _ _ ,60- 55 _ International ,350 - _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ 45-_ 40 __ ~~China <= 40 - 35 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 Tonnes per Day of Processing Figure A5.5: Steam Use in India, by Scale of Integrated Soft Seed Factory 700 ____* __Nl_ 600 ____ ___ China 400 -___ 30- w- o~ Intemnational 200 ---- 100 - l 200 400 So4 800 1,000 1.200 1.400 1,600 1.800 2,000 Tonnes per Day of Processing Annex 5 Page 7 of 49 Figure A5.6: Hexane Use in India, by Scale of Integrated Soft Seed Factory 6 ___ . - ___ 7 -0 4 ! , l ~~~~~~~~~~~~~~~~International Norm. 0 k 0 200 400 600 Boo 1,000 1,200 1,400 1,600 1,800 2,000 Tonnes per Day of Processing Mustardseed and Groundnut Expellers AR5.13 Small Scale Industry Reservation prevents factories from taking advantage of scale-economies in oilseed expelling. Having considered efficiency and economies of scale in solvent extraction, we now turn to the small scale oilseed expellers. In other countries, it is normnal to find expellers integrated with the solvent extraction of the expeller cake on a large scale. Accordingly, we do not present any international technical comparisons, and we concentrate instead on the evidence of the existence of economies of scale in India. Figures A5.7 to A5.9 present data on labor utilization, electric power use and direct costs for mustardseed expellers. Although there were only a limited number of expellers surveyed, all three figures do appear to indicate that there are efficiency savings in larger sized plants; however, Small Scale Industry Reservation prevents factories outside the cooperative sector Figure A5.7: Mustardseed Expeller Labour Intensity .0 CruChing Capacity, TonneslDay Annex 5 Page 8 of 49 from taking advantage of these economies of scale. Figure A5.8: Mustardseed Expeller Electric Power Use 140__ _ -_ _ _ 1 1 120 100 = X 80 0 .e 80 __ __-- 40 20 40 0 10 20 30 40 50 60 70 80 90 100 Crushing Capacity, Tonnes/Day Figure A5.9: Mustardseed Expeller Direct Costs 1,000 ~ 900 0 800 0 3 00- 20 (0 I o o 0 0 20 30 40 50 60 70 80 90 100 Crushing Capacity, Tonines/Day A5.14 Groundnut expellers enjoy ecoInomies of scale, too. For groundnut expellers, too, which are also subject to the restrictions of Small Scale Industry Reservation, the data again indicate economies of scale in labor and steam utilization (Figures A5.10 to A5.12). Annex 5 Page 9 of 49 However, electricity usage appears to be roughly similar among all plants surveyed, regardless of their size (Figure A5. 13). Figure .A5.10: Groundnut Expeller Labour Intensity (all plants) 35 30 1 ~_ _ _ _ _ _ __ _ e 25 _ __ 20 _ o_6so 0 .15 1 ____ 10 5 __ U~~~~~~~~ 0 o o -__ I_ - 0 10 20 30 40 50 60 70 80 90 100 Crushing Capacity, Tonnes/Day Figure A5.1 1: Groundnut Expeller Labor Intensity (excluding the smallest plant) 2.5 ___ 2. 0 a' 1.50_ _ . _ _ _ 0. 0.0f 0 10 20 30 40 50 60 70 80 90 100 Crushing Capacity, Tonnes/Day Note: The smallest kacchi ghani factory has been excluded because its labor-intensity was very much higher than any other factory surveyed, and would have reduced the value of the figure. Annex 5 Page IO of 49 Figure A5.12: Groundnut Expeller Steam Use 800 . 700 600 _ 200 100 si 1W 200 300 400 500 600 Crushing Capacity, Tonnes/Day Figure A5.13: Groundnut Expeller Electricity Use 70 - _ _ _ _ _ _ _ _ _ 60 { . E 40 - _ _ ,_ 30 _ _ _ __ _ _ _ _ _ _ _ 20 _ _ _ _ _ _ _ _ __ _ _ 010 _ _ __ _ _ _ _ __ _ _ 0 100 200 300 400 500 600 Crushing Capacity, Tonnes/Day The Economic & Technical Consequences of Small Scale Industry Reservation A5.15 SSI Reservation results in a failure to exploit economies of scale and the adoption of the sub-optimal technology of expanders in order to circumvent these restrictions. SSI Reservation in the cases of groundnut and mustardseed expelling has led to grossly inefficient processing of these two oilseeds, because economies of scale cannot be attained. Annex 5 Page 11 of 49 It has also led to the adoption of expander technology (which is really intended for low oil content seeds) for the processing of these high oil content seeds, as a means of circumventing the Small Scale Industry (SSI) Reservation, even though expanders are less suitable than expellers in the processing of groundnuts and mustardseed. A5.16 High processing losses result from a lack of vertical integration. SSI Reservation has prevented the three vertically linked operations of (a) expelling groundnuts and mustardseed, (b) the solvent extraction of the resultant oilseed cake, and (c) the refining of expeller and solvent extraction oil, from being integrated within one building, as is normnal elsewhere in the world. The separation of these stages causes high losses of oil along the processing chain, as well as an inability to share infrastructure overheads, and also jeopardizes the quality of the expeller cake entering the solvent extraction plant. The resulting expeller cake is high in its oil content, and a great deal of this oil is not extracted subsequently at extraction plants, but is fed to local cattle, without a full reflection of the value of the oil content. Oil Refining A5.17 Scale economies are a factor in oil refining, and Indian efficiencies are again poor, especially in the co-operative sector. In the final part of this section, we turn to efficiency in the oil refining sector. Table A5.3 compares capacity and electricity and steam usage in the co-operative and private sectors in India. The regulatory environment has favored the expansion of co-operatives, who on average have the larger capacity. However, they are less efficient, utilizing more electricity and steam per tonne of oil than private firms. The efficiency of the Indian refining industry is compared with EU and US norms and with international best practice. The normal size of a vegetable oil refining plant in the EU or the US is 500 tonnes per day, much larger than the Indian average of just over 60 tonnes per day. The Indian industry uses more than twice the international standard amounts of electricity and steam. Figures A5.14 and A5.15 examine the relationship between output and electricity and steam use, respectively (we do not have comparable Chinese data in this case). The picture which emerges for electricity shows a mixed range of efficiency, with no clear economies of scale. However, with steam there do appear to be increased efficiencies as plant size expands. Table AS.3: Comparison of Indian Efficiencies and International Norms in Oilseed Refining - EU. & USPefomac as. Technical Data/ INDIA -: )- v ofdiAa-- Tonne of Input Units Cooperative Private --eag-NORM B- S- Capacity Tonnes/Day 75 59 63 500 500 Electric Power Kwh/lTonne 110 71 84 36% 30% Steam Kgs/Tonne 817 678 718 49% 42% Source: Field visits, LMC data Annex 5 Page 12 of 49 Figure A5.14: Electric Power Use in India, by Scale of Refinery 1 4 0 100 .1ur A5.15 Sta_s_nIda b cl fRfnr 0 0 _ __ _ _ = -- = International N orm 20o ==_ __=__= 0 50 100 150 200 250 300 350 400 450 500 T onnes per D* y of P rocess ing Figure Ap .1c : Steam Use in India, by Scale of Refinery 0.000 900 700 ___1 __ 800 ____ 4 00 4 proc00sing is------ vey or y oldsanarsLwlaorpodcivnternational Norm 300 200- 0 50 100 180 200 250 300 350 400 450 500 Teannse s pear D ay o f P r oessaing9 Key Conclusions A5.18 Government policy is to blame for much of the poor technical performance of the Indian oilseed processing industry. The productivity of the key inputs in Indian oilseed processing is very poor by world standards. Low labor productivity would be anticipated, on account of low wage rates, but poor steam and electricity use, and exceptionally inefficient use of solvents are unrelated to labor costs, and reflect several distortions caused by official policy. The more important of these can be summarized as (a) the small scale of Indian factories - a phenomenon explained, in part, by artificial barriers against the construction of medium or large sized expellers; (b) the use of backward technology - exacerbated by the rigid, inflexible application of credit controls; (c) a failure to apply environmental controls; and (d) a willingness on the part of processors to tolerate low productivity and low capacity utilization, since poor crushing margins can be made up through tax evasion associated with the failure of many State Governments to collect the stipulated taxes. Annex 5 Page 13 of 49 B. Costs Comparisons A5.19 Preparing consistent international comparisons: In the following section, we compare oilseed field and factory costs in India and other major oilseed producing countries. To achieve consistency in the estimates, we have relied upon LMC International's engineering cost methodology, in which costs are built up by multiplying the matrices describing the production technologies by vectors of local input prices. For India, costs of cultivation data from CACP have been used. Field Costs are broken down into four categories: capital (land, machinery, storage, interest, repair and maintenance, and depreciation); fuel, fertilizer and chemicals; labor; and other (management charges, cost of seed). Field Costs A5.20 Low agricultural yields raise Indian soybean costs. Figures A5.16 to A5.18 plot field costs per ton of soybeans, rapeseed and groundnuts, broken down into capital charges; fuel, fertilizer and chemicals; labor; and other costs. Data in Figure 1 on soybean costs are 1989-93 national averages, expressed as indices, with US costs set at 100. Indian field costs are the highest of the five countries considered, with total costs per ton nearly 20% above those in the US. Indian unit costs of both labor and fuel, fertilizer and chemicals are particularly high. However, Indian costs per hectare are typically lower than those elsewhere, but this advantage is more than offset by the country's low yields. Figure A5.16: Average Field Costs per Tonne: Soybeans 120,. 100 80 India Argentina Brazil China USA C Capital Charges nFuel, Fertiliser& Chemicals um Labour -U-Other A5.21 Low agricultural yields also raise Indian rapeseed field costs. Figure A5.17 presents rapeseed cost comparisons, where Canada is the benchmark. In this case, Indian costs are less uncompetitive. Above-average capital charges and fuel, fertilizer and chemical costs leave total Indian field costs 16% above Canadian levels. However, German costs that are far ahead of those in India. As with soybeans, average Indian rapeseed field costs per hectare are usually below those elsewhere, but any benefits are more than offset by low agricultural yields in India. Annex 5 Page 14 of 49 Figure A5.1 7: Average Field Costs per Tonne: Rapeseed 180_ '60 140 120 40 Canada China India Germany | Capital Charges clFuel, Fertiliser & Chemicals Labour Other A5.22 India is a competitive groundnut producer, despite low agricultural yields. Figure A5. 18 depicts groundnut field costs in the US, India, China and Senegal, with China as the benchmark. India is the lowest cost producer. US costs are not fully comparable to those in the other countries, since they refer mainly to high value confectionery nuts. Indian unit field costs are nearly 20% below China's. In addition, as with other oilseeds, average Indian groundnut field costs per hectare tend to be below those elsewhere. Figure A5.18: Average Field Costs per Tonne: Groundnut 250] 200 100 _* - China India Senegal US m Capital Charges 1 Fuel, Fertiliser & Chemicals [E Labour EOtih Source: LMC estimates Factory Costs A5.23 Low capacity utilization destroys the cost-competitiveness of average Indian soybean processors. Earlier, we evaluated the technical competitiveness of oilseed processing in India at the individual plant level. In the next two figures, we compare Annex 5 Page 15 of 49 average factory costs in India with costs in other major producing countries. Figure A5.19 illustrates average soybean processing costs in five countries, with costs in the US taken as the benchmark. For India, we have computed three alternative factory costs, assuming 50%, 30% and 25% capacity utilization. Table A5.4 reveals that recent average utilization rates have actually been around 30%, but it could be argued that the total capacity estimate is over-stated by including factories which do not operate. However, even if one assumes that average utilization rates in India reached 50%, India would still have a higher level of costs than all of the other four countries shown in the figure, with total processing costs nearly 40% above those in the US. With lower levels of capacity utilization, fixed costs in India rise accordingly, pulling total costs to more than double those in the US in the case of 25% utilization, and outweighing the benefit of very low unit labor costs in India. For reference, capacity utilization rates are: 75% in Argentina, 53% in Brazil, and 48% in China. FiguLre A5.19: Average Factory Costs per Ton of Soybeans 250 200 -I 111_11 _ I S i1o 50 USA Argentina Brazil China India 50% India 30% India 25% ECapital & Sundries L-Fuel & Chemicals umLabour Source: LMC estimates A5.24 Low capacity utilization also undermines the cost-competitiveness of Indian soft seed processors. Figure A5.20 presents a similar cost comparison for integrated soft seed crushing and solvent extraction. This definition excludes the very large number of heavily under-utilized small scale expellers, protected by Small Scale Reservation. Nevertheless, there remains considerable excess capacity among integrated soft seed processors. Three alternative rates of capacity utilization, 30%, 50% and 66%, are contrasted for India in Figure A5.20; 30% is probably closer to reality, although higher capacity utilization rates are achieved among the largest sunflowerseed crushers. The US is again the benchmark country with Canada emerging as the lowest cost processor --with capacity utilization in both countries equal to 75%. If the Indian industry can achieve a capacity utilization rate of 66%, total softseed processing costs start to become competitive at international levels, being only 1% above those in the US. Higher unit charges for fuel and chemicals are offset to some extent by much lower labor costs. However, if Indian capacity utilization is only 30%, increased capital charges raise total costs to nearly 70% above US costs, or 40% above Chinese costs, which also has a poor utilization of its capacity. For reference, capacity utilization is 81% in Germany, and 50% in China. Annex 5 Page 16 of 49 A5.25 Groundnut and mustardseed expellers have particularly high costs. In Figure A5.20, we have included an estimate of the costs of groundnut and mustardseed small-scale expellers in India. These expellers operate within the framework of Small Scale Industry Reservation, and are penalized both by their low scale of operations and by their poor utilization rates (of 30%, exactly the same as the utilization rate in the solvent extraction sector). The true economics of expellers are even less competitive than the poor impression conveyed by the figure. The expellers have a much poorer rate of extraction of oil than the integrated expeller/solvent extraction plants. Therefore, one should add an extra cost -- corresponding to the loss of revenue from poor extraction rates-- to the figures shown in Figure A5.20. Figure A5.20: Average Integrated Factory Costs per Ton of Soft Seeds 180 160 140 120 100 80 60 40 20 0 a -0 OCapital& Su'dries O Fuel&Chmr,icWs *L.7r Source: LMC estimates A5.26 Capacity utilization for solvent extraction plants averages barely 30%. Capacity utilization is a critical determinant of India's overall processing costs, and hence relative competitiveness. Table A5.4 presents aggregate data on capacity utilization and processing throughputs per year in the solvent extraction sector from 1987 to 1994. Although average utilization rose from the low level of 30% in 1987, it peaked at only 38% in the early 1990s, before falling back to 30% in the wake of the wave of heavy new investmnent. The causes of the remarkable degree of over-investmnent are to be found in a combination of (a) generous Backward Area incentives for new capacity; (b) high domestic crushing margins, made possible by tariff protection on oil imports and a prohibition on most oilseed exports; and (c) very widespread tax avoidance, as described elsewhere in this report. Annex 5 Page 17 of 49 Table A5.4: Capacity Utilisation: Indian Oilseed Sector Year No. of Units Average Capacity per:Unit (t) Average Procesing per Unit#): () t -.te 1987 305 34,815 10,449 30% 1990 395 39,381 15,020 38% 1991 396 41,574 15,718 38% 1992 494 43,608 15,298 35% 1993 516 47,562 15,226 32% 1994 550 48,890 14,691 30% 1995 553 53,885 Source: Indian Solvent Extractors' Association, LMC estimates C. International Comparisons of Extraction Rates & Crushing Margins A5.27 The difficulties of comparing crushing performance. It is difficult to compare extraction rates and crushing margins in different countries. Because of tax avoidance and the poor level of data monitoring within many factories, the data on crushings, oil output and meal production are inaccurate. Furthermore, even when the data are recorded accurately, there is substantial scope for deriving misleading conclusions about the recovery rates from processing. The moisture content of meal is not recorded on a standardized basis. In practice, Indian meal output is increased by several percent by the common practice of adding water to meal before bagging, in order to maximize the quantity exported, within the tolerances permitted in export contracts. This practice reduces substantially the reported wastage of product during soybean processing in India. A5.28 International comparisons. With these qualifications in mind, it is still important to try to place India's oilseed crushing industry in an international context. In this section we consider comparative extraction rates for soybeans, rapeseed, sunflowerseed and groundnuts, derived from data published by Oil World and the US Department of Agriculture (USDA). Using these calculated extraction rates, we then proceed to derive typical gross crushing margins, both in India, in the European Union, the US, and Latin American countries. Extraction Rates A5.29 lndian oil extraction rates are typically lower than for other countries, except for groundnuts, but wastage is not out of line with levels in other countries. Table A5.5 lists the average extraction rates for the four main oilseeds achieved by major producing countries over the last three years. Differences in yields can be due to both efficiency variations and varietal differences, as well as the reporting biases noted above: it is not possible to separate out the pure efficiency difference. This should be borne in mind when interpreting the figures. India emerges from the table as the most efficient groundnut oil producer, achieving an extraction rate of over 41%, just ahead of that attained in the US. For the other oilseeds, India has a generally lower extraction rate than the major producing Annex 5 Page 18 of 49 nations, with the exception of China. However, wastage levels, at 2% for rapeseed and 16% for sunflowerseed, are not out of line with international practice: only the EU manages a significantly lower wastage for sunflowerseed than the average. This implies that, in India, the meal product contains higher levels of oil than in other countries, although varietal differences may also explain part of the lower oil yield. The figures point to an exceptionally low wastage in soybean crushing for India, close to that of Argentina, but still significantly better than general international results. This is reflected in higher meal extraction rates: soybean oil extraction in India is, again, below that in the major producing nations, with the exception of China, although the difference is not large. The low wastage and high meal extraction figures are a result of the addition of moisture to the de-oiled cake, noted above. Gross Crushing Margins - International Comparisons A5.30 Definition. Gross crushing margin simply measures the gross value-added in the crushing industry. It is equal to the combined value of the oil and the meal --each weighted by their respective extraction rates-- in one unit (e.g., ton) of oilseeds minus the unit price of the oilseeds. Average extraction rates for oils and meals indicated in Table A5.5 have been used to compute crushing margins for each respective country. For India, the same domestic prices used for estimating Nominal Protection Coefficients have been used to compute the gross crushing margins. This means that meal prices correspond to the FOB values of the DOC exports, from which port charges, marketing costs and transport costs to the factory have been subtracted. A5.3 1 Gross crushing margins in India tend to be higher than those in the EU or US, with growers bearing the main burden of processing inefficiencies. Figures 21 to 23 present a comparison of the gross crushing margins in India, the US and the EU for rapeseed, sunflowerseed and soybeans, respectively. In general, with the exception of the rapeseed industry, Indian crushers appear to have enjoyed higher margins than those in the EU and the US. This reflects the protection, both from tariffs and from transport costs, given to vegetable oils in India, which has sustained edible oil prices at levels well above world market quotations. At the same time, domestic meal prices are below world quotations, since local processors, as net exporters, are penalized by the high level of internal freight and handling costs. There is a comparatively free domestic market for the seeds themselves, in which GOI minimum price supports seldom have much impact, since these supports have been set well below recent domestic producer prices. The weak bargaining power of local farmers, who are not permitted to turn to export sales as an alternative to the domestic market (other than for high grade HPS groundnuts), has caused local oilseed prices to fall close to world levels, as crushers, in effect, force them to absorb the inefficiencies of the processing industry. The data on the crushing margin for groundnuts in Figure 24 relates only to India, without attempting a comparison with other countries. This is because there is no comparable industry in the US (where groundnuts are high quality, and destined predominantly for direct edible uses) or the EU. Table A5.5: Average Extraction Rates 1992/3-1994/5 Soybeans Rapeseed Sunflower Groundnut Oil Meal Wastage Oil Meal Wastage Oil Meal Wastage Oil Meal Wastage India 17.6% 82.0% 0.5% 37.3% 60.3% 2.4% 35.3% 48.8% 16.0% 41.4% 56.6% 2.0% US 18.2% 79.2% 2.6% 40.0% 57.0% 3.0% 39.5% 50.1% 10.4% 40.2% 57.0% 2.8% EU 17.9% 79.1% 3.0% 40.8% 58.1% 1.1% 40.6% 54.0% 5.4% 38.5% 59.9% 1.6% China 16.1% 79.5% 4.4% 35.0% 63.6% 1.4% 26.0% 58.0% 16.0% 38.5% 59.5% 2.0% Argentina 18.8% 81.0% 0.3% - - - 40.6% 42.5% 16.9% - Brazil 18.9% 78.2% 2.9% - - - - - - Canada - - - 41.7% 58.0% 0.3% - - - Ex-USSR - - - - - - 42.1% 42.0% 15.9% - - - Note: Dashes indicate that the values were not calculated since the country is not a major producer of the relevant oil. Source: Oil World, USDA * D - hX Annex 5 Page 20 of 49 Figure A5.21: Gross Crushing Margin - Rapeseed 180 - ---------------------- - - - - - 160 _ 14 0 - - - - - - - - - - - - - - - - - - - - - 120 / - _ 100 /- ------- --- ----' 4n 0 -- - - - - - - - - - -_ -2 0 - - - - - - - - - - - -40 l l l l l l l l 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 L-.--EIJ India A Canada Source: mission estimates Figure A5.22: Gross Crushing Margins - Sunflowerseed 120 1 0 0 - - - - - - - - - - - - - - - - - - - - - - 1984/85 1985185 1986/87 1987/88 1988/89 19B5-90 199t1 1991/92 1992t93 199d94 199/5 20 ----- ~- W ~ - --- -- -- -- -- Source: Mission estimates A5.32 Rapeseed-mustardseed crushing margins are at international norms. Figure A5.21 presents the margins calculated for Rajasthan market, together with those in the EU, and Canada. Rapeseed-mustardseed margins in India have been close to those prevailing in the EU prices since the late 80s, and declined since 1991/92 to become even negative (US$-9 per ton) in 1994/95. Annex 5 Page 21 of 49 A5.33 Sunflowerseed crushing margins are high. Local crushing margin in India (Karnataka) is much higher than that in either the US or the EU, except in 1994/95 (Figure A5.22). Since 1989/90, the margin in India has averaged around US$58 per tonne, compared to around US$40 in the US and only US$6 in the EU. The high crushing margins in the sunflowerseed industry may reflect the more limited competition which prevails in that sector. Figure A5.23: Gross Crushing Margin - Soybean 120 80 40 20 1 984185 1985/86 1986/87 1987/88 1988'/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 V-a-. EL) US - India x Argentina _ Brazil Source: Mission estimates A5.34 Soybean crushing margins in India are much higher than elsewhere in the world. Figure A5.23 indicates that the crushing margin for soybeans in the US has been consistently above that in the EU and Latin American countries. The margin in India (Madhya Pradesh) appears to have been somewhat erratic, being negative in 1987/88, before jumping to about US$100 per tonne in 1990/91. Since 1991/92, soybean gross crushing margins average about US$51 per tonne. This is 60% higher than the US margin (US$31 per tonne), and considerably higher than margins in Brazil (US$13 per tonne), Argentina (US$15 per tonne), and the EU (US$7 per tonne). The decline in Indian crushing margin during 1994/95 may be explained by the poor harvest which led firms to bid up bean prices in order to meet meal export commitments. A5.35 One difficulty in evaluating gross crushing margins outside India is that processors have access to risk management instruments, and are able to use forward and futures markets to lock in profitable crushing opportunities when they occur. Consequently, the calculation of margins from spot prices of beans and products (oils and meals) is not representative of the true situation facing the predominant part of the processing sector outside India. The access to risk management instruments explain how Annex 5 Page 22 of 49 crushing industries survive in spite of apparent low, erratic and sometimes negative gross crushing margins. A5.36. Ground nut crushing Figure A5.24: Gross Crushing Margins - Groundnuts margins are I high in India, 10 and sustained I at these levels l by Small Scale Industry23 Reservation.21 Figure A5.24v19 presents the17 runcrushing margin in the groundnut 1990191 1991192 1992193 1993/94 1994/95 industry in ....India~ Andhra Pradesh. - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ T'he margin are high, averaging around the US$200 per tonne. The high crushing margins are affected by the restriction of expelling activity to Small Scale Industries, whose costs are higher than for modem plants with optimal economic scale. It has not been possible to compare Indian crushing margins with those in other countries, since the EU is not a significant groundnut producer, and US prices are distorted by the system of production quotas and by the emphasis upon the production of high quality nuts for direct edible use. D. Nominal & Effective Protection in the Oilseed Complex Methodological Note A5.37 Nominal Protection Coefficient. The Nominal Protection Coefficient (NPC) of a commodity is defined as the ratio of its domestic price to its international reference price, both expressed in the local currency and measured at the same location or reference point. The NPC is simply an estimate of the extent of government interventions on the price of the commodity under consideration. If greater than unity (i.e., the domestic price is greater than the reference price), that commodity enjoys a positive protection from government policies. Its production is encouraged, while its consumption is discouraged. If the NPC is less than unity (i.e., the domestic price is less than the reference price), then the commodity under consideration is dis-protected or "taxed", its production discouraged, and its consumption encouraged. A5.38 NPCs have been estimated for each the four main commodities of the Indian oilseed complex: groundnut, rapeseed-mustardseed, soybean, and sunflower. For each of these four commodities, NPCs have been estimated for the seed (or bean), and the corresponding oil. NPC estimates for the four oilseeds have been borrowed from G. Pursell & A. Gupta (forthcoming), and the NPC estimates for oils have been borrowed Annex 5 Page 23 of 49 from A. Gulati, A. Sharma & D.S. Kohli. In the case of both oilseeds and oils, NPCs have been estimated on an import basis, and with the up-country market in the major producing states(s) as the reference point (where the prices of the imported and domestic oilseeds are compared) since India is a net importer of edible oils and, by implication, of oilseeds. The NPC estimates reported in the annex tables differ from those by Pursell & Gupta, and Gulati, Sharma & Kohli because of our assumptions differ from theirs regarding the location of the reference point. A5.39 In the case of meals, the estimates reported in Annex for groundnut, rapeseed- mustardseed, soybean and sunflower compare the unit export values of DOC Indian exports to their corresponding world, reference prices. The price comparison for meals has been estimated under the exportable hypothesis since India is a net exporter of meals. The comparison between domestic and reference prices could potentially reflect both government policy interventions on the Indian meal markets and quality differentials. Since Indian meals exports are basically free of government interventions, except for the small distortion induced by export incentives, the observed difference between domestic and reference prices should be mostly attributed to quality differentials, not to government interventions. Accordingly, we refer to the price comparison as a Quality Discount Coefficient which measures the price discount faced by Indian meal exports on the world market largely as a result of inferior quality (aflatoxin in groundnuts, glucosinolates in rapeseed-mustardseed). A5.40 Effective Protection of the Crushing Industry. The effective protection simply measures the protection to the crushing industry provided by government policies. It is defined as the difference between the gross crushing margin faced by Indian crushers (i.e., using domestic prices) and gross crushing margin which would have prevailed at reference prices, both measured at factory, up-country. Reference prices have been estimated under the iimportable hypothesis for oilseeds and oils, and under the exportable hypothesis for meals; i.e., using similar assumptions than for calculating NPCs. The gross crushing margin at reference price also uses the Indian extraction rates for oils and meals to avoid introducing biases in the results. A5.41 Measuring the effective protection to the Indian crushing industry is important to get an accurate picture of the true extent of protection to the industry given its joint- production nature. Indeed, the relatively high edible oil prices faced by Indian consumers (NPC greater than unity) may be a reflection of the relatively low meal prices (NPC lower than unity) Indian crushers can realize having to export a significant share of the meal production. A5.42 Groundnut. Tables A5.6 to A5.9 give the NPC estimates for oilseeds and oils, the Quality Discount Coefficient estimate for meals, and the effective protection estimate for the groundnut industry, respectively. In the case of groundnuts, the NPC is estimated for the three largest producing states (Andhra Pradesh, Gujarat, and Tamil Nadu), and for India as a whole by aggregating the three state NPCs (as a convention, in the NPC oilseed tables, the second calendar year of the fiscal year is used to indicate that fiscal year; e.g., 1995 corresponds to the fiscal year 1994/95). The NPC for groundnut oil is estimated at Bombay as the reference point. The Quality Discount Coefficient for meals is estimated Annex 5 Page 24 of 49 at Bedi port, as the reference export point. T he effective protection has been measured for a factory located in Andhra Pradesh. A5.43 On average, groundnuts have received no protection (1965-1995), while groundnut oil has enjoyed a substantially higher level of protection (69% between 1981 and 1995). During the 80s, groundnuts received increasing level of protection (about 25% on average), but groundnut oil continued to enjoy even higher protection (83% on average). Since 1991, however, the protection level in the groundnut complex has fallen dramatically as a result of the increased domestic production and Rupee devaluation. Groundnut oil domestic prices are now below the protection offered by the (30% in 1995/96, 20% since mid-1996) tariff barriers. Groundnut prices have fallen even lower and well below import parity prices since 1992/93. A5.44 Groundnut crushers are enjoying very high levels of effective protection (about 65% on average between 1990/91 and 1994/95), in spite of the low meal realization and 20% quality discount on the world market. The ability of the groundnut crushing industry to maintain a high and stable level of effective protection since 1991 has clearly come at the cost of the groundnut growers who now stand dis-protected. A5.45 Rapeseed-Mustardseed. Tables A5.10 to A5.13 give the NPC estimates for oilseeds and oils, the Quality Discount Coefficient for meals, and the effective protection estimate for the rapeseed-mustardseed industry, respectively. In the case of rapeseed, the NPC is estimated for the largest producing state (Rajasthan) and one of the largest wholesale market for rapeseeds (Hapur in Uttar Pradesh), and for India as a whole by aggregating the two NPCs. The NPC for rapeseed oil is estimated at Kanpur (Uttar Pradesh) as the reference point. The Quality Discount Coefficient for meals is estimated at Bedi port, as the reference export point. The effective protection has been measured for a factory located in Rajasthan. A5.46 In the rapeseed-mustardseed complex also, seeds always receive a much more modest level of protection (18% between 1985 and 1995) than the oil (120% between 1985 and 1995). During the 80s, the protection level increased for both seeds and oils until 1988. With increased domestic production driving their domestic prices down, and the Rupee devaluation, the protection level started falling after 1988 for both oils and seeds. By 1995, rapeseed oil enjoyed a positive level of protection virtually in line with its tariff barrier; by contrast, the protection for rapeseed-mustardseed turned slightly negative, implying that rapeseed growers received a lower than import parity price. On the meals side, the estimates indicate that Indian exports face substantial quality discounts (about 50%) on the world market. A5.47 The effective protection enjoyed by the crushing industry has fallen significantly over the period (1985-1995), but remains positive and significant (US$ 48/ton). Unlike the groundnut crushing industry, the rapeseed crushing industry was less successful in maintaining its initial and very high level of effective protection. Rapeseed-mustardseed growers suffered a loss, but smaller than that imposed on groundnut growers. A5.48 Soybean. Tables A5.14 to A5.17 give the NPC estimates for oilseeds and oils, the Quality Discount Coefficient for meals, and the effective protection estimate for the Annex 5 Page 25 of 49 soybean solvent extraction industry, respectively. In the case of soybean, the NPC is estimated for the largest producing state (Madhya Pradesh). The NPC for soybean oil is estimated at Betul (Madhya Pradesh) as the reference point. The Quality Discount Coefficient for meals is estimated at Bedi port, as the reference export point. The effective protection has been measured for a factory located in Madhya Pradesh. A5.49 On average, soybean farmers have been dis-protected throughout the period (NPC of 0.87 between 1974 and 1995), but less so in the late 80s. By contrast, soybean oil consumers have been heavily taxed consistently, paying domestic prices more than twice the import parity level (NPC of 2.16 between 1988 and 1995). By 1994/95, the protection level of soybean oil had declined significantly but remained well above the tariff level for edible oils. Soybean meals (DOC) face little to no quality discounts on the world market. A5.50 The soybean solvent extraction industry was extremely successful in maintaining a very high level of effective protection (US$ 120/ton), even in the face in declining protection level on the oil side. This success, however, was achieved at the cost of lower prices for soybean growers. Only in years of poor harvest (1995) pushing domestic farmgate prices higher was the soybean solvent industry compelled to trim its margins. A.5.51 Sunflower. Tables A5.18 to A5.21 give the NPC estimates for oilseeds and oils, the Quality Discount Coefficient for meals, and the effective protection estimate for the sunflower industry, respectively. In the case of sunflower, the NPC is estimated for the largest producing state (Karnataka). The NPC for sunflower oil is estimated at Bidar (Karnataka) as the reference point. The Quality Discount Coefficient for meals is estimated at Bedi port, as the reference export point. The effective protection has been measured for a factory located in Karnataka. A.5.52 Sunflower seeds, like all other oilseeds, have been much less protected than sunflower oil (18% and 118% protection levels between 1988 and 1994, respectively). The protection level has fallen for both sunflower seeds and oil since the late 80s in response to increased domestic production and Rupee devaluation. While the protection level of sunflower oil was approaching by 1995 the floor set by the import tariff level, sunflower seed prices were falling at or below world price levels, except in a poor production year (1995). A.5.53 The sunflower processing industry has been therefore fairly successful in maintaining a high level of effective protection (US$ 120/ton), in spite of the falling protection for sunflower oil prices and hefty quality discounts for meals on the world market (about 50%). Table A5.6: Nominal Protection Coefficient Groundnut YEAR WORLD FREIGHT FOB PRICE. B EXCHA PORT LDf M ANDHBAPB1)H GUJA RA TAMILNADU ALL- EUROPE USG KERNA PODD CT- PODS COSTS ^E O TRANP REF. NPC DOM. NPC DM NPC OIL YR. ROTTER- DIA SEPT PR. PRICE ORT PRICE PRICE PRICE DAM CS USD/MT USDIT USD/4T USD SDMTUSMT RSrJSD RS/wLT 1.S/ Q RTES/QUINTA RS/QTL RS/QTL 1965 201.3 6.30 194.95 136.46 21.46 151.5 4.76 1.47 73.6 7.4 81.0 87.7 1.8 82.8 1.06 79.8 0.99 88.6 1.09 1.05 1966 191.0 6.85 184.15 128.91 23.33 145.2 5.67 1.58 84.0 8.4 92.4 132.4 1.9 94.3 1.40 137.8 1.49 120.7 1.31 1.40 1967 180.0 6.42 173.58 121.51 21.84 136.8 7.50 1.79 104.4 10.4 114.8 150.8 2.0 116.8 1.29 103.8 0.90 139.7 1.22 1.14 1968 169.0 8.21 160.79 112.55 27.97 132.1 7.50 1.99 101.1 10.1 111.2 99.2 2.1 113.3 0.88 122.7 1.10 92.7 0.83 0.96 1969 196.8 6.99 189.76 132.83 23.82 149.5 7.50 1.99 114.1 11.4 125.5 131.3 2.3 127.9 1.03 142.2 1.13 127.1 1.01 1.05 1970 224.3 7.46 216.79 151.76 25.39 169.5 7.50 2.01 129.2 12.9 142.1 173.0 2.4 144.4 1.20 138.3 0.97 147.8 1.04 1.08 1971 248.8 7.55 241.20 168.84 25.71 186.8 7.50 2.12 142.2 14.2 156.5 148.1 2.5 159.0 0.93 138.1 0.88 136.4 0.87 0.90 1972 259.5 5.01 254.49 178.14 17.06 190.1 7.45 2.18 143.9 14.4 158.2 132.4 2.6 160.8 0.82 134.3 0.85 120.9 0.76 0.81 1973 354.8 8.24 346.51 242.56 28.06 262.2 7.75 2.14 205.4 20.5 226.0 220.6 2.8 228.8 0.96 195.8 0.87 211.8 0.94 0.94 1974 530.8 22.18 508.57 356.00 75.54 408.9 8.07 2.05 332.1 33.2 365.3 268.6 3.1 368.4 0.73 235.7 0.65 243.0 0.67 0.68 1975 471.8 18.74 453.01 317.11 63.79 361.8 8.17 2.73 298.4 29.8 328.2 251.7 3.6 331.8 0.76 237.7 0.72 247.3 0.75 0.74 1976 427.8 10.43 417.32 292.12 35.52 317.0 8.97 3.32 287.6 28.8 316.4 160.0 3.8 320.2 0.50 152.4 0.48 165.9 0.52 0.50 1977 513.5 10.38 503.12 352.18 35.36 376.9 8.82 3.29 335.7 33.6 369.2 276.8 4.2 373.4 0.74 194.0 0.53 252.6 0.68 0.60 1978 601.5 10.21 591.29 413.90 34.77 438.2 8.30 3.71 367.7 36.8 404.4 214.6 4.5 408.9 0.52 253.4 0.63 236.4 0.58 0.59 1979 579.0 15.89 563.11 394.18 43.95 424.9 8.12 4.12 349.2 34.9 384.1 200.0 4.9 389.0 0.51 248.4 0.65 218.3 0.57 0.59 1980 516.3 26.96 489.29 342.50 72.06 392.9 7.95 4.60 317.0 31.7 348.7 287.7 4.9 353.6 0.81 304.8 0.87 284.9 0.82 0.84 1981 662.0 29.63 632.37 442.66 86.18 503.0 8.32 5.26 424.0 42.4 466.3 379.7 5.1 471.4 0.81 364.5 0.78 396.6 0.85 0.80 1982 409.0 20.16 388.84 272.19 74.27 324.2 9.31 5.96 307.8 30.8 338.6 376.9 6.2 344.8 1.09 390.0 1.15 400.6 1.18 1.14 1983 379.0 17.07 361.93 253.35 47.26 286.4 9.94 6.65 291.3 29.1 320.4 397.8 7.3 327.7 1.21 390.8 1.22 419.5 1.31 1.24 1984 441.0 18.80 422.20 295.54 48.00 329.1 10.91 7.94 367.1 36.7 403.8 431.7 8.3 412.1 1.05 458.8 1.14 466.1 1.15 1.10 1985 368.0 20.19 347.81 243.47 48.00 277.1 12.39 8.97 352.1 35.2 387.3 449.2 8.9 396.3 1.13 453.1 1.17 451.4 1.17 1.16 1986 338.0 17.54 320.46 224.32 48.00 257.9 12.37 9.53 328.7 32.9 361.6 458.1 9.6 371.2 1.23 470.7 1.30 458.3 1.27 1.26 1987 283.0 18.50 264.50 185.15 40.53 213.5 12.97 10.63 287.6 28.8 316.3 600.0 10.5 326.9 1.84 450.0 1.42 604.7 1.91 1.72 1988 289.0 25.41 263.59 184.51 41.20 213.4 13.44 12.00 298.7 29.9 328.6 670.0 11.6 340.1 1.97 759.0 2.31 646.6 1.97 1.98 1989 342.0 28.34 313.66 219.56 69.73 268.4 15.73 14.55 436.6 43.7 480.3 548.2 12.6 492.9 1.11 492.2 1.02 547.5 1.14 1.08 1990 420.8 35.50 385.25 269.67 67.20 316.7 17.21 16.01 561.1 56.1 617.2 751.7 13.8 631.0 1.19 726.0 1.18 698.9 1.13 1.17 1991 449.0 30.40 418.61 293.03 65.60 338.9 20.79 17.61 722.4 72.2 794.7 950.6 15.9 810.6 1.17 1027.5 1.29 819.8 1.03 1.17 1992 408.2 27.07 381.17 266.82 65.60 312.7 25.89 20.83 830.6 83.1 913.7 1003.4 18.0 931.6 1.08 1068.7 1.17 964.5 1.06 1.08 1993 395.9 29.90 366.00 256.20 62.40 299.9 31.17 23.95 958.7 95.9 1054. 866.7 20.3 1074.9 0.81 843.7 0.80 795.4 0.75 0.79 6 1994 506.3 16.48 489.86 342.90 55.20 381.5 31.37 26.59 1223.5 122.4 1345. 828.1 23.2 1369.1 0.60 1001.7 0.74 903.9 0.67 0.65 9 1995 540.7 25.92 514.82 360.37 62.40 404.1 31.58 30.16 1306.3 130.6 1437. 977.9 25.9 1462.9 0.67 1164.2 0.81 1079.2 0.75 0.72 0 65-73 1.06 1.02 1.01 1.04 74-80 0.65 0.65 0.66 0.65 81-87 1.19 1.17 1.26 1.20 88-95 1.08 1.17 1.06 1.08 O M 65-95 1.00 1.01 1.00 1.00 X Source: Adapted from Pursell, Gany and Anju Gupta, 1996. Trade Policies and Incentives in Indian Agriculture. Background Statistics and Protection and Incentive Indicators, 1965-1995. Background Papers nos 1-6. World bank, mimeo. Table A5.7: Nominal Protection Coefficient Groundnut Oil Units 1980-81 1981-S2 1982-83 1983-84 19S4-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Price(cif,Rotterdam) US 1104.67 635.58 639.58 1016.50 910.67 638.17 510.42 576.25 723.50 936.67 955.67 619.33 702.75 990.92 1007.44 (Nov-Oct) $/MT. Minus Freight from US 37.04 25.20 21.34 23.50 25.24 21.92 23.12 31.76 35.42 44.38 38.00 33.84 37.38 37.38 37.38 Rotterdam to US $/MT. Gulf Plus Freight From US 107.72 92.84 59.08 60.00 60.00 60.00 50.66 51.50 87.16 84.00 82.00 82.00 84.42 84.42 84.42 US Gulf to India $/MT. (Bombay) CIF Prices at US 1175.35 703.22 677.32 1053.00 945.43 676.25 537.96 595.99 775.24 976.29 999.67 667.49 749.79 1037.96 1054.48 Bombay $/MT. ExchangeRate US$= 8.53 8.96 10.06 11.24 12.09 12.55 12.98 13.57 15.90 17.31 21.39 25.89 29.65 (Official) Rs. Cif Bombay atOER Rs./qt 1002.57 630.09 681.38 1183.57 1143.02 848.69 698.27 808.76 1232.63 1689.96 2138.29 1728.13 2223.13 3257.12 3308.96 PortClearance Rs./qt 6.74 7.63 8.53 10.18 11.49 12.22 13.62 15.38 18.65 20.53 22.57 26.69 30.57 32.71 32.71 Charges 1. LandedCostatPort Rs./qt 1009.31 637.72 689.91 1193.75 1154.51 860.91 711.89 824.14 1251.28 1710.49 2160.86 1754.82 2253.70 3289.83 3341.67 1. MarketingCostand Rs./qt 60.56 38.26 41.39 71.63 69.27 51.65 42.71 49.45 75.08 102.63 129.65 105.29 135.22 197.39 200.50 trader's margin 1. Reference Price Rs./qt 1069.87 675.98 731.31 1265.38 1223.79 912.57 754.61 873.59 1326.36 1813.12 2290.52 1860.11 2388.92 3487.22 3542.17 1. Wholesale Price Rs./qt 1339.58 1353.08 1549.58 1612.92 1514.25 1866.58 2282.42 2228.83 2125.00 2694.83 3498.75 3406.25 3027.50 3446.36 3831.25 (Bombay) 1. NPC 1 .25 2.00 2.12 1.27 1.24 2.05 3.02 2.55 1.60 1.49 1.53 1.83 1.27 0.99 1.08 Source: Adapted from A. Gulati, A, Sharma, & D.S. Kohli, (1996): "Self-Sufficiency & Allocative Efficiency: Case of Oilseeds in India", National Council of Appiled Economic Research, New Delhi o P )- l A JS. Table A5.8: Quality Discount Coefficient Groundnut Meal 1984/85 1985/86 1986/87 "1987/88 988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Rottc.i.fUS$/ton 147 164 157 199 205 187 155 153 153 184 161 Freight US$/ton From West Africa to Far Eastl 38 36 40 34 58 56 54 54 56 50 50 Minusfrom West Africa toRotterdam2 20 18 19 25 28 36 30 27 29 28 28 Minusfrom India to Far East3 18 16 17 23 26 34 28 25 27 26 26 Reference Price (estimated India fo.b.) 147 167 162 184 208 174 150 155 153 180 157 US$/t Export Values Rs (Crores) 34.8 64.7 110.7 194.2 153.4 Quantity Exported (000 tonnes) 140 207 293 440 49 Exchange Rate 12.39 12.37 12.97 13.44 15.73 17.21 20.79 25.89 30.65 31.37 31.41 India fo.b. (Actual) $/ton n/a n/a n/a n/a n/a n/a 120 121 123 141 140 Quality Discount Coefficient (Exports) n/a n/a n/a n/a n/a n/a 0.80 0.78 0.81 0.78 0.89 Note: I In the absence of other information, the West Africa to Far East freight rate has been estimated as being the same as that for the US to the Far East 2 In the absence of other information, the West Africa to EU freight rate has been estimated as being the same as that for the US to the EU, as the distances are similar. 3 Thailand to Far East freight typically $20 per tonne 00 FOh X NO in Annex 5 Page 29 of 49 Table A5.9 Effective Protection in the Groundnut Complex (US$/ton) India Reference Effective Actual Margin Price Margin Protection (At Factory) (At factory) Extractioni rate 41-%/57% 41%/57% 1987/88 - 113 1988/89 - 148 1989/90 - 165 - 1990/91 297 151 146 1991/92 216 25 191 1992/93 187 63 124 1993/94 260 126 133 1994/95 262 94 168 Av 1990/91 - 1994/95 244 92 152 Note: Extraction rates from Oil World Prices from NPC tables Table A5.10: Nominal Protection Coefficient Rap eseed -Mustard seed CIF FREIGH FOB FREIGH BORDER EXCIL4NGEB~ 'PORT DER MAoRt I ) ' '3' ''-Y : ' P(HPR RAJASTHAN ALL EUROPE T CAN. T PRICE RATE : :$ KEIING INDIA YAS PRICE CAN.- PRICE CAN. (CIF) CO £STS. RUPEE COST DOM. PR T. REF. PR. NPC DOM. T. REF. PR. 14PC NPC ROTT. INDIA (13DPR. C OSTS : PR COSTS USD/MT USD/MT USD/M U m U D/ RSMSD A$OT "Om R5{QTLRr " ;0;-0- T >9; 0;00:0, 1965 134 6.30 127.7 21.5 149.2 4.76 71.0 1.47 72.5 4.3 99,0 5.1 81.9 1.21 102.'9 4.8 81.7 1.26 1.21 1966 122 6.85 115.2 23.3 138.5 5.22 72.3 1.58 73.8 4.4 115.6 5.2 83.5 1.38 130.4 5.0 83.2 1.57 1.40 1967 130 6.42 123.6 21.8 145.4 7.50 109.1 1.79 110,9 6.7 138.0 5.5 123.0 1.12 145.7 5.2 122.8 1.19 1.13 1968 122 8.21 113.8 28.0 141.8 7.50 106.3 1.99 108.3 6.5 176.4 5.6 120.4 1.47 178.3 5.3 120.1 1.48 1.47 1969 105 6.99 98.0 23.8 121.8 7.50 91.4 1.99 93.4 5.6 134.0 6.0 104.9 1.28 133.5 5.7 104.6 1.28 1.28 1970 120 7.46 112.5 25.4 137.9 7.50 103.5 2.01 105.5 6.3 150.5 6.1 117.8 1.28 150.2 5.7 117.5 1.28 1.28 1971 137 7.55 129.4 25.7 155.2 7.50 116.4 2.12 118.5 7.1. 163.8 6.4 132.0 1.24 167.0 6.1 13I.7 1.27 1.24 1972 142 5.01 137.0 17.1 154.0 7.30 112.4 2.18 114.6 6.9 167.0 6.7 128.2 1.30 166.3 6.4 127.8 1.30 1.30 1973 134 8.24 125.8 28.1 153.8 7.67 118.0 2.14 120.1 7.2 176.8 7.1 134.4 1.32 181.2 6.7 I134.1 1.35 1.32 1974 254 22.18 231.8 75.5 307.4 8.12 249.5 2.05 251.6 15.1 207.5 7.6 274.3 0.76 214.7 7.2 273.9 0.78 0.76 1975 377 18.74 358.3 63.8 422.1 7.94 335.0 2.73 337.7 20.3 313.8 9.1 367.1 0.85 335.8 8.6 366.6 0.92 0.86 1976 293 10.43 282.6 35.5 318.1 9.00 286.2 3.32 289.5 17.4 219.5 10.2 317,0 0.69 234.2 9.6 316.5 0.74 0.70 1977 246 10.38 235.6 35.4 271.0 8.83 239.2 3.29 242.5 14.6 189.8 11.1 268.2 0.71 186.7 10.5 267.6 0.70 0.71 1978 336 10.21 325.3 34,8 360.1 8.30 298.9 3.71 302.6 18.2 352.5 11.2 332.0 1.06 380.8 10.6 331.4 1.15 1.07 1979 313 15.89 296.7 44.0 340.7 8.18 278.8 4.12 282.9 17.0 341.2 11.7 311.5 1.10 331.7 11.0 310.9 1.07 I.09 1980 305 26.96 277.9 72.1 349.9 7.96 278.4 4.60 283.0 17.0 308.5 12.4 312.4 0.99 307.2 11.8 311.8 0.99 0.99 :1981 293 29.63 263.5 86.2 349.7 8.26 288.9 5.26 294,1 17.6 399.0 13.4 325.2 1.23 414.2 12.7 324.5 1.28 1.24 1982 305 20.16 284.8 74.3 359.1 9.27 333.1 5.96 339.0 20.3 442.5 17.2 376.6 1.18 455,8 16.3 375.7 1.21 1.18 1983 300 17.07 283.1 47.3 330.4 9.95 328.6 6.65 335.3 20.1 398.8 21.0 376.4 1.06 390.8 19.9 375.3 1.04 1.05 1984 289 IS.80 269.9 48.0 317.9 10.86 345.1 7.94 353.0 21.2 453.7 23.7 397.9 1.14 466.7 22.4 396.6 1.18 1.15 1985 380 20.19 360.0 48.0 408.0 12.67 516.9 8.97 525.8 31.5 501.7 25.1 582.5 0.86 520.0 23.8 581.2 0.89 0.88 1986 314 17.54 296.1 48.0 344.1 12.41 426.8 9.53 436.4 26.2 405.7 27.1 489.6 0.83 403.3 25.6 488.2 0.83 0.83 1987 237 18.50 218.3 40.5 258.9 12.90 333.9 10.63 344.5 20.7 458.3 29.4 394.6 1.16 418.3 27.8 393.0 1.06 1.11 1988 245 25.41 219.6 41.2 260.8 13.24 345.2 12.00 357.2 21.4 702.5 32.8 411.4 1.71 683.3 31.0 409.7 1.67 1.69 1989 211 28.34 182.2 69.7 251.9 15.69 395.3 14.55 409.8 24.6 727.5 35.2 469.6 1.55 733.3 33.3 467.8 1.57 1.56 1990 232 35.50 196.5 67.2 263.7 17.19 453.2 16.01 469.2 28.2 580.8 40.3 537.6 1.08 561.7 38.2 535.5 1.05 1.06 1991 219 30.40 188.8 65.6 254.4 19.67 500.3 17.61 517.9 31.1 904.3 44.2 593.2 1.52 951.7 41.9 590.9 1.61 1.58 1992 202 27.07 174.8 65.6 240.4 25.90 622.6 20.83 643.4 38.6 939.2 48.0 730.0 1.29 931.7 45.5 727.5 1.28 1.28 1993 199 29.90 169.1 62.4 231.5 31.20 722.3 23.95 746.2 44.8 889.2 54.8 845.8 1.05 916.7 51.9 842.9 1,09 1.08 1994 226 16.48 209.5 55.2 264.7 31.37 830.4 26.59 857,0 51.4 1003.3 64.1 972.5 1.03 1044.2 60.7 969.1 1.08 1.06 1995 310 25.92 283.7 62.4 346.1 31.44 1088.2 30.16 1118.4 67.1 1140.0 71.0 1256.5 0.91 1220.0 67.2 1252.8 0.97 0.95 . 65-73 . ~~~~~~~~~~~~~~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1.29 1.33 1.9Db 74-80 0.88 0.91 0.88 81-87 1.06 1.07 106 w 88-95 1.27 1.29 1.28O 65-95 1 1.14 11.17 1.14 O Source: Adapted from Pursell, Garry and Anlju Gupta, 1996- Trade Policies and Incentives in Indian Agriculture. Background Statistics and Protection and Incentive Indicators, 1965-1995. Background Papers nos 1-6. World bank, mimeo. Table A5.11: Nominal Protection Coefficient Rapeseed-Mustardseed Oil 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Price (cif,Rotterdam) US 586.00 338.00 297.00 428.00 411.67 415.33 423.00 409.58 426.67 496.33 581.00 (April-March) S/MT. Minus Freight from US 37.04 25.20 21.34 23.50 25.24 21.92 23.12 31.76 35.42 44.38 38.00 33.84 37.38 37.38 37.38 Rotterdam to US $/MT. C-ulf Plus Freight From US 107.72 92.84 59.08 60.00 60.00 60.00 50.66 51.50 87.16 84.00 82.00 82.00 84.42 84.42 84.42 US Gulf to India $/MT. (Bombay) CIF Prices at Us 620.76 376.08 324.54 447.74 463.41 454.95 467.00 457.74 473.71 543.37 628.04 Bombay $/MT. Exchange Rate 1 7.91 8.97 9.67 10.34 11.89 12.34 12.78 12.97 14.48 16.65 17.94 24.47 26.43 31.37 31.37 (Official) US$= Rs. Cif Bombay Rs./qt 738.08 464.08 414.76 580.72 671.02 757.49 837.80 1120.09 1252.02 1704.55 1970.16 1. PortClearance Rs./qt 6.74 7.63 8.53 10.18 11.49 12.22 13.62 15.38 18.65 20.53 22.57 26.69 30.57 32.71 32.71 Charges 1. Landed Cost at Port Rs./qt 749.57 476.30 428.38 596.10 689.67 778.02 860.37 1146.78 1282.59 1737.26 2002.87 1. Marketing Cost and Rs./qt 44.97 28.58 25.70 35.77 41.38 46.68 51.62 68.81 76.96 104.24 120.17 trader's margin 1. Transportation cost 16.74 21.55 26.28 29.62 31.43 33.82 36.71 40.98 43.99 50.39 54.27 59.91 67.70 71.94 76.18 (Bombay to Kanpur) Reference Price Rs./qt 825.98 538.70 490.80 672.84 775.04 875.09 966.26 1275.50 1427.24 1913.44 2199.22 1. Wholesale price Rs./qt 1260.83 1318.75 1170.00 1485.42 1357.50 1195.83 1654.17 2333.42 1814.55 1752.08 2602.08 2877.08 2502.08 2578.64 2959.30 (Kanpur) (April- 1. March) NPC 1.64 2.22 3.37 3.47 2.34 2.00 2.69 2.26 1.75 1.35 1.35 Source: Adapted from A. Gulati, A, Sharma, & D.S. Kohli, (1996): "Self-Sufficiency & Allocative Efficiency: Case of Oilseeds in India", National Council of Appiled m Economic Research, New Delhi O 'u F-hA Table A5.12: Quality Discount Coefficient Rapeseed-Mustardseed Meal 1984185 19858 198/8 198/8 1988/89 1989/90 1990/91 1991/92 1~992/93 1993/94 1994/95 Hamburg c.if US$/ton 95 118 95 153 167 137 131 139 162 156 134 Freight US$/ton Rotterdan to Far Eastl 38 36 40 34 58 56 54 54 56 s0 50 Mmnusfrom India to Far East3 18 16 1 7 23 26 34 28 25 27 26 26 Reference Price (estimatedlIndia .o.b.) USS/t 115 139 119 164 198 159 157 168 191 180 158 Export Values Rs /ton 998 819 881 925 1422 1276 1348 1380 1893 2634 2726 Exchange Rate 12.39 12.37 12.97 13.44 15.73 17.21 20.79 25.89 30.65 31.37 31.41 India f.ob. (Actual) $/ton 81 66 68 69 90 74 65 53 62 84 87 Quality Discount Coefficient (Exports) 0.70 0.48 0.57 0.42 0.46 0.47 0.41 0.32 0.32 0.47 0.55 02 OQ 0 : M-h xc10 Annex 5 Page 33 of 49 Table A5.13: Effective Protection in the Rapeseed-Mustardseed Complex (US$/ton) India Reference Effective Actual Margin Price Margin Protection (At Factory) (At factory) Extraction rate :37%l60% 370/o60% 1984/85 18 -171 189 1985/86 53 -170 223 1986/87 172 -112 285 1987/88 156 -44 200 1988/89 -7 -19 13 1989/90 74 -50 124 1990/91 26 -39 64 1991/92 66 -17 83 1992/93 25 -8 33 1993/94 5 4 1 1994/95 -5 -66 61 Av 1990/91- 23 -25 48 1994/95 Note: Extraction rates from Oil World Prices from NPC tables Table A5.14: Nominal Protection Coefficient Soyabean YEAR CIF ROlIr FREIGHT USjFOB FREIGEfT BORDER EXCHANGE BOR9ER PORT LDF DOMESTIC TRANS. MARKET REF. NPC CROP YR US-ROTT. US-INIA PRICE RATE PRICE CHAR INDIAN PRPCE COOST CST PRICE SDM USIUSDSDM[T UUSDIMT SDMbSUS SQL SQL RSQL R/QL R/T RS/Q'TL S/ 1974 218 22.2 196 75.5 271 8.2 221 2.1 223 209 5.1 13.4 242 0.86 1975 214 18.7 196 63.8 259 8.0 206 2.7 209 200 5.8 12.5 228 0.88 1976 193 10.4 183 35.5 218 8.9 195 3.3 198 150 6.3 11.9 216 0.69 1977 282 10.4 271 35.4 307 8.9 272 3.3 275 222 6.9 16.5 299 0.74 1978 240 10.2 229 34.8 264 8.4 221 3.7 224 196 7.3 13.5 245 0.80 1979 285 15.9 269 44.0 313 8.2 255 4.1 260 171 7.9 15.6 283 0.60 1980 274 27.0 247 72.1 319 8.1 258 4.6 262 190 8.0 15.7 286 0.66 1981 328 29.6 298 86.2 384 8.0 305 5.3 311 281 8.3 18.6 338 0.83 1982 257 20.2 237 74.3 311 9.2 285 6.0 291 273 10.2 17.5 319 0.86 1983 232 17.1 215 47.3 262 9.8 257 6.7 264 262 12.1 15.8 292 0.90 1984 313 18.8 294 48.0 342 10.5 361 7.9 368 345 13.7 22.1 404 0.85 1985 243 20.2 223 48.0 271 12.5 339 9.0 348 267 14.8 20.9 383 0.70 1986 214 17.5 196 48.0 244 12.2 298 9.5 307 279 16.0 18.4 342 0.81 1987 200 18.5 181 40.5 222 13.0 289 10.6 299 421 17.4 18.0 335 1.26 1988 242 25.4 216 41.2 257 13.0 335 12.0 347 551 19.2 20.8 387 1.42 1989 313 28.3 284 69.7 354 15.1 535 14.6 549 529 20.9 33.0 603 0.88 1990 243 35.5 207 67.2 274 17.0 466 16.0 482 509 23.1 28.9 534 0.95 1991 242 30.4 212 65.6 278 18.4 512 17.6 530 586 26.3 31.8 588 1.00 1992 237 27.1 210 65.6 275 25.9 713 20.8 734 813 29.5 44.0 807 1.01 1993 233 29.9 203 62.4 266 31.5 836 23.9 860 730 33.4 51.6 945 0.77 1994 271 16.5 254 55.2 309 31.4 971 26.6 997 791 38.4 59.8 1095 0.72 1995 240 25.9 214 62.4 276 31.4 868 30.2 898 926 42.8 53.9 994 0.93 74-80 0.75 0 81-87 0.89 0 88-95 0.96 L 74-95 0.87 0 1-h Source: Adapted from Pursell, Garry and Anju Gupta, 1996. Trade Policies and Incentives in Indian Agriculture Background Statistics and Protection and Incentive Indicators, 1965-1995. Background Papers nos 1.6. World bank, mimeo. Table A5.15: Nominal Protection Coefficient Soyabean Oil 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 Priee US - - - - - - - 443.42 435.42 437.25 454.00 438.00 452.33 580.08 647.2 (CIF,Rotterdam) S/MT (Oct-Sept) I MinusFreightfrom US 37.04 25.2 21.34 23.5 25.24 21.92 23.12 31.76 35.42 44.38 38.00 33.84 37.38 37.38 37.38 Rotterdam to US S/MT. Gulf Plus Freight From US 107.72 92.84 59.08 60 60 60 50.66 51.5 87.16 84 82.00 82.00 84.42 84.42 84.42 US Gulf to India S/MT. (Bombay) IF Prices at US 463.16 487.16 476.87 498.00 486.16 499.37 627.12 694.24 Bombay S/M Exchange-Rate I 8.53 8.96 10.06 11.24 12.09 12.55 12.98 13.57 15.9 17.31 21.39 25.89. 29.65 31.37 31.37 (Official) USS-R S. CifBombay RsJqtl. 628.51 774.58 825.46 1065.22 1258.67 1480.63 1967.28 2177.83 PortClearanec RsJqtd. 6.74 7.63 8.53 10.18 11.49 12.22 13.62 15.38 18.65 20.53 22.57 26.69 30.57 32.71 32.71 charges Landed Cost at Port Rs./qtl. 643.89 793.23 845.99 1087.79 1285.36 1511.20 1999.99 2210.54 Marketing Cost and Rslqtd. 38.63 47.59 50.76 65.27 77.12 90.67 120.00 132.63 trader's margin Transportation cost Rs./qtl. 10.41 12.73 15.15 17.17 18.49 19.95 21.77 23.97 26.1 28.86 31.10 34.04 38.62 40.96 43.31 (Bombay-Bhopal) Reference Price Rs./qtl. 706.49 866.93 925.61 1184.16 1396.52 1640.49 2160.94 2386.48 Wholesale Price Rs./qtl. 2050 1903.75 2228.75 3262.40 3453.44 2660 3067 3610.37 (Betul) (Oct-Sept) NPC at OER 2.90 2.20 2.41 2.76 2.47 1.62 1.42 1.51 Source: A. Gulati, A, Sharma, & D.S. Kohli, (1996): "Self-Sufficiency & Allocative Efficiency: Case of Oilseeds in India", National Council of Appiled Economic Research, New Delhi Q D 00 hpI '.01I' Table A5.16: Quality Discount Coefficient Soyabean Meal 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/9.3 1993/94 1994/95 Hamburgf.o.b.US$/ton 170 196 202 270 274 218 210 217 216 223 197 Freight US$/ton From US Gulf to Far Eastl 38 36 40 34 58 56 54 54 56 50 S0 Minusfrom US Gulfto Rotterdam2 20 18 19 25 28 36 30 27 29 28 28 Mtinusfrom India to Far East3 18 16 17 23 26 34 28 25 27 26 26 Reference Price (estimated India fo.b.) 170 199 207 255 277 205 205 219 216 219 193 US$1t Export Values Rs (Crores) 60.9 98.8 131.0 86.2 276.9 359.1 473.9 656.9 1114.4 1500.7 1027.8 Quantity Exported (tonnes) 265,225 481,365 577,920 311,275 699,690 927,570 1,352,626 1,376,294 1,825,038 2,381,493 1,637,206 Exchange Rate 12.39 12.37 12.97 13.44 15.73 17.21 20.79 25.89 30.65 31.37 31.41 India£fo.b. (Actual) $/ton 190 164 175 204 249 224 164 184 206 201 200 QualityDiscountCoefficient(Exports) 1.12 0.82 0.84 0.80 0.90 1.09 0.80 0.84 0.95 0.92 1.04 Note: I US Gulf to Far East freight rate estimated 2 Thailand to Far East freight rate typically $ 20 per ton 10 OQ D.u Annex 5 Page 37 of 49 Table A5.17: Effective Protection in the Soyabean Complex (US$/ton) India Refere;e Effectivi Actual Margin Price Marin Protection (At Factory) (At factory) Extrctionwrate : 8%/82% I 8%8% - 1987/88 -6 -18 12 1988/89 49 -91 141 1989/90 87 -76 163 1990/91 101 -41 142 1991/92 45 -64 109 1992/93 58 -64 121 1993/94 57 -76 133 1994/95 43 -53 96 Av 1990/91 - 61 -60 120 1993/94 __I Note: Extraction rates from Oil World Prices from NPC tables Table A5.18: Nominal Protection Coefficient Sunflower YEAR USA/CAN, FREIGHT FOB PR. FREIGHT BORDER EXCHANGE O ER PORT LANDED DMEST TRMNSPTI 'MARKET REF. NPC CIF US-ROT1r. US-INDIA PRL (CIF) RATE PRICES COSTS COST PRIEt COST COST PICE ROTE. ~4 R, ~2 m A 1976.0 275 10.4 265 35.5 300 9.0 269 3.3 273 166 4.4 16.4 293 0.57 1977 304 10.4 294 35.4 329 8.8 290 3.3 293 279 4.8 17.6 316 0.88 1978 300 10.2 290 34.8 325 8.3 270 3.7 273 220 5.1 16.4 295 0.75 1979 330 15.9 314 44.0 358 8.1 291 4.1 295 234 5.6 17.7 318 0.74 1980 291 27.0 264 72.1 336 7.9 267 4.6 272 268 5.7 16.3 294 0.91 1981 331 29.6 301 86.2 388 8.3 323 5.3 328 360 5.8 19.7 353 1.02 1982 .298 20.2 278 74.3 352 9.3 328 6.0 334 374 7.1 20.0 361 1.04 1983 269 17.1 252 47.3 299 9.9 297 6.7 304 425 8.3 18.2 331 1.28 1984 366 18.8 347 48.0 395 10.9 431 7.9 439 431 9.5 26.4 475 0.91 1985 290 20.2 270 48.0 318 12.4 394 9.0 403 409 10.2 24.2 437 0.94 1986 214 17.5 196 48.0 244 12.4 302 9.5 312 502 11.0 18.7 342 1.47 1987 201 18.5 183 40.5 223 13.0 289 10.6 300 696 12.1 18.0 330 2.11 1988 253 25.4 228 41.2 269 13.4 361 12.0 373 640 13.3 22.4 409 1.57 1989 343 28.3 315 69.7 384 15.7 605 14.6 619 600 14.5 37.1 671 0.89 1990 267 35.5 231 67.2 299 17.2 514 16.0 530 787 15.9 31.8 578 1.36 1991 292 30.4 262 65.6 328 20.8 681 17.6 699 1057 18.2 41.9 759 1.39 1992 241 27.1 214 65.6 279 25.9 723 20.8 744 1018 20.6 44.6 809 1.26 1993 259 29.9 229 62.4 292 31.2 910 23.9 934 917 23.3 56.0 1013 0.90 1994 286 16.5 270 55.2 325 31.4 1019 26.6 1046 1055 26.6 62.8 1135 0.93 1995 262 25.9 236 62.4 298 31.6 942 30.2 972 1230 29.7 58.3 1060 1.16 77-80 0.77 81-87 1.25 88-95 1.18 Id 77-95 1.10 P 1.10~ ~~0 O P %0 Ln Source: Adapted from Pursell, Garry and Anju Gupta, 1996. Trade Policies and Incentives in Indian Agriculture. Background Statistics and Protection and Incentive Indicators, 1965-1995. Background Papers nos 1-6. World bank, mimeo. Table A5.19: Nominal Protection Coefficient Sunflower Oil 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 | Price (CIF,Rotterdam) (Oct- US i - - - - - - - 457.67 477.25 485.92 480.75 457.75 490.17 635 Sept) S/MT. Minus Freight from US 37.04 25.2 21.34 23.5 25.24 21.92 23.12 31.76 35.42 44.38 38.00 33.84 37.38 37.38 Rotterdam to US Gulf $/MT. Plus Freight From US 107.72 92.84 59.08 60 60 60 50.66 51.5 87.16 84 82.00 82.00 84.42 84.42 US Gulf to India (Bombay) S/MT. CIF Prices at Bombay US 477.41 528.99 525.54 524.75 505.91 537.21 682.04 S/MT. Exchange Rate (Official) 1 8.53 8.96 10.06 11.24 12.09 12.55 12.98 13.57 15.9 17.31 21.39 25.89 29.65 31.37 31.37 USS=R S. CifBombay Rs./qti. 647.85 841.09 909.71 1122.44 1309.80 1592.83 2139.56 PortClearanceCharges Rs./qtl. 6.74 7.63 8.53 10.18 11.49 12.22 13.62 15.38 18.65 20.53 22.57 26.69 30.57 32.71 32.71 Landed Cost at Port Rs./qtl. 663.23 859.74 930.24 1145.01 1336.49 1623.40 2172.27 Marketing Cost and trader's Rs./qtl. 39.79 51.58 55.81 68.70 80.19 97.40 130.34 margin Transportation cost Rs./qtl. 11 13.48 16.05 18.2 19.59 21.13 23.05 25.4 26.4 27.4 28.4 29.4 30.4 31.4 32.4 (Bombay-Karnataka) Reference Price Rs./qtl. 736.19 947.82 1024.37 1255.58 1461.80 1756.10 2334.01 Wholesale Price (Bidar) Rs./qtl. 2144.44 2108.33 2329.17 3279.17 3154.17 2918.18 3243.32 3752.2 (Oct-Sept) NPC at OER 2.91 2.22 2.27 2.61 2.16 1.66 1.39 0 Source: A. Gulati, A, Sharma, & D.S. Kohli, (1996): "Self-Sufficiency & Allocative Efficiency: Case of Oilseeds in India", National Council of Appiled Economic Research, m New Delhi 0 0 I-t 0n Table A5.20: Quality Discount Coefficient Sunflower Meal 75 8 / 1987/8 98 1 9 1 9 99/ 199/9 19 1994/95 Hamburg f.o.b.USS/ton 84 111 119 148 148 123 113 123 134 130 101 Freight USS/ton Rotterdam to Far Eastl 38 36 40 34 58 56 54 54 56 50 50 Minusfrom India to Far East3 18 16 17 23 26 34 28 25 27 26 26 Reference Price (estimated India f.o.b.) US$/t 104 132 143 159 179 145 139 152 163 154 125 Export ValuesRs/ton 1015 608 890 1016 1294 1439 1537 1693 2320 2503 2457 Exchange Rate 12.39 12.37 12.97 13.44 15.73 17.21 20.79 25.89 30.65 31.37 31.41 India fo.b. (Actual) $/ton 82 49 69 76 82 84 74 65 76 80 78 Quality Discount Coefficient (Exports) 0.79 0.37 0.48 OA8 OA6 0.58 0.53 OA3 0.47 0.52 0.63 Note: I Freight Rotterdam to Far East similar to US Gulf to Far East %O Ln o P Fh L.r Annex 5 41 of 49 Table A521: Effective Protection in the Sunflower Complex (US$/ton) India- : Ref-r-n Effei*v- . . . : ActalMrina Prie Magn Potction (At . Fatory) (Atfactory) .Extracton rate 35%149 - 35ol4 -- 1987/88 110 -47 157 1988/89 118 -141 258 1989/90 48 -68 116 1990/91 72 -96 169 1991/92 57 -51 108 1992/93 62 -61 123 1993/94 55 -37 92 1994/95 - - - Av 1990/91 - 61 -61 123 1993/94 ___ Note: Extraction rates from Oil World Prices from NPC tables Annex 5 42 of 49 E. Efficiency Gains from Improved Marketing & Processing Performance Improvement Scenarios A5.54 The preceding analysis indicates that the Indian oilseed complex suffers from structural inefficiencies: low oil extraction rates except in the case of groundnut, poor technical and economic efficiency in processing (reflected by high crushing margins), and poor meal realization stemming from both high export costs and quality discounts. Altogether, these inefficiencies result in un-necessarily high processing and marketing costs and/or low market realization borne almost entirely by oilseed growers. With edible oils now freely imported under modest tariffs, domestic prices for edible oils cannot exceed import parity levels. As a result, oilseed growers bear the costs of the inefficiencies in the marketing and processing of oilseeds, and see their farmgate prices fall unnecessarily low. Unless the oilseed processing industry and trade is allowed to modernize and trim its marketing and processing costs, farmers will shift out of oilseed production. A5.55 Estimating Efficiency Gains From De-Regulation of Marketing and Processing. How much could be gained by addressing each of these marketing and processing inefficiencies? T-his section seeks to estimate the gains from overcoming the observed inefficiencies in oilseed processing and marketing. The gains will be measured in terms of potential improvement in oilseed prices which growers could receive from improvements in the marketing and processing of oilseeds and its derived products. A5.56 Potential Sources of Efficiency Gains. Four different scenarios for improvements are considered: Improvement in technical efficiency in processing and marketing alone. This is captured by raising the oil recovery ratio from oilseeds to best practice international standards. The structure of the processing industry remains unchanged, and crushing margins remain remain also unchanged. Higher oil recovery ratio will come from improvements in the genetic material of the seed, marketing practices, and extraction technology (e.g., integration of expelling and solvent-extraction to reduce losses) and management. In the case of groundnut, the oil extraction rate in India is higher than elsewhere in the world; at the same time, losses are important in groundnut extraction because of poor technical efficiency in expelling and solvent-extraction, and absence of vertical integration. It is therefore assumed that reduced losses could raise the groundnut oil extraction from 41% to 44%. Improvements in technical and economic efficiency processing and marketing. In addition to the first scenario improvement, this scenario captures the efficiency gains from moving to economically and technically efficient, large-scale, integrated and higher capacity utilization factories. It is assumed that operating costs of crushing factories are reduced by 52% in the case of softseeds (groundnut, rapeseed-mustarseed, and sunflowerseed), and by 35% in the case of soyabean. Improvements in technical and economic efficiency processing and marketing, combined with lower quality discounts for meals. Improved meal realization would come from lower quality discount on the world market for meals. This gain is added to the previous scenario. It is assumed that the quality discounts faced by Indian exporters, as identified by the NPCs for meals, are simply eliminated. Quality discounts would disappear as a Annex 5 43 of 49 result of improved quality management and reliability on the domestic market, improved seed material, i mproved reliability and timeliness in delivery. Improvements in technical and economic efficiency processing and marketing, combined with lower export costs for meals. Lower meal export costs are further added to the preceding scenario, contibuting to a higher meal realization. Lower meal export costs would come from investments in bulk transportation and storage system in India and in bulk loading directly into the hold of the export vessel An estimated US$18 per ton (or about Rs 570 per ton) savings in export costs could be achieved which such investments. A5.57 Efficiency Gains Are Estimated Under Free Imports and 20% Tariff Policy for Edible Oils. In order to reflect the current policy situation, we assume that edible oils are freely imported under 20% tariffs. Practically, this means that, for the recent years, we derive the implied domestic price for edible oils under 20% tariffs and observed import and domestic transport costs. We also derive the implied domestic oilseed prices that would result from lower oil prices and observed domestic crushing margins. This means that the observed inefficiencies in marketing and processing are being passed-on to oilseed farmers. This is consistent with the observed evolution of prices in the oilseed industry analyzed earlier (see paras A.5.42 to A.5.53). Results A5.58 Free and cheap oil imports do not need to come at the expense of mostly rainfed farmers. Free oil imports need not threaten overall agricultural growth, in particular in the rainfed areas; nor do they need to threaten the remarkable achievements in oilseed production achieved during the 80s. The results indicate that the de-regulation of domestic trade and oilseed processing industry could fully compensate farmers for the lower seed prices resulting from free edible oil imports. With de-regulation enabling the processing industry to trim its marketing and processing costs, oilseed growers could see their farmgate prices increase significantly without however imposing higher prices on consumers. It stems from the fact that the gains from technical and economic efficiency improvements in the oilseed complex are large. Oilseed producer prices could be raised by as much as 25% in the case of groundnut, 22% for soyabean, 57% for rapeseed-mustardseed, and 44% in the case of sunflower, on average between 1990/91 and 1994/95.' A5.59 In the case of groundnut (Table A5-22), the simulated efficiency gains suggest that the largest gains would come from improved marketing and processing performance alone (scenario 2). This is consistent with the earlier findings about the high crushing margins and poor processing efficiency associated with a fragmented, small-scale, technically inefficient and under-utilized capacity utilization in the groundnut processing industry. Together, the potential gains under scenario 2 in 1994/95 could have yielded an additional US$ 54/ton of groundnut (about Rs 1 70/quintal). Gains from improved meal realization (from lower quality discounts and reduced export costs) would yield comparatively less since quality discounts are relatively small to start with, and meals account for a relatively small share in the value of groundnut. Clearly, groundnut growers who are currently highly taxed by the current inefficiencies in processing and marketing (NPC groundnut has fallen well below unity) would gain a lot from the de-regulation The percentage increases are calculated relative to the implied oilseed price which are generally lower than the actual prices, except for groundnut and soyabean. Annex 5 44of49 of domestic trade and groundnut crushing industry; it would come at no costs to either consumers or processors. A5.60 The rapeseed-mustarseed industry stands to benefit the most from de-regulation and investments in bulk-handling facilities. The gains, measured in terms of potential increases in rapeseed prices, would come almost equally from improvements in marketing and processing performance (scenario I and 2), and from improved meal realization (scenario 3 and 4). The rapeseed-mustarseed complex would gain significantly (US $ 41/ton or Rs 125/quintal of rapeseed in 1994/95; scenario 3, Table A5-23) from improvements in the quality of the seed material, such as double zero-varieties, which would lower discounts on the meals export markets by reducing the content in erucic acid and glucosinolate. The rapeseed complex would also benefit (an additional US$ 1 1/ton or Rs. 34/quintal of rapeseed) from investments in bulk handling facilities which would lower the costs of exporting meals (scenario 4). This is consistent with the observed large price discounts faced by rapeseed DOC exports on the world market. The small-scale reservation and other regulatory constraints are likely to stand in the way of raising oil recovery, even with improved seed varieties, and would need to be lifted to allow oilseed growers to reap the full benefits from adopting new, improved seed varieties. Higher oil extraction and lower processing costs could yield an additional US $ 50/ton or Rs. 155/quintal of rapeseed in 1994/95 (scenario 4). We cannot predict how the potential gains would be actually distributed between consumers, growers and processors. However, from the simulations, it is clear that all three groups would benefit. With improved marketing and processing performance, while consumers would benefit from lower rapeseed oil prices, growers could receive higher prices and the processing industry simultaneously raises its margins and level of profitability.2 A5.61 Soybean complex could benefit comparatively more from investments that reduce the costs of exporting soybean meals (US$ 15/ton or Rs 47/quintal of soyabean in 1994/95; scenario 4 in Table A5-24). This is consistent with the very large weight of the meal in the value of the bean and its relatively low oil content. The gains from technology up-gradation and improved capacity utilization in the soyabean processing industry remain nevertheless significant (US$ 9 and 1 1/ton in scenario 1 and 2, respectively, or Rs. 28 and 34/quintal). This is consistent with the observed high margins and effective protection of the soya solvent processing industry. Note that the gains from raising oil recovery in soyabean would more than compensate for the lower recovery of meals. The gains from efficiency gains would benefit both growers and consumers, without negatively affecting the profitability of the soyabean extraction industry. A5.62 In the case of sunflower, the efficiency gains are particularly large. The sunflower complex would gain the most from improvements in the processing industry (US$ 56/ton or Rs. 173/quintal in 1994/95 from improved oil recovery alone, and an additional 17/ton or Rs. 53/quintal from lower processing costs; scenario 1 and 2 in Table A5-25). This is consistent 2 Consumers could benefit since the rapeseed oil price implied under 20% import tariff is lower than the observed, actual price. Rapeseed prices are virtually at import parity levels (NPC close to unity in 1994/95, see Table A5-0), but crushing margins are getting smaller and even negative in 1994/95. The efficiency gains are therefore large enough to raise both producer prices and crushing margins. 3 As indicated by Table A5-24, there is room for the soyabean oil price to fall since the implied price under 20% import tariff is lower than the observed, actual price. Similarly, soyabean growers are currently taxed by inefficiencies in the marketing and processing soya industry (NPC are below unity). Annex 5 45 of 49 with the observed low oil extraction rates and high crushing margins in the industry. The gains from improved meal realization are just as large (US$ 50/ton or Rs. 155/quintal; scenario 4), and consistent with the high quality discounts faced on the world market together with the important export costs. Consumers, growers and industry all have to gain from improved marketing and processing performance in the industry. A5.63 A reform strategy which concentrates on the domestic regulatory reforms and investments needed to bring about such efficiency gains, would benefit growers as well as consumers, and need not come at the expense of the processing industry. Today, the protection of the oilseed industry is being dissipated in poor processing and marketing performance, and poor meal realization, which eventually tax oilseed producers and, until recently consumers. A reform strategy that aims directly at alleviating the root causes for these inefficiencies has the potential to benefit the large constituencies of oilseed growers, the bulk of whom live in poorly endowed rainfed areas. Raising farmgate prices and returns to quality, would give the necessary incentives for growers to continue to grow oilseeds and invest in new oilseed production technologies. Improving the performance of the transformation and marketing chain in the oilseed complex would give therefore a tremendous boost to productivity growth in oilseed production, allowing domestic production to keep-up with the rapid increases in projected demand. Such a strategy would simultaneously benefit consumers who would gain from improved quality of oils while keeping oil prices low under modest tariffs. Indeed, faster productivity growth in oilseed production would alleviate the need for renewed protection policy of the oilseed complex, keep domestic price of oils in line with world price levels, and reduce import needs substantially. In addition, such a strategy would also benefit the oilseed industry which has the capacity to improve its profitability, and raise the necessary resources for its modernization and restructuration. It would therefore escape the pitfalls of a strategy limited to changes in the foreign trade policies by minimzing the inherent conflicts between growers, consumers, and processors. Government would also benefit from a strategy of de-regulation of the oilseed industry and markets since it would strengthen food security objectives, promote sustained agricultural growth and rural development in rainfed areas, and facilitate the pursuit of essential public concerns such as health safety and environmental concems. Table A5-22: Potential Producer Price Gains from Alternative Scenarios of Improved Marketing & Processing Performance With Free Imports of Edible Oil at 20% Tariff: The Case of Groundnut (US $ per ton) India Act'al o Pc Pre&EdibjejOi M mo cario1BeAi sr eO xatn Sed M Oil' C Seed Price ,ece in Oipe E nIfld jndreIS in%OU6d Marin (implied) Se~ed Price (intpid OjlseePrceee e Pri4c'e Pric Ch'ng (impied __,plied)____ _rice_____ ___ _ ge 1990/91 457 95 1683 293 297 160 1307 333 36 12% 1991/92 388 97 1316 212 193 195 852 215 23 12% 1992/93 283 100 988 183 253 29 924 278 25 10% 1993/94 264 115 1099 256 351 -87 1319 387 36 10% 1994/95 311 113 1220 258 356 -44 1338 392 37 10% Av 1990/91 - 1994/95 51 31 11% #~~~~nro2 cn~o Prngo~ avUi Ma66 1I2tyD6ut ScePi 4± 5w5 l st - Cost Saig Oile Nice Se Pice PieCage Pice lise rce; Fe Price Piehnge 0s~iIS Oile Pc SePre PicChg 1990/91 20 353 56 19% 114 363 66 22% 18 373 76 26% 1991/92 18 234 41 21% 128 250 58 30% 18 260 67 35% 1992/93 19 297 44 17% 138 318 64 25% 18 327 74 29% 1993/94 18 404 54 15% 128 412 61 17% 18 422 71 20% P (b 1994/95 18 410 54 15% 99 402 47 13% 18 412 56 16% 4- Av 1990/91 - o P 1994/95 50 18% 59 22% 69 25% 1 I Source: NPC Tables; World Bank estimates. Table A5-23: Potential Producer Price Gains from Alternative Scenarios of Improved Marketing & Processing Performance With Free Imports of Edible Oil at 20% Tariff: The Case of Rapeseed-Mustardseed (US $ per ton) India Actual Domestic Prices Free Edible Oil bnport Tariff: 20% Scenario 1: Best Practice Oil Extraction (extraction rate: 370/o/60°t) . (41°%/581/%) Seed Meal Oil Cushing Seed Price Decline in Oil Price mphied Oitseed tncreaseinSeed %OilseeJPtice Mert (Implied) see Pice (mlidce ePlice Ciig 1984/85 420 48 1096 18 296 124 786 326 30 10% 1985/86 326 30 967 53 181 145 511 201 20 11% 1986/87 323 32 1275 172 155 168 442 172 17 11% 1987/88 508 28 1736 156 203 306 587 226 23 11% 1988/89 466 49 1154 -7 210 256 578 232 22 11% 1989/90 326 34 1018 74 203 124 597 226 23 11% 1990/91 458 27 1252 26 176 281 545 198 21 12% 1991/92 360 18 1111 66 180 180 579 202 23 13% 1992/93 299 26 816 21 166 133 547 188 21 13% 1993/94 333 46 822 1 233 100 719 261 28 12% 1994/95 388 47 942 -9 266 122 826 299 32 12% Av 1990/91 - 1994/95 163 25 12% Scenaio2:Sceniol+,Ptocesagcoasavinps, Scenarioo3:, Scenar2, 3Mea , it ,is: Sna 3+ we e oCo ProcessingCost ImpliedOilsecd boteaseinSeed %OilseedPwice impliedMeal IbpliedOilseed Incease in Se: d OloseediPrce Export cost IinpliedOileeed Inre,ein Seed %Oilace Pri,ce Savings Price Price Change Price Price Price Change, savings Ptice Price Change 1984/85 19 345 49 17% 82 365 69 23% 18 375 80 27% 1985/86 18 219 38 21% 103 261 80 44% 18 272 91 50% 1986/87 17 189 34 22% 82 219 64 41% 18 229 74 48% 1987/88 18 244 41 20% 122 299 96 47% 18 309 106 52% 1988/89 18 250 40 19% 157 313 103 49% 18 323 113 54% 1989/90 19 245 42 21% 119 294 91 45% 18 304 102 50% 1990/91 20 217 41 23% 119 271 94 54% 18 281 105 59% P) 1991/92 18 221 41 23% 133 288 108 60% 18 298 118 66% ID 1992/93 19 207 40 24% 155 281 115 69% 18 292 126 76% P: 1993/94 18 278 46 20% 142 334 101 44% 18 344 112 48% 14 1994/95 18 316 50 19% 118 358 91 34% 18 368 102 38% Av 1990/91 - i1-t .P. 1994/95 44 22% 102 52% 112 57% t- Source: NPC Tables; World Bank estimates. Table A5-24: Potential Producer Price Gains from Alternative Scenarios of Improved Marketing & Processing Performance. With Free Imports of Edible Oil at 20% Tariff: The Case of Soyabean (US $ per ton) 0~~~~~ni Acua Domes tic Prce Frez Ed.l Oil Imor Scenri 1 >De~ P,racice OlExtrcto (extraction rate: 18%/&2%) TarE 20%~ nce l9%lt81% O) oo Seed Meal Oil Crushin Seed Prie Dli Oi Pce m isee M i (plied) 1987/88 410 166 1525 -6 262 148 667 267 5 2% 1988/89 336 210 1210 49 269 67 810 275 6 2% 1989/90 296 189 1295 87 216 80 822 222 6 3% 1990/91 282 131 1569 101 188 94 1008 196 9 5% 1991/92 314 152 1334 45 262 52 1013 271 9 3% 1992/93 238 175 868 58 281 -43 1085 290 9 3% 1993/94 252 168 978 57 296 -44 1197 306 10 3% 1994/95 295 166 1150 43 287 8 1076 296 9 3% Av 1990/91 - 1994/95 14 9 4% 4. rm* 0 'T_ Processing Impled Increase in Oilseed Imp-ie Mel Ilid Icesin %Osed Expot cot Imlie Wnraei % Oilseed Cost Savings OllsedPic See Prc rc hng rc is Price S eed rc rc hne svns O PriPrice Sed Price Price Change 1987/88 13 279 18 7% 217 321 59 23% 18 336 74 28% 1988/89 13 288 19 7% 238 311 42 15% 18 325 56 21% 1989/90 14 236 20 9% 170 220 4 2% 18 235 19 9% 1990/91 14 211 23 12% 173 244 57 30% 18 259 71 38% 1991/92 14 285 23 90/0 187 313 51 20% 18 328 66 25% 1992/93 16 306 25 9% 185 313 33 12% 18 328 47 17% 1993/94 16 322 26 90/% 186 337 41 14% 18 351 55 19% to 1994/95 13 308 22 8% 159 303 16 6% 18 317 31 11% 6 Av 1990/91 --C 1994/95 24 9% 40 16% 54 22% O P Source: NPC Tables; World Bank estimates. Table A5-25: Potential Producer Price Gains from Alternative Scenarios of Improved marketing & Processing Performance With Free Imports of Edible Oil at 20% Tariff: The Case of Sunflower (US $ per ton) India Actual Domestic Prices' ' ' |: Free Edible Oil Import Scenirio l: Best Practice Oil EXtractio,t | (extraction rate: 35%/ol49%) Tariff: 20% (410/6/54%) I Seed Meal Oil Crushing Seed Price Decline in Oil Price Implied Increase in % Oilseed Margin (implied) Seed Price (implied) Oilseed Price Seed Price Price Change (implied) 1987/88 476 48 1596 110 137 340 638 177 41 30% 1988/89 381 54 1340 118 155 227 703 200 45 29% 1989/90 457 57 1353 48 223 234 695 267 45 20% 1990/91 508 49 1577 72 199 310 705 243 45 23% 1991/92 393 41 1218 57 194 199 660 236 42 21% 1992/93 299 51 952 62 200 100 675 243 43 22% 1993/94 336 54 1034 55 280 57 880 335 56 20% Av 1990/91 - 1993/94 166 46 21% Scenario 2: Scenario I + Processing cost savings. Scenario 3, Scenario 2 + No,Qu,1it Disco'it. ' S'enro 4: Scenario 3+ Lowe Export Costs. Processing, Implied Increase in % Oilseed Implied Meal Implied Increase in % Oilseed Export cost Implied Increase in %/Oilseed Cost Savings Oilseed Price Seed Price Price Change Price Oilseed Price Seed Price Price Change savings Oilseed Price Seed Price Price Change 1987/88 18 195 59 43% 131 240 104 76% 18 250 113 83% 1988/89 18 218 63 41% 151 270 115 75% 18 280 125 81% 1989/90 19 286 63 28% 118 319 96 43% 18 329 106 48% 1990/91 20 263 65 33% 114 298 100 50% 18 308 109 55% 1991/92 18 254 60 31% 128 301 107 55% 18 311 117 60% 1992/93 19 262 62 31% 138 309 109 55% 18 318 119 60% lb eQ 1993/94 18 353 73 26% 128 393 113 41% 18 403 123 44% w Av 1990/91 - 1993/94 65 30% 86 40% 117 44% 'wo n Source: NPC Tables; World Bank estimates. Annex 6 Page I of 21 The Oilseed Complex Anne:x 6 and the GATT A6.1 In 1995, India signed the Uruguay Round of the General Agreement on Tariffs and Trade (GATT). In signing the GATT, India committed to: (i) converting all non-tariff measures into tariffs (known as tariffication); and (ii) following GATT rules regarding market access, domestic support, and export competition. This Annex reviews the implications of the GATT on oilseed and edible oil trade in the world in general and India in particular. It also examines the impact of the current trade regime on domestic price stability and explores the feasibility alternative mechanisms for managing the price risks associated with a more open trade environment.' A. Implications of GATT on Trade of Agricultural Products A6.2 The Uruguay Round of the GATT mandated trade measures specific to developing countries. It required India and other developing countries to: * convert non-tariff barriers into bound duties; * bind all tariffs and tariff equivalents; * reduce the new bound tariffs, as well as tariffs which had been bound in previous negotiations, by at least 10 % per tariff item and by 24 % on a simple (unweighted) average over ten years (1995-2004); - for commodities subject to tariffication, establish minimum access opportunities at 2 % of 1986-88 consumption in 1995, rising to 4 % in 2004. A6.3 The Uruguay Round agreement in agriculture defines non-tariff measures to include quantitative restrictions, minimum import prices, variable import levies, discretionary import licensing regimes, non-tariff measures applied through state-trading enterprises, voluntary export restraints, and similar border measures other than ordinary customs duties. These non-tariff measures had to be replaced by a tariff equivalent. This tariff equivalent is a customs duty designed to provide the same level of protection as the non-tariff measure. A6.4 Developing countries had the option of setting maximum tariff ceiling bindings2 instead of tariff equivalents of existing non-tariff measures. The binding of all tariff items at the established maximum levels was also accepted in lieu of reduction commitments. In addition, if This Annex is based on M. Ingco, 1995, "India's Domestic and External Trade Policy Environment, Implications for Marketing Policies and Strategies in Oilseeds and Vegetable Oil Markets," International Economics Department, mimeo. 2 Developed countries were required to convert non-tariff barriers into tariff based on tariff equivalents of NTBs in the base period, 1986-88. Bindings or bound rates refer to tariff rates that resulted from GATT negotiations and were incorporated in a country's schedule of concessions. Bindings are thus enforceable and form an integral part of the GATT. The purpose of a tariff binding is to provide greater commercial certainty by imposing a ceiling which cannot be breached without recourse to the GATT. Annex 6 Page 2 of 21 the option of maximum tariff ceilings is chosen, the country is exempted from the minimum access commitments.3 A6.5 For agriculture, India chose the option to establish maximum tariff ceiling bindings in converting quantitative restrictions into tariffs for all agricultural commodities, including oilseeds and edible oils. For most products, India is also not required to reduce the tariffs during the 10-year implementation period (1995-2004). However, India is not allowed to introduce any new non-tariff measures, unless they can be justified under the WTO provisions. Since India also pursued this option, it is also exempted from minimum access commitments. B. Implication of the GATT on Oilseed Trade India's Current Tariff Levels and GATT Commitments A6.6 India's current tariffs on oilseeds are set at significantly lower levels than their GATT ceiling bindings. India's tariff ceiling bindings for oilseed imports (soybeans, copra, linseed, rapeseed, colza, and sunflower) are set at 100 % Table A6.1: Current and GATT Tariff Ceiling Bindings for (Table A6. 1). But these bindings Oilseeds and Edible Oils are not relevant at the present CA> modities Currenaif _ time, since the tariff levels for Soybeans, Rapeseed, these oilseeds have been set at Sunflower, Groundnuts 50 100 50 % since 1995. Copra and Linseed i 100 Soybean oil, Rapeseed & 30 45 Colza, or mustard oil ...................... ........................................ ..................... A6.7 Oilseed imports, Palm oil & Coconut oi. 50 300 however, continue to be o u .n.d.nut oil. & 3 Sunflower seed oil i 30 i 300 canalized through the two state Other.Vegetableoils 3- .3.00 corporations-- the State-Trading Source: Appendix Table A-1. Corporation (STC) and Hindustan Vegetable Oils Corporation Ltd (HVOC). The canalization of imports is considered legal under the UR agreement. Thus although current tariffs much below the ceiling bindings, the volume of imports will remain a government prerogative, via the two state corporations. A6.8 If imports are decanalized, the GATT bindings will impose the upper bound on the nominal protection for these oilseeds. These maximum tariffs will likely be binding for three commodities at least, that is rapeseed, groundnut, and copra. This is due to the fact that their domestic prices occasionally exceeded border prices by even more than the ceiling bindings in 2- 7 years during 1965-1993. A6.9 India's current tariffs for the major edible oils are also significantly lower than its GATT ceiling bindings (Table A6.1). The tariff ceiling bindings for most edible oils--with the exception of soybean, rapeseed, mustardseed and colza oil whose ceiling bindings are set at 45 %--are 300 %. Actual tariffs for vegetable oils, however, have been reduced to 30 % from the previous level of 65 % for most oils and 35 % for soybean and rapeseed oils. A6.10 Unlike oilseeds, the lowering of the tariffs was also accompanied by complete elimination of the monopoly on edible oil imports by the state trading corporations. Prior to 1995, only palm olein was allowed to be imported by the private sector. Edible oils are now freely importable under open general license. The STC and the National Dairy Development 3 Contracting parties are to provide minimum level of import access opportunities for products subject to tariffication. Minimum access will be ensured by a tariff-quota. Annex 6 Page 3 of 21 Board (NNDB), however, benefit from a concessional import tariff of 20 % on edible oil imports. The preferential access to imports is permitted under the GATT provided that in the process of importing, there is no discrimination with respect to the sourcing of supply. A6. 1 1 The freeing up of edible oil imports at the a 45 % tariff level will set the ceiling on domestic prices of edible oils. To the extent that various oils are substitutable in consumption,4 an increase in available supplies of particular edible oils (such as soybean, rapeseed , or mustardseed oil) will also have an effect on the price of other oils.5 Substitutability will be high in food consumption, although tastes and habits will influence choice. In industrial use, substitutability is high because fats and oils are used in mixed form, but technical requirements may restrict choice and use. But ultimately, substitutability between oils is determined at the processing level where the manufacturer is subject to the constraint of input prices relative to output prices. A6.12 The tariff Figure A6.1: Domestic Soybean Prices Relative to Import Parity Prices binding of 45 % on major edible oils will SoybeanOilPrices also indirectly influence 3500 the level of protection of 3000 oilseeds. The upstream 3 effect of oilseed 5 2500 . _ protection results from the fact that oilseed P 2000 prices are influenced not 1500 only by supply-demand conditions for oilseeds, 1000 i but also by the prices of jan94 apr94 'jul94' oct94' JaA95' 'apr95 'juX95' its joint-products, edible l._ ref price + 30% tariff ref price + 45% tariff oil and oilseed meals. .._ ref price + 0 tariff domestic price Such a spill-over effect is highly likely for soybeans. A comparison of monthly import parity prices (inclusive of UR tariff commitments) with domestic prices for soybean oil, groundnut oil and palm oil for the period January 1994-August 1995,6 show that for domestic soybean oil are significantly higher than import parity prices (inclusive of tariffs) (Figure A6.1). 4 The technical substitutability varies according to use. In markets with specific demands, end users attach high importance to certain natural characteristics which cannot be reproduced and for which they are prepared to pay a higher price. In markets with interchangeable demands, end users are largely indifferent to manufacturers choice of inputs and favor products with prices consistent with least-cost formulation. The latter is true in oils used in soaps, margarine, and oleic acid manufacture. 5 There is some evidence that the demand schedule of particular oils becomes more elastic over time if the supplies of that particular oil continue to expand relative to other oils. Palm oil provides an example. 6 The import parity prices are derived assuming constant transport costs and marketing margins. Estimates of marketing margins and transportation costs are adapted from Gulati, A. and Pursell G. Trade Policy. Incentives and Resource Allocation in Indian Agriculture (Draft book manuscript, 1995). Annex 6 Page 4 of 21 State-Trading Enterprises and the GATT A6. 13 India's canalized STE imports of oilseeds and some oils is permitted under GATT Rules. Imports of oilseeds and coconut oil remain canalized through the State Trading Corporation of India and the Hindustan Vegetable Oils Corporation (Table A6.2). This is permitted under the GATT Table A6.2. Canalized Agencies and products provided India notifies the WTO ProducDescription. Canlizing Agency about its intention to retain these Seeds (copra, groundnut, palm, The State Trading Corporation of state trading enterprises (STEs) rapeseed, India Limited (Box A6.1). India has already safflower, soybean, sunflower, cotton) done so, by registering the two Palm stearin, excluding crude palm The State Trading Corporation of corporations as State-Trading stearin; India Limited T and tallow amines of all types Enterprises (STEs). Therightof Coconut oil The State Trading Corporation of countries to maintain state- India Limited trading monopolies in imports All other seeds or any other material The State Trading Corporation of from which oil can be extracted India Limited or exports are described in (whether edible or non-edible) and Hindustan Vegetable Oils Article XVII of the GATT. Corporation Limited A6.14 Under the new WTO Source: IndiaTradePolicyReview, GATT,Decemberl993. rules, any monopoly of the importation of any product covered in the GATT schedule of commitments shall not result in protection which is on average in excess of the amount of protection provided for that schedule. The import mark-ups of STEs will be bound by the tariffs ceiling, and once bound should not provide protection above the resulting tariff equivalent. Given the high tariff bindings on most oilseeds, the new rules will not severely constrain import policies of STEs in India. Given that India is exempted from minimum access commitments and canalization of imports can potentially be expanded from oilseeds to other oilseed products, the protection levels for oilseeds and their derivative products can actually potentially exceed the ceiling bindings. Nonetheless, the greater transparency provided by the notification requirements could constrain greater trade restrictiveness. Box A6.1: India's State Trading Enterprises and the GATT In the Uruguay Round of the GATT, attempts were made to impose constraints on the operations of state-trading enterprises (STEs) and increase surveillance by requiring countries to notify World Trade Organization (WTO) about their STEs. The GATT definition of a STE is an agency that has "exclusive or special privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports." The enterprise does not have to be a state enterprise per se in order to be covered; it need only enjoy "exclusive or special privileges" granted by the government. It therefore includes a private corporation or enterprise, or marketing board that receives some special favor from the State, giving it an advantage over other firms. Under the new WTO rules, any monopoly of the importation of any product covered in the GATT schedule of commitments shall not result in protection which is on average in excess of the amount of protection provided for that schedule. The import mark-ups of STEs will be bound by the tariffs ceiling, and once bound should not provide protection above the resulting tariff equivalent. Given the high tariff bindings on most oilseeds, the new rules will not severely constrain import policies of STEs in India In practice, if there are no actual imports by the state-trading monopoly, as in the case of most oilseeds, the tariff bindings will not effectively constrain domestic protection on oilseeds. However, the greater transparency provided by the notification requirements could constrain greater trade restrictiveness. The WTO notification rules for STEs will require India to provide the reason and purpose for introducing or maintaining the enterprise. For instance, India has to notify whether the purpose is to prevent prices to consumers from exceeding certain limits, or to protect domestic producers by the control of imports, or to make it possible to establish a stabilization program. In addition, India has to describe, item by item, the functioning of the enterprise in the following areas: * whether private traders are allowed to import or export and if so, under what conditions; whether there is free competition between traders and the state-trading enterprise; * criteria used in determining quantities of imports or exports; * how import mark-ups on imported products are determined and how re-sale prices of imports compare with domestic prices; * whether long-term contracts are negotiated by the state-trading enterprise. Annex 6 Page 5 of 21 Domestic Support Measures for the Oilseed Sector A6. 15 India will not be required to reduce domestic support levels for agriculture. This is due to the fact that India's aggregate measure of support (AMS) for agriculture was estimated to be negative. The AMS included both product-specific and non-product specific support (Box A6.2). According to Gulati and Sharma (1994), the AMS amounted to minus Rs 196 billion, which is equivalent 22 % of the total value of agricultural output. Although the oilseed sector received the positive support. Export Subsidies A6. 16 Since India does not have direct export subsidies, GATT Rules on export subsidies are not relevant a present time. The GATT requires developing countries to reduce export subsidies by 24 % over 10 years from the base period of 1986-90. India, however, is not directly subsidizing any agricultural imports.! India has de facto subsidies, where oilmeal exporters receive a premium on exchange rates paid for by importers who need foreign exchange. However, these de facto subsidies are not covered in the UR rules on export subsidies. A6.17 The UR rules prohibits the introduction of export subsidies in products to which they have not hitherto applied. However, as part of special and differential treatment given to developing countries, India is not required to reduce the cost of marketing exports and internal transport subsidies. This also implies that the UR rules do not constrain India from instituting subsidies on marketing and transport in oilseeds and edible oils. Trade Restrictions for Balance of Payments Provisions A6.18 GATT rules permit countries to use quantitative restrictions (QRs) in special situations, including cases where the country is facing balance of payment difficulties and temporary market disruptions. India obtained the right from the GATT to use quantitative restrictions (Qrs.) for balance of payments reasons (Article XVIII:B) in 1949 and has retained it ever since. This right is maintained in the Uruguay Round commitments. The document called "Understanding on the Balance of Payments Provisions of the GATT" clarifies the disciplines and procedures governing the use of Box A6.2: Domestic Support Measures and the GATT BOP safeguard measures while safeguarding existing rights and Under the Uruguay Round of the GAiT, developing countries obligations. The Uruguay Round are required to reduce aggregate producer subsidies by 13.3 % over 6 years. However, it provides exemptions for developing countries with an rules attempts to strengthen these aggregate measure of support (AMS) of 10 % or below on agricultural disciplines, in order to control the products. The AMS include product- and non-product specific support. of balance-f-payments Product-specific AMS includes market price support and non-exempt practice of balance-of-payments direct income payments. The estimated product-specific AMS for India provisions as a means of providing (for 17 products) was negative, amounted to about -Rs 242 billion during protection to particular industries. A the triennium ending 1988189. This is equivalent to minus 27.7 % of the total value of agricultural production (excluding forestry and fisheries) basic principle of the new rules is during the period. Non-product specific AMS includes various public that they should apply to a wide expenditures and subsidies (such as input, fertilizer, and irrigation, range of imports, and not be targeted subsidios) which are non-crop specific. The non-product specific AMS was estimated at Rs 46 billion, about 5 % of the total value of agricultural to particular sectors such as the production. oilseed industry. Selective targeting 7 Direct export subsidies include (i) sale or disposal for export of stocks at a price lower than that in the domestic market; (ii) payments on exports financed by producers by virtue of governmental action; (iii) subsidies to reduce the costs of marketing exports including handling, upgrading, and other processing costs, and the costs of international transport (but excluding widely available export promotion and advisory services); (iv) internal transport subsidies on export shipments. Annex 6 Page 6 of 21 of a particular commodity or a range of products for BOP-based protection, however, appears to be inconsistent with the WTO rules'. A6.19 If India wishes to impose restrictions and raise tariffs beyond the tariff bindings for BOP reasons, it should do so in the least trade-disruptive manner and should favor price-based measures, such as import surcharges and import deposits, rather than quantitative restrictions. The new rules require India to avoid the imposition of new quantitative restrictions unless, because of critical balance-of-payments situations, price-based measures cannot arrest a sharp deterioration in balance of payments situation.. The agreement also established a WTO Balance of Payments Committee to handle consultations and notifications of BOP measures. The committee will decide the type of procedure for consultations while the WTO Secretariat will be available to assist in preparing documentation for the consultations. A6.20 In the context of these consultations, the IMF will provide information on recent economic developments and assess whether a balance of payments problem exists. It is possible that the balance of payments justification for India's use of QRs. could be challenged in the WTO in the future. During the past few years, India's balance of payments situation has improved, as there has been as a positive current account, large foreign exchange reserves and capital inflows. It is unlikely that BOP provisions could be invoked under these circumstances. Safeguard Measures9 A6.21 The safeguard provision allows India to impose tariffs or quantitative restrictions on imports for a limited time period if they cause or threaten serious injury10 to the domestic oilseed and edible oil industry. The UR safeguards provisions provide for a tighter discipline and increased flexibility (Box A6.3). It also aimed to deter countries from using other "gray area" measures to restrict imports. Under the new arrangements, safeguard actions may discriminate among suppliers in exceptional circumstances where imports from a member country increase disproportionately, which is something that the old GATT Article XIX did not allow. Discrimination is to be carefully controlled, however, to ensure that it responds only to disproportionate increases in imports from particular countries, and is not resorted to as a matter of course. Box A6.3: How Countries Can Introduce Safeguard Measures? The procedures for introducing safeguard measures differ according to the nature and degree of injury cause by imports. In critical circumstances where delayed action against imports would prove difficult to repair, provisional safeguards measures may be adopted for a maximum of 200 days, during which time a proper investigation must be carried out. In less "critical circumstances" provisions, the imposition of safeguards must be preceded by a transparent and thorough investigation of the case by the authorities, and confirmation of actual or threatened serious injury, and of the causal relationship between the injury and increase imports. Countries may invoke safeguard measures for a maximum of four years, but can be extended for a further period of four years, provided the underlying conditions provoking the initial action persists, and there is evidence that the industry concerned is adjusting. Safeguard measures must be reviewed by country members if they have been in place for three years, and progressive liberalization must take place during the life of the measure. All existing safeguard measures must be eliminated over five years to eight years (10 years for developing countries) after they entered into force. The determination of injury must demonstrate a causal link between imports and injury. The agency that conducts the investigation and makes the determination must publish a detailed analysis, setting out its findings and conclusions, and how these relate to the facts developed and to the applicable law. The agreement establishes a Committee on Safeguards to monitor the operations, consultations and notifications requirements. 8 GATT (1994) explicitly mandates members to give preference to price-based measures. 9 A mechanism available during the implementation period (1995-2004) for temporarily applying higher tariff rates in particular circumstances. 0 The conditions under which safeguard actions are possible under the rules are described in Article XIX of the Agreement. l Aside from voluntary export restraints, gray area measures include: orderly marketing arrangements, export-price or import-price monitoring systems, export or import surveillance, compulsory import cartels and discretionary export or import licensing schemes. Annex 6 Page 7 of 21 C. Trade Regime, UR Trade Rules and Management of World Price Risks A6.22 India's recent move to liberalize external trade links the domestic economy closer to the global market. While the more open trade regime will enable India to capture emerging opportunities in the world market, it also exposes the domestic economy to the risks of fluctuating world market prices. This section looks into the incidence of price risks in oilseed and edible oil markets in India and the world market and evaluates their implications, given India's UR commitments and the new UR trade rules on India's domestic price stabilization programs. How Volatile Have Oilseed and Edible Oil Prices Been? A6.23 To evaluate the incidence of price risks associated with a more open trade regime, the volatility of world and domestic prices is analyzed in this section. The level of price risks is assumed to be determnined by the instability of prices over time as measured by the standard deviation and coefficient of variation (CV). For oilseeds, these instability measures were calculated using actual and de-trended annual average world and domestic prices (in Rs/quintal) for major oilseeds during the years 1960 to 1995.12 To measure the volatility of world prices, similar measures were calculated using monthly averages of world prices (in dollars/ton). For comparison, the volatility measures of world prices for other major commodities such as grains, cotton and sugar are also reported. The results of the analysis are presented in Table A6.3. A6.24 Most domestic oilseed prices display greater price volatility than world oilseed prices. Both domestic and world market price of oilseeds displayed significant price variability. Their CVs range from 35 to 70 % (Table A6.3). However, with the exception of soybeans, domestic oilseed market prices displayed greater price instability than world market prices during the last 35 years. Although similar analysis on domestic edible oil and meal prices could not be undertake due to data limitations, it is likely that they would also show significant price volatility, because of joint-product characteristics. In the case of palm oil, since it is mostly imported, the volatility of domestic prices would mainly reflect the volatility of world palm oil prices. 12 The coefficients of variation were estimated using average annual data of actual and de-trended price series. Monthly data of world product prices tend to show seasonality, which appears to raise the estimated volatility. Annex 6 Page 8 of 21 A6-25 World market prices for Table A6.3: Instability index for Oilseed and Vegetable Oil Prices edible oils show a high degree of Commodit C oefficient.of iC St r. price volatility. This is illustrated by Variation D ati omTend, the frequency distribution of monthly Domestic Prices of Olseeds prices show in Figures A6.2a to A6.2d. RsIquintal The historical world price volatility in Groundnut 71 35 oilseeds and edible oils results from ~ ~~~~~~~~~~~~~........................................................................ ........................................................ oilseeds and edible oils results from Rapeseed-mustardseed . , ........... ,,6 6 , I 3., 2 _ three major factors. First, policy ... nflo ..........,.653 ; 28' 674 shocks and weather variations in major ''''Soyb'ean '.''.'''''','''''.'''''''55' '''''.''''''22'' '''' '' '' producing countries, particularly in the World Prices of United States and the European Union, Ollseeds utal Groundnut 61 1 25 contributed to sharp changes in output 'ia'p'es'e-e'di m'us't'ar'diseed -''''------ '. 54 21 levels. Policy reorientation towards Copra ' 62 30 lower support prices but increased S...nflower 4 ..............4.. 2s Soybean 54 20 direct income payments to farmers World Prices of oilseeds, linked to supply control measures in edible oils and meals OECD countries resulted in high levels US$/ton of support for the oilseed sector in Sybean 8eal 40 13 _~~~~~~~~~~~~~~~oi;W~ ................ 40 13 these countries. For example, In oybean oil 24 18 addition, soybeans account for 75 % of Ialm oil 4T3 21 Groundnut oil 46 24 intemnational trade in oilseeds. The Groundnut......meal.. 3 43...... Groundnut meali 35 i 4 United States alone accounts for over .opra 49.... 29 ~~~~~~. ....................................................................................... ........................ 50 % of world soybean production and Coconut oil 47 31 over 65 % of world soybean exports.'3 World Prices of Other Major Products, USS/mt In 1992/93, Brazil and Argentina Wheat 37 13 combined accounted for 20-25 % of Rice i 42 23 ....................................................................................... .................................................................... world soybean exports. Because so Sorghum 36 14 Maize 35 1 fewcountriesconstitutesuch a large Cotn 40 16 proportion of world soybean supply, sugari 83 46 factors affecting production in any Source: IECCP, World Bank. single country can produce significant a - CV = standard deviation/ mean; b - quintal = 100 kg consequences in world markets. A6.26 Second, the joint-production of vegetable oils and meals, combined with high substitutability among the oils and substitution of the meals with other feeds, contribute to the high volatility of prices. Oilseeds are not consumed directly, but are crushed to produce oil and meal. The markets for these by-products are determined by very different factors. The demand for meals is driven by livestock production and competition among livestock feeds (soybean meal, maize, wheat, etc.), while demand for vegetable oils is influenced by large substitution possibilities in direct and industrial uses. The complexity in market conditions in the two markets contribute to the volatility in prices.. 3 World production of soybeans is dominated by five major producers (the United States, Brazil, Argentina, China, and India), accounting for more than 90 % of world production. Annex 6 Page 9 of 21 Figure A6.2a to 2d: Frequency Distribution of World Edible Oil Prices World Coconut Oil Price World Palm Oil Prices Months from 1960-1995 Months from 1960-1995 250 ____ 120 100 - - -- --- - - - - - - - - Ca 200 -80- --------- CS a 250 - ------------------ '6 1 00 -- -- -- -- - _ 0 40 -- - -- - -- - -----____ ____ 0 06ii Z 50 ------- 1-|- ~~~~~~ z 20 -- l>X >¢- ------ O- N-_ __ __ __ __ __ 0 .bb1. btjF - 60-8o0 1200-1.00 Rr000+ Prices, $/ton, c.i.f. N.W. Europe $/ton, c.if. Rotterdam World Soybean Oil Prices World Groundnut Oil Prices Months from 1960-1995 Months from 1960-1995 60 __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _70 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ I 0 -' - i -. ,-- -. --------- ~40 --- - - -- --- - - - - - 0~~~~~~~~~~~~~~~~~~o4 ~30 --- - -- - M - - - -- - 30- - 020 -- - - - - - -- - - - - 20 0 z 01o - 25IUU- Current $/ton, crude, fo.b. ex-mill Prices, $/ton, c.i.f. Rotterdam A6.27 Third, the fixed nature of perennial vegetable oil production influences the extent of price instability. While farmers of annual oilseed crops can change production plans in response to price changes every year, oil palm and coconut trees are planted based on projections of long- term price movements. The trees take several years to reach fruit-bearing stage, and some may take a decade to reach maturity. The yield of the trees follow a biological cycle and may produce for more than 50 years. In addition, for modem palm oil plantations, the majority of the costs of producing vegetable oil from tree crops are generally fixed. In addition to the fixed cost of planting, processing plants are usually built near the plantation, since the oil contained in the picked fruit quickly becomes rancid. Since most of the processing plants are fueled by waste products, the variable costs of palm oil production are quite low. Hence, tree-crop farmers are unable to adjust production as quickly as producers of annual crops in response to price changes. A6.28 The price instability analysis on world market prices was done in both Rupee and dollar terms. The results also indicate that there was greater price variation in world markets prices when analyzed in rupee terms (Rs/quintal) than in dollar terms ($/mt). This implies that there is additional risk resulting from exchange rate volatility. India's UR Commitments and Management of Price Risks A6.29 Given the volatility of world market prices of oilseeds and edible oils, the effects of a more open trade regime are a major concern. Discriminatory interventions such as quantitative restrictions have been used by the GOI ensure some measure of price stability. However, the lessons from experiences in other countries indicate that price stabilization schemes point to several implementation problems. They also have the tendency to function Annex 6 Page lOof21 more as a price support program than a neutral price stabilization program (see Valdes, 1992). As the government liberalizes its trade policy and moves toward more transparent and non- discriminatory tariffs as agreed in the UR, the implications of transitional tariff-based price stabilization measures are being considered by the government. A6.30 This section examines the effects of various kinds of stabilization measures on price variability. In principle, trade liberalization would reduce the extent of insulation of domestic markets, thereby enhancing the risk-spreading role of international markets. The conversion of non-tariff barriers into fixed tariffs (tariffication) would contribute to the reduction of the instability of international prices and of domestic prices in relatively open economies. This is particularly relevant for India in the case of oilseeds, since domestic prices have been more volatile than world prices. A6.31 Evidence of lower estimated instability in world prices resulting from tariffication have been shown in the case of grains and meat products (Anderson and Tyers, 1992). While there is no empirical evidence available in the case of oilseeds and edible oils, there is reason to expect that tariffication will have a similar effect, but of a different degree on the instability of world prices of these commodities. However, because world oilseed and edible oil markets are generally less protected than grains and meat products, the impact of liberalization on the instability of world oilseed and edible prices is expected to be less than the effect on the more heavily protected commodities. A6.32 How would India's UR tariff commitments affect import price instability? In the case of oilseeds, the current restrictive policies on imports (monopoly by STC), the absence of minimum access commitments, the high tariff ceiling bindings and the right to continue using QRs due to balance of payments considerations in the UR, provide India with significant flexibility to maintain the current insulation of domestic oilseed prices. Thus, how India's tariff commitments will affect import price stability will depend primarily on India's actual implementation of its commitments. As described in section 1, the final commitments would allow wide discretion in setting actual applied tariffs. The frequency at which India changes the applied tariff rates will determine how much import price instability would increase. At the same time, because of the relatively high level of the tariff bindings committed by India in the UR, the tariff bindings will allow India more room to manage world price spikes in the context of a tariff-based price stabilization scheme. A6.33 Although the actual implementation rules on tariff bindings are quite uncertain, it appears that India is allowed under the UR to apply variable tariffs within the margin of the binding. The tariff could be set as the difference of the given domestic price and the world price as long as the tariff does not exceed the binding. In practice, the tariffs could be varied within the binding to achieve a certain level of stability for the long-run domestic price (internal and import prices) as in price band mechanisms. In this context, import prices could be stabilized within a pre-determined band. A6.34 In implementing a price stabilization scheme, it is important to devise procedures such that the mechanisms will not undermine the stability objective of bindings and the transparency objective of tariffication in general. Such transparency of government policies is important in providing an favorable environment for increased private sector participation in India's oilseed and edible oil sector. Imposing a variable tariff has the disadvantage of reducing the potential gains from increased transparency of the trade regime. Therefore, careful consideration of potential implementation problems and the tendency over time for measures to function more as a price-support program should be carefully evaluated. Annex 6 Page 11 of 21 A6.35 The import parity prices, subject to the range of tariffs committed in the UR and assuming similar incidence of world price instability as in the past. World Bank projections of world prices for oilseeds and edible oils are used in the analysis. Figures A6.3a and A6.3b show that there is considerable instability in border prices for major edible oils, particularly for groundnut oil and coconut oil.(See Appendix Figures A6.la and A6.lb for projected import prices for soybean and palm oil). Figure A6.3a: Projected Groundnut Prices under Different Tariff Scenarios. Groundnut Oil Prices 14000 12000 --___________- -_- - -_- _ 10000 _ - - - - - - - - - - - -, 8000_____________ t: 2to0t -- - - - - - - a) 6000 2000 646k 1 011 ~~79I 9111i6M8Z 1110 'ob | v reference price, 0 tariff + 30% tafiff +165%tariff _+300%tariff Figure A6.3b: Projected Coconut Prices under Different Tariff Scenarios. Coconut Oil Prices 14000 12000 -, 10000 -- - - - - - -- - - - - -- - - - - 8 10000 -- - - - - - - - - - - - - - - - - - =- - - - -v - - - - - - ~4r @ 8000 ----------- ------- a 6000 z 4000 . -TT^ S 2000 - - 0 I I WM ! tM6 96/ MM !t |*|||bt}| bb reference price, 0 tariff .. + 50% tariff _+ 165%tariff + 300% tariff Impact of Selected Tariff Based Price Stabilization Mechanisms A6.36 The impact of four alternative tariff-based price stabilization measures for selected major edible oils were examined. The mechanisms examined were: * Scenario I: Variable tariff to maintain a particular reference price * Scenario II: Scenario I with 30 % nominal protection * Scenario III: Scenario II with a price band set at 10 % above and below the reference price * Scenario IV: Scenario II with a price band set at 30 % above and below the reference price Annex 6 Page 12 of 21 A6.37 Scenario I involves maintaining a reference price level using variable tariffs, so that a given price is guaranteed in each period to producers and consumers. The reference price is assumed to be equivalent to the 5-year moving average of past world prices. Given that the moving average of past prices is more stable than the underlying price itself, the scheme reduces the variability of prices facing producers and consumers. If the border price is below the reference price, the tariff is positive to ensure that the reference price prevails in the domestic market. If the border price is above the reference price a subsidy is required. Over time, the reference price does not raise the average domestic price, since the average (mean) of the reference price is equal to the average of the underlying world price. Thus, in the long-run, the tariff revenues and subsidy payments will match. The length of the moving average is critical. If a long moving average of prices is used as the reference price and real prices have been falling over time, then the world price will tend to be below the reference price for long periods, requiring persistent government tariffs. A6.38 In Scenario II, the reference price to adjusted to provide 30 % nominal protection. In Scenario III, in addition to the 30 % protection rate, a price band mechanism is also introduced. The price band scheme, sets the upper and lower limits on the level of domestic prices. In this case the prices are allowed to move freely within the band of 10 % above and below the reference price. When the world price falls below the lower band, a tariff is levied in order to raise the price of imports to the lower band level. If the world price exceeds the upper band, subsidy payments are made in order to lower the price of imports to the upper band price level. Scenario IV expands the price band introduced in Scenario III to 30 %. A6.39 The period of analysis extended over 10 years and each of the schemes was analyzed using nominal prices.'4 Subsidies in certain periods are excluded by normalizing the tariffs so that the average normalized tariff would be set at the level of the largest estimated subsidy."5 Tariff Variability under Different Scenarios A6.40 The mean, standard deviation, and coefficient of variation (CV) of the variable tariffs under each scenario are summarized in Table A6.4a and A6.4b. The differences in the standard deviations and coefficients of variation between world prices and stabilized domestic prices (5- year moving average of world prices) provide a measure of the degree of risk reduction. To account for risks associated with changes in exchange rates, shipping, port and other handling charges, the prices are translated into Rs/qtl.'6 However, while these risk components are important, they have a more global impact on trade in general, and their variations are not directly related specifically to commodity trade. Hence, the costs and benefits of stability in exchange rates and shipping charges should be analyzed separately for the economy as a whole. 14 The denomination of prices used has implications on the results. For example, if the price bands and reference prices are in nominal terms, and if prices rise in nominal terms, then in most periods the current price will be above the reference price and frequently will exceed the upper band level. This results in lower government tariffs needed to maintain the upper band level. In periods of abnormally high prices, subsidies (cases where tariffs are shown negative) are necessary to maintain the upper band price level. Alternatively, if prices are in real terms, real prices decline during periods of stable nominal prices. During these periods, the current real price will tend to be below the reference price or even below the lower band level. In this case, the lower band price is maintained by increasing the tariff rate. 5 Subsidies, indicated by negative tariffs, are required to maintain the upper band when world prices exceed the upper band by more than the basic tariff. 16 A quintal (qtl) is equal to 100 kg. Annex 6 Page 13 of 21 In analyzing price risk(s faced by the Indian producer, the relevant price variable are prices in terms of Rs/qtl. Figures A6.4 shows the results based on 5-year moving average of nominal world prices translated in Rs/qtl for soybeans, thus accounting for exchange rate variations. (See Appendix for the results for coconut oil and palm oil.) Table A6.4a: Price Stabilization Schemes and Tariff Variability Commodity Scenario I Scenaro 11 CIF Europe Border 5-yr. Normalized 5-yr. mv+30% Nonnalized moving price rupee price average tariff reference price tariff US$/ton Rs/qtl Rs/qtl % Rs/qtl % Coconut Oil Mean 546.76 1101.84 852.88 52.08 1108.74 67.71 Std Deviation 228.50 537.34 209.43 39.75 272.26 51.67 CV 42 49 25 76 25 72 Min 284 559.33 670.54 0 871.7 0 Max 738 2356.52 1497.06 92.15 1946.18 119.81 Soybean Oil Mean 487.53 1025.13 758.46 30.84 986.00 40.10 Std Deviation 121.62 524.71 244.30 25.72 317.58 33.43 cv 25 51 32 83 32 80 Min 318 451.61 610.8 2.57 794.04 3.35 Max 706.00 2356.52 1483.67 82.97 1928.77 107.87 Palm Oil Mean 423.46 897.73 667.53 41.90 867.79 54.48 Std Deviation 146.50 503.98 181.21 31.71 235.57 41.22 CV 35 56 27 76 27 76 Min 267.00 428.26 524.07 0.00 681.29 0.00 Max 719 2397.3 1289.97 85.95 1676.96 111.74 Source: M. Ingco, 1995, "India's Domestic and Extemal Trade Policy Environment, Implications for Marketing Policies and Strategies in Oilseeds and Vegetable Oil Markets," World Bank. A6.41 Except for soybean oil, the variable tariffs required to perfectly stabilize domestic prices in all four scenarios are well within the UR tariff binding commitments. However, the tariffs required change significantly from year to year. The implied import prices associated with the variable tariffs also exhibit large variability. In general, the scheme of variable tariffs undermine the objective of stability and transparency in government policies. In addition, its management would likely impose large administrative costs. A6.42 The 30% nominal protection introduced in Scenario II provides greater insulation of domestic prices, but only reduces slightly the instability of the variable tariffs obtained in Scenario 1. For example, the coefficient of variation (CV) of the normalized variable tariffs required to stabilize domestic prices at the 5-year moving average prices was 0.83 for soybean oil under Scenario 1 and 0.80 in Scenario II. The means of the variable tariffs (estimated as simple average of monthly tariffs over 1988-1995) required to stabilize domestic prices (at the 5- year moving average plus a 30 % nominal protection) in Scenario II, however, is higher Scenario I, because of the higher protection under this scheme. Annex 6 Page 14 of 21 Table A6.4b: Price Stabilization Schemes and TariffVariability Scenarib I eBandwith f 0% DScenario V: rice Band-,3.GI it '± 5-yr. lnocn=0 ceiling= Sta§biized un0ma- 5-yr. t''floor- ceiling= Stabi1ized; mlna - 't; mv+30% -;10v4% +10% border lized mv+30A .340% +30% r . lized pricepre mRs/qtl RsW/qt RsIqtl Awl tariff R/ti Rs/qtl i Raqtl tariff Coconut Oil Mean 1108.74 997.87 1219.62 1114.57 58.02 1108.74 776.12 1441.37 1105.10 38.91 Standard deviation 272.26 245.03 299.48 357.66 41.56 272.26 190.58 353.93 472.11 24.03 CV 25 25 25 32 72 25 25 25 43 62 Min 871.7 784.53 958.87 784.53 - 871.7 610.19 1133.21 610.19 0 Max 1946.18 1751.56 2140.8 2140 97.44 1946.18 1362.3 2530.03 2297.62 52.7 2 Soybean Oil Mean 986.00 887.40 1084.60 1015.45 32.40 986.00 690.20 1281.80 1035.38 14.62 Standard deviation 317.58 285.83 349.34 388.24 24.04 317.58 222.31 412.86 500.58 9.00 CV 32 32 0 38 74 32 32 32 48 62 Min 794.04 714.64 873.45 714.64 3.68 794.04 555.83 1032.25 555.83 4.35 Max 1928.77 1735.89 2121.65 2058.51 83.46 1928.77 1350.1 2507.4 2287.56 34.64 4 Palm Oil Mean 867.79 781.01 954.57 875.37 44.81 867.79 607.46 1128.13 888.10 26.71 Standard deviation 235.57 212.02 259.13 305.62 31.79 235.57 164.90 306.25 429.24 15.79 CV 27 27 27 35 71 27 27 27 48 59 Min 681.29 613.16 749.42 613.16 0.00 681.29 476.90 885.67 503.00 0.00 Max 1676.96 1509.26 1844.65 1844.65 88.74 1676.96 1173.8 2180.04 2121.25 42.74 7 Source: M. Ingco, 1995, "India's Domestic and External Trade Policy Environment, Implications for Marketing Policies and Strategies in Oilseeds and Vegetable Oil Markets," World Bank. Figure A6.4: Variable Tariffs and Border Prices for Soybeans. Soybean Oil Prices and Variable Tariff 2500 150 _ 135 2000 P / -120 105 _1500 . . ... . . .-.-..-.......--..- - 90 Es L ~ A _C -75 Y : 1000 - 60 /\_~~~~/ 9 \/\ _ _-E ~~~~~~~~45 500 variable tariff 30 X -~~~~~~~~~~~t _ 1 5 O 0 - border price - 5-yr mavg tariff_adj A6.43 Scenario III and IV introduce a price band which sets upper and lower limits on the level of reference prices (maintained at the 5-year moving average plus 30 % nominal protection). The bands are set at 10 % and 30 %, respectively, above and below the reference price level. In any given year, producers and consumers are protected against extremely high or low prices. Another advantage of the price band scheme is that it does not discourage private storage as much as other schemes because there is some price variability left. Maintaining the Annex 6 Page 15 of 21 incentives for private storage becomes a problem, however, if prices remain persistently high or low, and the upper or lower price bands prevail for long periods A6.44 The results suggest that the price band schemes in Scenario III and IV reduce the variability of the tariffs. The CVs of the variable tariffs are lower in all the edible oils. Figures A6.5a and b shows a comparison of the variable tariffs and stabilized prices across schemes for soybean oil (See Appendix for the figures for palm oil and coconut oil). The tariffs are all within the tariff ceilings committed in the UR. The mean and CV of the variable tariffs further declined significantly as the size of the price band is increased in Scenario IV. Associated with the decreased variability in tariffs, however, is the increased variability of the stabilized border prices. However, in terms of price variations, the price band schemes (scenarios III and IV) result in larger CV of domestic prices than the reference price schemes (scenarios I and II). Price Variability under the Different Scenarios A6.45 There is very little difference in the degree of reduction of price risks between Scenario I and HI. The additional 30 % nominal protection raised the level of the mean of stabilized prices under scenario II, but retained the same level of the volatility of domestic prices (5-year moving average) as in scenario I. A6.46 Scenario m permits greater reduction in price risks relative to Scenario IV. As shown in Table A6.4a, world border prices (in Rs/qtl) are highly volatile as measured by the coefficients of variation: coconut oil (49 %), soybean oil (51 %) and palm oil (56 %). Under the price band schemes, the CV of stabilized border prices are reduced and the reduction in price risks is greater in Scenario III than Scenario IV. For coconut oil, the CV of stabilized domestic prices declines to 43 % in scenario IV and to 32 % under scenario III. For soybean oil, the CV declines to 38 and 48 %, under scenarios III and IV, respectively. For palm oil, the CV declines to 35 % in scenario I[I and to 48 % in scenario IV. However, in terms of tariff volatility, scenario IV displayed lower volatility in the normalized tariffs than scenario III for all the three oils considered in the analysis. A6.47 Overall, the results indicate that India's commitments on tariffication and tariff bindings will not impose any significant restrictions on India's domestic policies in oilseeds and edible oils. Given the relatively high level of tariff bindings, significant flexibility exists in setting the level of tariffs in the context of alternative price stabilization schemes, such as those explored in this study. However, the analysis also shows the high variability in tariffs required to stabilize prices under the four schemes, which puts into question the administrative feasibility of these schemes. Annex 6 Page 16 of 21 Figures A6.5a & b: Level of Variable Tariffs to Stabilize Soybean Prices and the Stabilized Prices Under Different Scenarios. Variable Tariffs 160 140 120 40 20 -A-A -20S - %C -O 00 o _ - 00 - 0ON 0r ON _ o o _ O 0 - oo ci N Ci Ci Ci N N Ci N N C~~~~~i Ci CiC i iC - ON~N ON N -00 00 0 00 0 00 . Scenario I C. Scenario 11 .s Scenario III X Scenario IV Stabilized Prices 2500 2000 1500 1000 500 l_ et- 00 m00 00 X ON ON C- 00 00 ON0 N'0 CD C4 Ci V) kn O0 - r \ sO oc Q q Q Q Q o =n---- C3E -=L i 93 jint Tn'v+9- +apv9 7 TS-pw4 t59 T b9i 1tj - ref price+ 50% tariff ref price+ 300% t - ref prcie+165% tariff ref price +0 tariff Appendix Figure A6.2: Groudnut Oil Import Parity Prices Under Different Tariff Structures Groundnut Oil Prices 14000 12000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,~. 10000 -- ___________-- ___________________ a) 8000 . -- _- --- ---- --- --- ---- --- --- (D a 6000 4000 -- - --------- 2000 ' ' I . . i ..... jnr4 '''''j164 ''' 'jn55 . 1 0 | ref price + 30% tariff ref price + 165% tariff . ref price + 300% tariff _ domestic price Annex 6 Appendix Page 7 of 11 Appendix Figures A6.3: Projected Palm Oil Import Parity Prices under Different Tariff Structures Palm Oil Import Prices 7000+ 0% tariff 6000 --- -__ +50% tariff , 5000 -- __- + 165% tariff " 4000 -------------------------- + 300% tariff m 3000 ----------_---------- -F -- 1000 Figures P da 6i M6'''576 ...... 8''' 20t Appendlix Figures A6.4: Projected Groundnut Oil Import Parity Prices under Different Tariff Structures Groundnut Oil Prices 14000 12000 -- - - - - - - I0000 . - - - - - - 2 4 __ _8000 2000 - 0 6465 509A602oOO _ reference price, 0 tariff _ +30%tariff __ +165%tariff _ +300%tariff Annex 6 Appendix Page 8 of 11 Appendix Figures A6.5: Projected Coconut Oil Import Parity Prices under Different Tariff Structures Coconut Oil Prices 14000 12000 - - - 10000 ------------------- --------------- U 8000 ------------- 0 6000 ------ ----- nz 4000 2000 0~ reference price, 0 tariff _ + 50% tariff + 165% tariff + 300% tariff Annex 6 Appendix Page 9 of 11 Appendix Figure A6.6: Variable Tariffs Required To Stabilize Palm Oil Prices at 5-Yr Moving Average Palm Oil Prices and Variable Tariff 1000 400.00 900 --- acual +5-ymavg tariffl adj 350.00 300.00 700 .2.50.00 150.00 600~~~~~~~~~~~~~~~~~~~~~~~~~~~~100 2 00 5 ' ' ' ' ' !20.00 10.00 mI sI ss. f~ IX \} £ £ N N 000000 xXX 08 00--- cS 03 m et ct V 00 X 00 00 00 00 00 00 00 00 00 00 X0 X 0X 0 0 0~ 0~ O 0~ Ct a' a' a - a' 00000-- a' 0 a' a' O0 0 -0 CS 00 _O - '0 - I a' eN N 0 t-e1 0n O I tN m 0 00- '0 - ' N o 0 0o 00 - 00 0 0 -0-0 000 - -00 - 0- - 0 - 0 Appendix Figure A6.7: Variable Tariffs Required To Stabilize Coconut Oil Prices at 5-Yr Moving Average Coconut Oil Prices and Variable Tariff 1600 400.00 1400 -.*. f | actual 5 5-yr m avg tariff adj 35000 1200 300.00 1000 , 250.00 E 800 '~200.00 600 ~~~~~~~~~~~~~~~~~~~~~~150.00 400 ~~~~~~~~~~~~~~~~~~~~~~~~~~~100.00 200 <0 50.00 0 0.00 -t It 0t 0 00 0 a ' 00 X X 0 -- 0 - 00- 00 -' 00 '0 00 2 0 0 0 0 - 0 - 0 0 - o - 0 000 - 0 0 0 - 0 - 0 a, 6 c2 6 w Annex 6 Appendix Page 10 of II Appendix A6.8: Variable Tariffs, Stabilized Prices, Average Border Prices for Coconut Oil Coconut Oil Prices and Variable Tariff 2500 . 400 Z UR binding | t/ 350 2000 _ 2 _1500 -A - -7250 v~~~~~ X # h / ~~~~~~~~~~~~~~~~~~~~~200 cj 1000_ _ 4 _ _._ __ a- 100 50 O O border price _ 5-yr m_avg tariff adj Appendix A6.9: Variable Tariffs, Stabilized Prices, Average Border Prices for Palm Oil Palm Oil Prices and Tariff Variability 2500 400 - - _ - - - - - - - - - - - - - - - - - - - --350 2000 binding I 1500 _V30 1500 ~~~~~~~~~~~~~~~~~~~~250 1500_ ... . - - - - - -- - - - - - 200 s 1000 r150 100 500 _ | , | variable ~tarIiff 50 0.-.~~~~~~~~~~~~~~~~~~~~~0 01/31/8/89 06/29/90 07/31/91 08/31/92 09/30/93 10/31/94 - border price 5-yr m_avg - tariff_adj Annex 6 Appendix Page 11 of 11 Appendix A6.10: Variable Tariffs, Stabilized Prices, Average Border Prices for Soybean Oil Soybean Oil Prices and Variable Tariff 1000 ... 140.00 90 t - -- 0 - .-- actual ---5-yrm avg _ tariffadj 120.00 800 J 700~~~~~~~~~~~~~~~~~~~~~~~~~~~100 500 ... L . :- . - ........ - . --I-> 1 E ; ............................. !i E ............. ...... !v v F v.-. 180.00 E 500 . 60.00 -- . . . . 300 40.00 200 20.00 100 0' 0.00 I- 'IT oE or o o- c- 00 00 00 o - - o - - - e- o o o -0 00000oC _ D 00' o' 0- - 00 00 o o _ - - - C4 eq m= C> I=> eq eq C, C, eq eq C' C> C .b 1= Z IMAGING Report No.: 15877 IN