Indian Market Surprisingly Complex

VANCOUVER - Jun 15/07 - SNS -- When India sneezes, does Canada's pulse industry catch a cold? Normally, production problems in importing countries adds to demand. This is clearly the case in North Africa and the Middle East. Ironically, problems with India's crops may be less helpful to the Canadian pulse industry than decent crops.

India's supply and demand situation is more complex than that which exists in many countries. At the current state of economic development, India always has significant unfilled demand potential. Consequently, there is not a straight line relationship between the size of local pulse harvest and imports.

Average incomes in the country are around U.S. $600 per year with 86% living on less than $2 per day and a quarter not making enough money to feed themselves adequately. In 1980, 69.7% of the workforce was employed in agriculture. By 2000 that had dropped to 59.6%. If the current rate of decline holds steady, around 55% of the workforce would be employed in agriculture today.

These economic and demographic factors make an important contribution to pulse demand in India. Based on the recommended caloric needs of the country's population, India should be consuming around 19 million metric tons (MT) of pulses this season.

Kharif and rabi season crops in 2006-07 were last forecast at 14.1 million MT by the Indian government. While roughly 5 million MT short of the caloric needs of the country, Indian economists say the effective shortfall for 2006-07 stands at 3.2 million MT because people do not have the money to buy the next 1.8 million.

The difference is a simply reflection of the fact too many people in India are too poor to buy all the food they need. Significantly, the number of people in that category rises when crops are poor in India. Conversely, it shrinks as production and/or commodity prices improve and farm incomes rise.

That is an important fact to bear in mind when assessing the validity of claims that as bio-energy raises demand and prices for feed grains and some oilseeds it worsens the situation of the world's poor. In India, higher commodity prices would worsen the situation of the urban poor, while improving the situation of the rural poor. And, as their economic circumstances improve, it may mitigate against the desire of young people to migrate to cities in hopes of a better economic future and potentially pull people back to the farm.

Demand is impacted. As rural incomes improve, more money is spent on food and diets become more diversified, lifting demand for imported products. Small crops and low prices have the opposite effect in rural communities in India, reducing food expenditures and limiting demand for imported foods.

Regional economic activity is similarly affected. Extra dollars earned by farmers selling what they grow is spent in local communities, increasing local economic activity and improving employment and income prospects for non-farmers. In turn, they buy more food in local markets.

India is desperately concerned with the widening gap between the caloric requirements of its people and domestic pulse production. It needs on-farm bids to increase so that farmers have enough money to buy fertilizer, improved plant varieties and the other production inputs needed to improve yields. But, with such a low average income and so many people already unable to buy enough food, the government needs to minimize the inflationary impact of local shortages and rising primary commodity values.

Canadian exporters benefitted from these conflicts this season. Total pulse exports from Canada to India had already set a marketing year total by the August through April period and will exceed the old marketing year record by a wide margin.

Field pea shipments in that nine month period totalled 44,876 MT of lentils; 12,688 MT of chickpeas; and 778,469 MT of field peas for a total of 836,033 MT. The previous 12-month record was set in 2005-06, with Canada shipping 661,644 MT of the three types of pulses to India. By the end of the current marketing year, Canadian pulse exports should exceed a million tons.

India's total pulse imports in 2006-07 should be at least 2.2 million MT, giving Canada a 47.6% market share. That is more than double the market share Canada garnered between 2001-02 and 2003-04, but consistent with the experience of the previous two marketing years.

Looking ahead to the coming marketing year, the Saskatchewan Wheat Pool recently commented, "India's appetite has been large for new crop Canadian peas, and it is estimated that the Canadian industry has nearly 700,000 MT sold for August to November positions. If such numbers hold true it would no doubt be a record during that four-month period.

"Questions therefore arise whether there will be a dip in the (Indian) market with so much supply hitting the market at once or is it simply an underlying signal of just how badly this country needs the product. There remains another round of subsidized Indian government tendering which upon completion will bring government purchases to 750,000 MT of old and new crop edible peas."

Indian demand for imported pulses was helped by the decision to eliminate imports duties. Duty free status was slated to end on July 31, but was extended through March 31 of 2009. Import duties on pulses were not substantial, but their elimination helped ease the pain of steady increases in world trading levels resulting from tightening stocks and competition for land resources from crops favored by the bio-energy sector.

At the same time, India banned all pulse exports except kabuli chickpeas; and it has instructed state-owned trading enterprises to import vast quantities of pulses. It wants them to import 1.5 million MT in calendar 2007, including 750,000 MT of yellow peas, lentils and chickpeas; and 750,000 MT of urad, masur moong and toor.

Canada also benefitted from last year's drought in Australia. Massive declines in pulse production levels forced Australia to curtail exports to the Indian subcontinent, creating more opportunities for Canada to ship product. This is clearly reflected in a massive surge in first quarter exports from Canada to India. Shipments in January and February total 188,055 MT, with at least 50,000 MT also shipped in March. First quarter shipments ranged between 30,000 and 85,000 MT the previous five years.

Since 1990, first quarter exports have averaged 9.8% of the calendar year's total, while shipments between April and June averaged 15.1%. Movement in the July to September period averaged 31.8% of the year's total, while 43.3% of all peas were shipped in the closing October to December quarter.

The implication is rabi season production levels in India have their greatest impact on local demand when Canadian exports are normally low. However, to the extent rabi season output affects demand for pulses from countries such as Australia and Myanmar, it affects post-harvest demand for Canadian pulses.

However, given the fact that India's total pulse harvest rarely exceeds 15 million MT and optimal consumption is around 19 million, India will likely remain the world's largest pulse importer. And, as its economy grows and average annual incomes rise, the gap between actual and optimal pulse consumption will narrow.

Recent develop of a high-yielding, hybrid pigeon pea points to the potential for significant increases in local pulse output in the coming years. High commodity prices resulting from diversion of some grains and vegetable oil into bio-fuel uses will help India's farmers become more productive. But, rising rural incomes should also stimulate pulse demand, helping sustain imports at high levels. Whereas cheap food will continually widen the gap between what is consumed and what ought to be eaten.