Should Myanmar Enter a Long-

term Pulse Exports Deal with India?

Manmeet Singh Ajmani, PK Joshi, Avinash Kishore and

Devesh Roy

Source: https://www.mmtimes.com/news/supply-chain-risk-indian-government-imposes-restrictions-myanmar-beans.html

Background

69.7 61.9 74.5

0.0

20.0

40.0

60.0

80.0

100.0

2005 2010 2015

% Share of different countries in the value of Myanmar's total pulse exports

India Pakistan Malaysia Indonesia

Bangladesh Japan Thailand Korea, Rep.

China Singapore

• 1988: Myanmar liberated pulse exports; Export = 47,000 tons• 2011: Myanmar exports 1.45 million tons

• Pulse exports accounted for 48% of total agricultural exports in 2016-17

• Compared to 19% (rice), 8% (maize) and 7% (rubber)

• ~12% of total exports of Myanmar

• Bulk of it to India: > 50% of country’s legume production

• India is the largest producer, consumer and importer of pulses in the world

• And Myanmar is the 2nd largest exporter (after Canada) of pulses to India

• Both India and Myanmar are important to each other

Background…

• In May 2016, Government of India sent a delegation to Myanmar to broker a long-term arrangement for government-to-government procurement of pulses

• India signed a similar deal with Mozambique in July 2016 to import 0.1 million tons of pulses in 2016-17, gradually increasing the annual imports to 0.2 million tons by 2020-21.

• With Myanmar, India sought a much bigger contract • supply 0.9 million tons of pulses/year • at a price equal to the 90 percent of the minimum support price (MSP) of these pulses in India• With gradual increase in the quantity over years

• India’s overtures for a forward purchase contract in pulses did not get a definite response one way or the other from Myanmar

• Monopolist vs. Monopsonist

• Incomprehension on either side may have led to indecision

When should one (a farmer, a firm or even a country) enter a forward selling agreement and

on what terms?

Why does India want to enter a forward purchase contract with Myanmar?

• Interest in forward selling contracts is often triggered by unstable prices• India faces quantity risks too

• Pulses account for 8-9% of food expenditure, but contributed to 42% of food price inflation in 2014-15

• India is the largest producer, consumer and importer of pulses in the world• Imported 5.4 million tons of pulses from 60 different countries in 2016-17

• Scarcity of Pigeon Pea and Black gram • Near zero elasticity of substitution between different pulses• India imports 1/3rd of the RoW’s pigeon pea production• A shortfall in pulse production in India drives up the world prices

• Given the huge domestic demand for pulses that are globally scarce, India struggled to meet domestic demand through spot purchases in world markets even at inflated prices

• Unreliable buyer

What is Minimum Support Price (MSP)?

• MSP is a form of market intervention by the Government of India• Supposed to act as a price floor

• How is it arrived at? • Commission for Agricultural Costs and Prices (CACP) sets the MSP for 21

agricultural commodities • based on estimates of the cost of production

• All variable costs (paid out costs + imputed value of family labor + land rent) taken into account

• Cost of production varies across India, but only one MSP is set for the entire country

• Element of subjectivity: factors such as international prices are also considered in the final determination of the MSP.

Is MSP a good benchmark for Myanmar’s pulse exports to India?

Pulse Farm harvest price

(Kyat/quintal) in

2013-14

Pigeon pea 62,000

Green gram 90,000

Chickpea 40,000

•

Is a MSP indexed forward contract could be worth exploring?

• MSP has never gone down from year-to-year in nominal or in real terms, in rupees or dollar

• Since it is based on the total cost of cultivation in a year, MSP guarantees that even net returns won’t go down in future

• IFPRI recommended that MSP of pulses should also take account of risks and positive environmental externalities

• Should be raised also to incentivize domestic pulse production in India

• Myanmar has higher pulse yields and lower unit cost of production compared to India

• If Myanmar retain their competitive edge, MSP indexed forward prices will ensure fair returns to them

• If they lose the cost advantage, then Myanmar’s export may lose competitiveness in the spot markets as well

What if India sets MSP too low for pulses to ensure cheap imports from Myanmar?

• Highly unlikely

• Doing so will hurt millions of India’s own farmers and

• set poor incentives for increasing domestic production of pulses

• Potential losses to Indian farmers far exceed possible gains from cheaper imports from Myanmar

• will be seen as an anti-farmer policy and

• will be extremely unpopular among the largest voting bloc in India—i.e. the farmers

Why is India offering to pay a price around MSP if prices in the market could be higher?

• It is politically not viable for Government of India to assure higher prices to farmers in a foreign country

than what it offers its own farmers

Why should Myanmar even consider a price indexed to MSP when the spot prices in recent years have been significantly higher?

• Pulse prices can be highly volatile• India’s pulse production jumped from 16 million tons in 2015-16 to 22 million tons in

2016-17• Consequently, farm harvest prices of most pulses fell below < 70% of MSP in the last

season

• Forward contract covers the downside risk

• Forward contracts are especially important to producers of perishable or specialized commodities

• Pigeon pea or black matpe are not perishable,• but they are highly specialized commodities for Myanmar’s farmers because there is

no home consumption • and India is the only major buyer

“We are totally reliant on the Indian market for our pulses and bean exports”

• In 2016-17, Myanmar exported

• 185,000 tonnes of pigeon peas

• 562,000 tonnes of black beans

• >400,000 tonnes of mung beans

• On August 5 2017, India announced a 200,000 ton import limit on pigeon peas and on August 21, India limited the import of black beans and mung beans to 300,000 tons/year

• There have been no such restrictions in the past

• “the move could have a huge negative impact on the market and its entire supply chain”

• A steep rise in prices will lead to a sharp supply response by Indian farmers : 19 to 22 million tons in just a few years

• Increasing pulse production from 14 to 17 million tons took 30 years

• Government also responds to rising prices of staples

• Higher MSP to incentivize pulse production

• $ 21 million to ensure widespread availability of quality seeds

• allotted $151 million to achieve self-sufficiency in all pulses by 2022

• High pulse prices attract entry from farmers in other parts of the world

• e.g., Canada, Australia, Malawi, Mozambique

Share of different countries in India’s pulse imports in 2001, 2005 and 2012

If high prices persist, Myanmar’s market share may erode also due to

• A shift in consumer preferences• Persistently high prices of pigeon pea, a major

export product for Myanmar, is slowly resulting in substitution away from this pulse

• Much cheaper yellow pea, exported from Canada, is being mixed with pigeon pea to reduce its effective prices

• It is probably in Myanmar’s interest that pulse prices are affordable and stable in India

The current price volatility in pulses is not good for small and marginal farmers of Myanmar

• Traders, not farmers, win in volatile markets. A regime of stable and predictable farm harvest prices works best for small farmers

• There is an asymmetry in how farm harvest prices (FHP) realized by smallholders respond to market prices

• The FHP falls sharply if market goes down, but it does not increase by as much if there is an increase in market prices

• Crop prices are relatively low around the time of harvest and rise later. Most smallholders are too cash constrained to be able to wait for prices to rise

• Most likely to be true for pulse growers of Myanmar too• Unfortunately, we cannot say so with certainty because we do not have data on FHP of pulses

• A forward sales contract with India at a MSP-indexed price can guarantee stable, inflation indexed and predictable harvest prices for Myanmar’s pulse growers

How big should the contracted quantity be?

• Commitment on the quantity is the second major issue to consider in any forward sales contract

• Is the contracted quantity feasible on a consistent basis?

• Should the producer sell forward if crop prospects are uncertain?

• How can the commitment be serviced if the production falls short of the target?

Risks

• Forward sales can be a risky proposition for the producer when there are high production risk

• Any shortfall in production in Myanmar is likely to drive up world prices

• Myanmar will incur losses if the contract requires it to buy from the spot market to fulfill its contractual obligations to India

• Can be addressed by negotiating the right to suspend the contract by notice of force majeure in case of a widespread crop failure

• This safety clause is a part of the sales agreement between Mozambique and India

Assured markets and prices could trigger a big jump in Myanmar’s pulse production

• High and assured prices for rice and wheat played a major role in bringing green revolution

• Smallholders in Myanmar could similarly benefit from the price guarantee that a contract with India offers—if a high share of the export prices goes to the farmers

• Ideally, one would want to know how the area, yield and production of pigeon pea and black matpe in Myanmar would respond to an assured and high price.

• However, currently estimates of supply elasticity of pulse in Myanmar do not exist

• Government of Myanmar and Government of India should invest in research and market intelligence to be able make a more informed decision

Can Myanmar leverage the proposed contract to bring a golden revolution in its pulse sector?

• Assured prices played a big role in bringing Green Revolution• A guaranteed market at assured prices for large quantities of pulses for 5 years can be a

significant stimulus for Myanmar’s agricultural economy

• Myanmar can use 2 different channels to leverage this opportunity

• 1st: Ensure that farmers get a fair share of the export price• Government of Myanmar may have to set up a procurement system

• PPP or a network of FPOs to reduce transaction cost of procuring from millions of smallholders

• 2nd: Vacant, Fallow and Virgin Lands Management Law of 2012• GoI encouraging private companies to acquire land for exclusively growing pulses in Myanmar and

supply them back to India. Examples: Tata International and ETG already working there

• A formal agreement between the 2 countries will promote investment

• With safeguards to ensure that the corporate involvement for growing pulses emerges into a development opportunity and not just a land grab scheme

In sum…• Myanmar has natural advantages in production of pulses like pigeon pea and black matpe that India needs to import in

large quantities, but has few options in the world market

• India has offered a large forward purchase contract to Myanmar to secure its supplies at stable prices

• Secure markets with stable prices are highly sought after for specialized that have few alternative outlets

• Myanmar, however, is yet to respond to India’s offer for a long-term deal

• This is partly due to lack of research and analysis about the different aspects of the proposed contract

• There are several issues that need evaluation

• Is the price initially offered by India adequate?

• Would entering this forward selling arrangement stabilize returns, but would it also lower the level of average returns?

• There are concerns if Myanmar can reliably service India’s large demand and what would it take to be able to produce enough pulses to meet this demand consistently.

In sum…

• It could be in Myanmar’s interest to enter a contractual agreement with India to provide pulses at pre-agreed prices

• Indexing prices to the MSP set by India can ensure stable returns to farmers or corporations if they remain competitive

• A forward sales agreement can also facilitate improved production decisions and protect Myanmar’s farmers from growing competition with farmers in India and other countries of the world.

• The large contract size preferred by India can work as a stimulant for Myanmar’s agriculture• If the country creates institutions to ensure fair share of export prices to its smallholders• And to properly negotiate and regulate land leasing agreements with private sector

• Myanmar will not only be able to meet India’s growing pulse demands, but can also trigger large scale investments in increasing agricultural production, productivity and improving smallholder incomes.

Thanks!