Icra highlights exports uncertainty in Basmati business due to Covid-19

The Covid-19 virus has added to the already existing woes of Indian Basmati rice industry and is likely hit the near term expectations. The industry is expected to have a weaker H1 FY21 , leading to excess supply in the domestic market and price corrections as a result. In the medium term, demand prospects from key destinations such as Iran, one of the worst affected by the virus, and Saudi Arabia will play a significant role and determine trade prospects.

As per an Icra report, with the virus still spreading rapidly in key export destinations, logistical constraints and business shutdowns are expected to have a negative bearing on the industry. Similar constraints will also impact domestic market. Moreover, the industry whose performance is linked to exports to a large extent is expected to have a weaker H1 FY21, thereby leading to excess supply in the domestic market and price corrections.

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Giving more insights on the trend, Sheetal Sharad (vice president, Icra) said, “After witnessing a strong growth of 25% in FY18 and 22% in FY19, basmati rice exports moderated in 9M FY20 owing to weak off-take across key markets like Iran. The value of exports fell from Rs 32,804 crores in FY19 to Rs 20, 925 crores in 9M FY2020. Exports are estimated to have further moderated in Q4FY20, and now with Covid-19 outbreak, the uncertain scenario in basmati rice exports has worsened.”

Basmati rice imports by Iran, the largest importer (33% of total exports), fell significantly in 9MFY20 at 13% lower in volumes and 11% lower in value terms than the corresponding previous year. As against this, there was an increased pre-emptive buying in FY19 due to the uncertainty over its global trade status, post re-imposition of US trade sanctions in November 2018.

In the past, whenever sanctions were imposed, Iran utilised its reserves (receivables against crude oil exports to India) through a payment mechanism to import Basmati rice from India. The same mechanism was reintroduced towards the end of 2018. With these reserves rapidly depleting, the uncertainty regarding future trade with Iran continuing, subdued buying was witnessed in Q4 FY20 also. The pandemic only worsens near-term concerns and prospects.

Basmati rice is the staple diet in Iran and current circumstances make recovery in export unlikely over the next two quarters. This could lead to a decline in Basmati prices, however, the impact of the outbreak and associated supply chain disruptions on prices remains to be seen.

Saudi Arabia, the second largest importer (20% of exports), also imported Basmati rice to the tune of Rs 4,246 crores (12% higher) in 9M FY20, prior to revised import rules by the Saudi Food and Drug Authority (SFDA). The higher buying can be attributed to pre-emptive action before the new rules came into effect from January 2020. Subsequently, the new norms are likely to slow down imports in the near term as it would take time for the industry to develop adequate sources of compliant paddy.

As for exports to EU, the same dropped sharply by 32% in FY19 to Rs 1,590 crores, post implementation of new regulations pertaining to chemical residues in Basmati rice. The decline was however arrested at 13% with the exports at Rs 1,011 crores in 9M FY20 over the corresponding previous period. Here again, demand revival could take more time. Nevertheless, EU’s contribution to India’s Basmati rice exports remains modest, thus, the blow of the above on the industry is expected to be limited.

On the Basmati paddy prices, Icra report said that after firming up for three consecutive years, the prices have sharply corrected in the current procurement season. This follows a weakening demand outlook for Basmati due to reasons discussed earlier on one hand, and stable crop output expectations, given adequate acreages under cultivation, on the other.

Going forward, price trends would be a function of demand. Both domestic and exports demand will be key determining factors affecting price trends. While weak demand in current fiscal has corrected the crop prices, prolonged supply disruptions and lockdowns can lead to lower sowing in the next season, leading to a reduced crop supply, thereby firming up paddy prices in the coming season.

Anupama Arora, vice president and sector head – corporate ratings, Icra said, “Despite pandemic challenges in the short-term, the outlook for the Indian Basmati rice industry remains stable. In the medium term, demand prospects from key destinations such as Iran and Saudi Arabia will play a significant role and determine trade prospects. Availability of a secure payment mechanism for exports to Iran, easing/ removal of sanctions by the US and response to pandemic in the destination country would be the factors underscoring the Basmati rice trade.

“While some comfort can be drawn from the fact that Basmati rice forms a part of the staple diet of Iran and Saudi Arabia, any considerable decline in level of imports by them would have a depressing impact on Basmati rice prices and exert pressure on the industry players. Given that the industry is cyclical, weak prices in a year can result in lower acreage in the next season, thereby balancing demand supply gap and limiting further contraction of prices.”

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