Commodity Analysis

Pepper curbs are too hot to handle

Rajalakshmi Nirmal | Updated on April 08, 2018 Published on April 08, 2018

The Centre’s import restrictions are not fetching farmers higher prices; instead, they are hurting re-exporters

An industry that employs 35,000 people directly and earned foreign exchange of $2.5 billion for the country last year is now fighting for survival. To save farmers from the falling prices of pepper, on December 6, the Directorate General of Foreign Trade issued a notification that black pepper of price below ₹500/kg cannot be imported into India. But, prices only dropped - from ₹450/kg in December to ₹360/kg by end of February. The Centre,on March 21 this year, made its next move — put pepper (of price below ₹500/kg) in the list of restricted items of import. At first glance, while this looks like a farmer-friendly move, it has left re-exporters of pepper in the lurch.

Most re-exporters are into value addition - they import pepper berries, process and re-export it. Now, with pepper imports restricted unless it is at ₹500/kg on the invoice, these sellers are in a tight spot. Paying ₹500/kg for whole pepper that is actually selling for below ₹200/kg in the global market and then re-exporting to customers outside, doesn’t make any business sense.

Farmgate prices too have not responded positively — pepper trades at ₹375/kg in the domestic market now, not much changed from what it was in March. So, why are pepper prices continuing to slide? Why are the actions on import front not helping push prices higher?

BusinessLine spoke to farmer associations, trade bodies, re-exporters and industry veterans from Kochi, the spices hub of the country, to find an answer.

Surplus supply

The pepper market, which was on a bull run between 2005 and 2015, has been facing correction over the last two-and-a-half years as supplies from all new vines planted during the bull phase has started coming into the market.

Prices have dropped from about $9,500/tonne (FOB) in mid-2015 to $2,800-3,000/tonne now.

In the domestic market, black pepper prices have dropped from ₹600/kg in 2015 to ₹500/kg last year and now to ₹375/kg.

Global market supplies have risen very sharply in the last two years.

The data from International Pepper Community and International Trade Centre shows that the total production in pepper has jumped from 3,59,399 tonnes in 2014 to 5,03,495 tonnes in 2017 — a 12 per cent annualised increase.

But demand, on the other hand, has been lacklustre.

The global demand growth has only been 2-3 per cent a year, for a long time.

The pattern of new plantings in key producing countries suggests that supply will continue to outgrow demand in the next few years too.

Exporters take the blow

The All India Spices Exporters Forum holds that the industry has spent at least ₹3,000 crore in setting up manufacturing facilities over the last 50 years to process pepper and the recent import restrictions have made them bring down the shutters.

Re-exporters bring pepper into the country in two ways — through Advanced Licence Authorisation (ALA) or setting up an export-oriented unit (EOU)/SEZ — and none of this pepper enters the local market.

Under ALA, a bond is given to the Government of India that 15 per cent value addition would be done on the CIF (Cost Insurance and Freight) value of the import and re-exported within the Standard Input Output Norm. EOUs start the business itself by giving the undertaking that they will not sell in the local markets; they can import goods duty free but allowed to sell only to the export market. Similar is the case with SEZs too.

Businesses of re-exporters that come under these three categories have now been hit.

Prakash Namboodiri, Chairman, All India Spices Exporters Forum, says, “Exporters now have no option but to shift base outside India. Earlier (December notification) at least the industry was importing by paying fine and meeting its obligation to clients, but now, even that is not possible. Annual contracts cannot be fulfilled now as the raw material prices globally are at ₹180/kg and to import and re-export it at ₹500/kg is totally unviable.”

The import restrictions also pose a risk of India losing its share in the pepper processing market globally, says Gulshan John, MD of Nedspice Processing India, a large pepper exporter. “India currently is the only pepper producing country which has the largest number of steam sterilisers for spice processing, both European and local made...may be more than 50 in number, whereas Indonesia may have, say, three maximum, Vietnam may have maximum 7-8 and Sri Lanka I think has none...All these years there was no reason as India was already way ahead of the game...but now entrepreneurs in other markets may actually invest in machines and set up the processing technology...”

Further, the rule regarding ₹500/kg invoice will only pave the way for hawala transactions, say insiders from the industry.

A pepper exporter who doesn’t want to be named, puts it thus: “The difference between the December notification and the recent one is that now, if pepper needs to be imported, the importer has to show the invoice of ₹500/kg. My seller in Vietnam or Brazil has to raise an invoice and I as an importer would have to send payment out of the country at an overpriced invoice, else, the import would be prohibited. This means I go in for an understanding with my supplier who is willing to sell me Vietnam pepper (ruling at ₹170/per kg) at ₹500/kg and I will actually overpay the seller out of India an amount of ₹330/kg. If my supplier agrees to deposit the cash paid in excess in an overseas account, I am actually repatriating foreign currency out of the country legally…”

Another concern is the emerging trend among producers to hold on to their stock and not bring it to market, in the hope that the import restrictions will eventually push prices higher. A recent article in BusinessLine (“Pepper output seen at 60,000 tonnes this season on scanty rain”) quoted pepper farmers from different taluks of Dakshin Kannada as saying that they do not intend to release their harvested pepper till the price goes to around ₹450/kg. Some said they will release only 40 per cent and hold back rest of the produce.

But what if prices don’t go up? In the next one month, as the many small and marginal farmers who don’t have holding capacity bring their harvest to market, prices in fact may only go down.

The farmers who are holding their stock now are actually creating a space for illegal importers to sell their stock. The unmet demand will be fed by the illegal pepper coming in from Vietnam and Sri Lanka.

Way out

It is not the banning of imports, that is a problem but the blanket ban, say re-exporters. The Centre should allow business of re-exporters continue and exempt them from any kind of restriction on import of pepper.

To help farmers, the State/Centre can take up procurement through a MSP arrangement. But given that even in large commodities such as pulses there is very minimal procurement, the government has to mull other ways, says Philip Kuruvilla, an industry veteran. “While companies in the domestic market and exporters should focus on value addition, farmers have to enhance productivity and see how they can improve the yield per acre. If this is done, even at current market prices, pepper will be a remunerative crop...”

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