The Hindu Business Line : Uptrend in wheat prices: What's driving them?

MENTION drought and be rest assured that you would have speculators working overtime. This, even when very little may have changed as far as the underlying supply-demand position of a particular commodity is concerned.

Take the case of wheat. Within a matter of three weeks, the September futures contract price of wheat traded on the National Commodity & Derivatives Exchange Ltd (NCDEX) has shot up by over Rs 130 per quintal. On July — much before news of deficient monsoon rains began hitting the headlines — the September contract was quoting at Rs 692 per quintal (Delhi delivery). Today, the same was traded at Rs 824 per quintal, having, in fact, touched as high as Rs 854 per quintal on July 26.

The current prices are even higher for the October, November and December contracts — Rs 845 per quintal, Rs 862 per quintal and Rs 871 per quintal, respectively.

The uptrend is visible in spot prices too, though not to the same extent. Benchmark wheat dara was quoted on Thursday at Rs 740-742 per quintal in Delhi, up from Rs 680-682 per quintal at the start of this month.

According to a top Food Ministry official, the unusual jump in prices is "totally sentiment-driven" and has "no link with fundamentals". True, stocks of wheat and rice in the Central pool as on July 1, at about 30 million tonnes (mt), are the lowest for this date since the 28.5 mt level of 1998.

But even at these levels, the current stocks, at 19.15 mt of wheat and 10.76 mt of rice are above the corresponding normative minimum buffer of 14.3 mt and 10 mt required to meet the needs of the country's public distribution system (PDS). Also, unlike previous years, the Government has no plans to export any grain, which means the entire stock is available for domestic consumption. Moreover, the official pointed out that there is no dearth of stocks with the private trade either. The wheat crop of 2003-04 (marketed during April-June) has been estimated at 72.7 mt, as against 65.1 mt for the previous year.

On the other hand, procurement of wheat by the Food Corporation of India (FCI) and State agencies has increased only from 15.8 mt to 16.8 mt.

"If production has risen by over seven mt, but procurement by the Government has gone up by just one mt, it means that the remaining six mt is lying with the private trade. There is no basis, therefore, for the current surge in prices and clearly there is mischief being played by interested parties in the name of drought,'' the official said.

There only rational explanation for wheat prices going through the roof has to do with the fact that the monsoon's failure in the country would mainly hit output of coarse cereals like bajra, maize and jowar. It is possible that the trade anticipates that the short supply of coarse grains would generate higher demand for cereals in the coming months and it is this expectation that is driving up prices of wheat.