The Hindu Business Line : Centre’s wheat projections scary

By the Government’s own implicit admission, the national wheat situation is set to go out of control sooner than you may imagine. The next wheat crop is under planting and would be ready for harvest towards end-March/early-April 2008.

According to the Ministry of Agriculture, projected wheat production for 2007-08 is 71.78 million tonnes. This is more than three mt lower than the 2006-07 crop of 74.89 mt. Indeed, the Government’s expectation may be justified. It is by now clear that Rabi (2007-08) crop prospects, in general, and wheat crop prospects, in particular, are far from encouraging. With many northern States facing moisture stress, the risk of lower yields and lower output is only too real, unless the weather gods smile and bring the much-needed precipitation to help harvest a decent crop.

More critical than the projected production for 2007-08 is the projected demand worked out by the Government and presented to Parliament (Rajya Sabha question # 125 answered on Nov 23,2007).

For 2007-08, the projected demand is 71.19 mt. In other words, the country is going to have a small surplus of 0.59 mt next season.

How real is this projection? Of course, the basis on which the Government worked out these numbers is unclear. But the possibility of a demand projection being understated is real.

For an economy logging GDP growth of over nine per cent and with a population of 110 crores growing at 1.7 per cent, the projected surplus is as good as next-to-nothing. The Government seems to believe consumption would expand by 1.5 mt annually. It could be off the mark.

Such a tight indigenous production and demand balance is a sure recipe for a major price spike. In a tightly balanced commodity market, even as small change in either demand or production would have a disproportionately large impact on market prices.

Indeed, we should consider ourselves fortunate if the projected production number is achieved come April 2008. It is the demand side which may turn out to be real cause for worry.

Imagine what would happen by March-April 2008 when wheat crop size crystallises? If the crop size turns out to be what the Government has projected, there will be a runaway price rise.

In 2006-07, when the country harvested 74.9 mt, there was a large shortfall in wheat procurement. The Government could procure only 11 mt as against the target of 15 mt This lent considerable strength to domestic wheat market. Despite near-record production, open market prices are around Rs 10,500 a tonne. High prices and the lower Government inventory have prompted wheat imports at record world prices.

What would happen if the next wheat harvest turns out to be less than 72 mt as projected? How much would the Government be able to procure, notwithstanding the record procurement price of Rs 10,000 a tonne?

Importantly, we need to ask what is impact of high MSP on production?

The Agriculture Ministry seems to draw some consolation by suggesting that the record production in 2006-07 would be consumed in 2007-08. Indeed, it is happening now. But eight months of the year are already over. The next four months are crucial because the stocks are currently low and in the coming months they will continue to progressively decline.

The picture beyond 2007-08 looks truly scarier. According to the Agriculture Ministry, in 2008-09, the projected production would be 72.60 mt (an increase of 0.80 mt from previous year) and projected demand 72.72 mt (71.19 mt), leaving a small deficit of 0.12 mt. A year later (2009-10), wheat production is projected to reach 73.44 mt (an increase of 0.84 mt) and demand 74.26 mt, leaving a deficit of 0.82 mt.

Uncertainties

What is important to note is that there is no guarantee the country would harvest the projected size of crop. In other words, supply side uncertainties will continue to linger. On the other hand, demand side is expected to continue to show robust growth. So, the risk of projected shortfall expanding to unmanageable levels is very real.

With these rather modest projections on the production front, how the Government hopes to achieve the National Food Security Mission target of raising wheat production by eight mt by 2011-12 remains to be seen.

Very clearly, the Government has run out of ideas. Admittedly, there are huge challenges in boosting grains production; and unless grains production grows at about four per cent a year, there would be no relief for the poor from high prices.

The unfortunate part is that there is no evidence the policymakers realise the magnitude of the problem, nor is there confidence that they are equal to the gigantic task.