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G. Chandrashekhar

Mumbai, Dec. 24 As reports from across the country suggest, the planting of major rabi crops — wheat, oilseeds, pulses — has nearly ended; and the acreage numbers are far from flattering. Both wheat and oilseeds are lagging considerably behind last year’s area, while pulses and coarse grains have managed to just about retain acreage.

Soil moisture deficiency has surely affected wheat planting. The Government continues to be sanguine about the 2008 wheat crop size reaching 75 million tonnes, same as 2007 crop; but evidence on the ground does not support the optimism.

From now on, it would largely be a weather-driven market. Assuming normal weather conditions until harvest of the rabi crops, one can expect a decline in wheat and oilseeds (mainly rapeseed/mustard) output. It may be a little too early to put a number on the crop size; but what is becoming increasingly certain is that the harvest of both wheat and oilseeds is unlikely to be close to last year’s levels.

While rapeseed/mustard crop is likely to be about 10 per cent lower than last year’s, in case of wheat it is anybody’s guess. The international situation too continues to remain bullish. Wheat prices on the Chicago exchange hit a new high recently. But forward prices, beginning July 2008 are already seen easing from the current levels in anticipation of a 4 per cent expansion in the global wheat area.

The London-based International Grains Council recently forecast that world wheat production in 2008-09 could rise to 645 mt, a 7 per cent increase from the current year’s 603 mt. It may not be out of place to mention that last year too around this time, the global wheat outlook for 2007-08 was forecast to be favourable with an anticipated 3 per cent increase in area. As is by now common knowledge, weather played dirty and curtailed production prospects in some countries including Australia and prices went through the roof.

For the world agricultural markets, the US crop conditions beginning April 2008 would be crucial. Competition for acreage among crops (corn, wheat, soyabean and cotton) would ensure that some gain and some lose. The extent of rally in prices in recent months would surely influence planting decision.

Clearly, wheat prices have rallied the maximum, followed by soyabean prices. Corn has rallied, but not to the extent of the other two. This may provide a pointer. By now there is general consensus that wheat could gain the maximum acreage because of the highest price rally, followed by soyabean, and then corn. Weather in the US and other major origins will have to be closely monitored.

Biofuel demand would continue to be a major driving force. Corn and to a lesser extent wheat are used for ethanol. Soyabean oil (also rapeseed oil and palm oil) is a feedstock for biodiesel. In 2008, corn market has the best potential for a rally because of demand from feed and fuel sectors.

This may be followed by soyabean and oil because of huge demand from China and of course from the biodiesel sector. When demand and supply are tightly balanced, even a small change in either demand or supply or both will have a disproportionately large impact on market prices. Tightening demand-supply fundamentals provide fertile ground for speculators, euphemistically called investors. Huge funds are expected to flow into the agri-commodity market and propel price higher.

India will have to cope with strong global prices in the grains and oilseeds complex, especially at a time when domestic crop conditions do not appear satisfactory. The country is likely to face serious food inflation in the first six months of 2008.

Not only agriculture, the crude market too is likely to explode and breakthrough the psychological $100 a barrel in the coming weeks. High crude prices will further encourage diversion of traditional food items for fuel purposes. So, a combination of rising food prices and fuel prices is sure to put the Government in the defensive in the New Year.

The options available to policymakers are limited. In its fight against inflation in the last 12-15 months, the Government has already used up many of the instruments in its armoury such as banning exports, opening up imports, reducing customs duty or even totally withdrawing it. What more can the Government, whose degrees of freedom are already curtailed, do? There is apprehension New Delhi may be forced to resort to more desperate measures.

Some of these would include restrictions on procurement (corporate buying), storage, movement and credit access. Non-basmati rice export may be banned totally. In case of edible oils, customs duty may be reduced further. Some more agricultural commodities (sensitive ones that have a high weightage in consumer price index) could be delisted from the futures exchanges. Even with an estimated 75 mt wheat output in 2007, the Government could procure only 11 mt. What will happen to procurement if output were to decline? To rein-in prices, the country may be forced to arrange for large-scale imports of wheat, edible oil and pulses at an enormous cost because global prices of pulses and edible oils would stay high.

The poor are going to be worse off than before. Their already low and declining per capita consumption may dip further. Any unrest resulting from food inflation may have serious socio-political implications, especially with general elections looming large on the horizon. The Prime Minister has cautioned the country against possible negative fallout of the US sub-prime crisis. Food prices may worsen the country’s plight. It is unclear if anyone in New Delhi is even remotely conscious of the emerging scenario and thinking about action to reduce its negative impact.

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