India’s recent invitation of bids for export of 5 million tonnes (mt) of wheat met with a poor response because the shipments were effectively priced out of the global market. State-run Food Corporation of India (FCI) had set the floor price for the wheat at Rs 1,484 a tonne, which was approximately 15 per cent expensive than US supplies on a free-on-board basis and at least 24 per cent costlier than Russian and Ukranian grain.

GoM meet shortly

What is more, since the announcement was made on March 7, domestic wheat prices have fallen by 9.2 per cent, indicating that the state-run food procurement agency did not factor in current market conditions accurately. The Group of Ministers is now expected to meet in the coming days to revise the minimum price for wheat exports downward to make exports viable and clear surplus stocks.

The steep decline came in the wake of the United Nations Food and Agriculture Organisation’s projections of a 4.3 per cent rise in the global wheat harvest to 690 mt this year on the back of an expansion of European acreage under cultivation and higher yields in Russia. In addition, higher-than-expected closing stocks for the 2012-13 crop year also depressed prices.

Bumper crop worry

The trend was evident in India too, with wheat stocks of 24.2 mt as of April 1, against the norm of 7 mt. The wheat stocks have risen in FCI godowns due to record procurement following bumper crops in the last two consecutive years. Wheat output is expected to be 92.3 mt in the 2012-13 crop year (July-June). On the other hand, annual consumption in the country is estimated at just around 72 mt at present, resulting in a significant surplus situation.

A technical analysis of wheat’s fortunes in international markets reveals that prices have been on the downtrend since they peaked at $9.3 a bushel in July 2012. They have come down by nearly 25 per cent since that high and the grain is currently being traded at around $7 a bushel. It is currently testing the support at this level, but if it falls further, the next key support is in the band between $5.8 and $6/bushel. The key resistance is at $7.5/bushel and subsequently at $8.4/bushel.

A similar downtrend is seen on the MCX, where after a sharp rally from Rs 1,218.1 a quintal in June 2012 to a lifetime high of Rs 1,692.1/quintal in late August, wheat has fallen by nearly 15 per cent to Rs 1,442.5/quintal. The next key support is around Rs 1,400/quintal, while resistance is likely to be met at Rs 1,560 and Rs 1,600 a quintal.

Large area, poor yields

India has the largest area in the world under wheat cultivation, but is only the third largest producer due to poor yields. The foodgrain is cultivated as a rabi crop in India, with sowing undertaken during October-December and harvesting during March-May.

The Government plays a major role in the wheat value chain in India, as it is an important crop for the country’s food security. It sets the Minimum Support Price for wheat every year, which sets the mood for the coming season. Government agencies account for 20-25 per cent of total procurement, as a consequence of which open market prices generally do not fall below this level.

The procured wheat is used as a minimum buffer stock for unforeseen exigencies as well as for providing foodgrains under the Public Distribution System and other welfare schemes.

(This article was published on May 4, 2013)
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