India is all set to record an all-time high wheat output of 107 million tonnes (mt ) in the current crop year of 2019-20 (July-June), 40 per cent higher than the past 10-year average, thanks to favourable weather and a supportive policy regime.

Wheat prices have fallen 17.5 per cent in the past six months on expectations of a bumper crop, and slack demand caused by the Covid-19 outbreak. The lockdown led to closure of wholesale food markets and bulk wheat consumers such as bakeries/confectioners and street vendors, leading to a sharp decline in demand and prices.

Between late March and May, wheat prices slipped by 10 per cent. However, record wheat purchases by the government capped the slides in prices.

Overall, wheat prices are likely to hover around the minimum support price (MSP) with slight downside risk due to ample harvest, overflowing stocks at government’s warehouses and tightening global supplies.

However, the actual quantity of release and sale prices will determine the direction and extent of gain or loss, going forward.

As per the third official advanced estimates, India is expected to produce 107.1 mt of wheat, next only to China, mainly on account of higher planting and increased productivity.

Adequate and well-distributed rainfalls, coupled with extended winter till Mid-April, have led to a better crop yield. Even though, unseasonal rain during peak harvest time (March-April) raised some concerns, no significant damage was reported.

The nation-wide lockdown due to Covid-19 resulted in a shortage of labour. There were issues related to timely availability of combine harvesters and transportation. Yet, the Centre has purchased 38.98 mt of wheat as on July 27, 2020. The government’s stocks are 58 per cent higher than the operational stocks needed for monthly distribution, and 30 per cent higher than the strategic reserve required to meet any emergency.

Despite delayed and staggered arrivals, New Delhi has already procured 36 per cent of expected wheat produce for 2019-20, an all-time record purchase primarily due to excess arrivals and to compensate for reduced participation of private traders during the lockdown. Favourable support prices, backed by strong procurement, has been responsible for India’s wheat production achieving new records year after year, barring a few exceptions.

Madhya Pradesh has turned out to be the biggest contributor to the Central reserves of foodgrains, surpassing Punjab, selling around 40 per cent of the State’s produce to the Food Corporation of India (FCI), government’s nodal agency for foodgrain procurement.

Almost a closed door for trade, including the likelihood of minimal exports and enough domestic supplies along with high import duty (40 per cent) that effectively rules out imports, wheat prices in India will be guided by domestic factors.

A continuous rise in MSP over the years has widened the gap between local and overseas wheat prices.

That has made exports unviable. India exported a mere 217,010 tonnes of wheat in 2019-20, the lowest since 2012-13 when it exported a whopping 6.5 mt. In this period, MSP has increased to ₹1,975 per quintal from ₹1,285 per quintal.

Of late, the FCI has shown interest in slashing the reserve price of wheat to encourage increased buying from private buyers which remain subdued during April-June, with no sales at all in June. The government has sold only 33,980 tonnes of wheat till June, but has set the target to offload 15 mt of wheat from its over-flooded warehouses to the open market in MY2020-21 (marketing year: April-March).

Tightening global supplies

The latest USDA (United States Department of Agriculture) report forecasts global wheat output to reach a record high in MY2020-21 (aggregate of MYs of major players) at 769.31mt, pushing the world’s effective wheat supply to be above the 1-billion tonne mark. But the majority of the increased output is expected from China and India (together they supply one-third of world’s wheat), both of which are not major exporters.

However, Russia, the EU, the US and Australia, which once dominated the world export market, have been reporting noticeably lower output due to bad weather.

Russia, the world’s largest wheat exporter, had imposed an export quota during April-June on wheat as the coronavirus started spreading across the globe, impacting top buyers such as Turkey, Egypt and Bangladesh.

However, with no revision of quota for July-December, Russia may increase its exports in the coming months, depending on its domestic consumption requirement. Given the above backdrop, wheat prices are likely to move around MSP with little negative bias amid sufficient domestic supplies and swelling government warehouses.

In between, the market is likely to take price cues from the sale prices and the quantity of the wheat releases to the open market.

The writer is Co-founder, Director, and Head of Agriculture, Food and Retail at Indonomics Consulting

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