Opinion

Higher wheat output = more inflation

TEJINDER NARANG | Updated on March 12, 2018

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This queer state of affairs is a fallout of the government's lopsided procurement policy

What are the implications of the government’s surprising pronouncement that Indian wheat output of 2014-15 will be around 100 million tonnes? Believe it or not, it is more inflation.

The questions to be asked are: Is this a reliable estimate? Will the farmer be getting a “market premium” over and above the minimum support price? How much will the Food Corporation of India and its agencies acquire for PDS? And, will this order of output tame wheat inflation or stimulate exports?

Estimates, right or wrong?

A declaration of 100 mt implies that last year output stands surpassed by 7 mt. Supply will exceed “annual” demand escalation of about 2-3 per cent. For 2013-14, the US Department of Agriculture maintained wheat output at 87 mt, while the Government stuck to 93 mt. Against an expectation of 44 mt, only 25 mt were sourced by FCI and agencies in 2013-14, while 38 mt were procured in 2012-13. Market values jumped by 13 per cent during the harvest season in 2013, which is quite unusual.

The previous year’s output is not entirely clear; this should be kept in mind while estimating the output for 2014-15. Wheat futures for April 2014 are ruling at ₹15,300/tonne ($249) against the minimum support price of ₹14,000/tonne or ($228). Farmers thus are poised for a “market determined premium” of ₹1,300/tonne (9.5 per cent).

Apparently, futures prices do not support what the government is saying. But some speculation in futures cannot be ruled out.

The implementation of the Food Security Act has been kept on hold. But a Food Ministry proposal for upward revision of buffer norms of wheat and rice to a maximum of 61 million tonnes, against 32 million tonnes now, is before the Cabinet.

Meanwhile, Madhya Pradesh (MP) is expecting an output of 19 mt (about 2 mt more than Punjab) and offering a bonus of ₹150/qtl. Procurement from MP has been 60-70 per cent of the output in that state. FCI may end up procuring 38-40 million tonnes this year, raising the stocks to 58 mt (20 mt carry-in and 38 mt procurement) by end June 2013 — that may starve the market and push wheat inflation.

If the crop is of poor quality or with high moisture content, farmers will offload more to the Government than in the open market. That too will not help in curbing wheat inflation. Flour millers may thus expect higher wheat prices in the market, despite a bigger crop. Exporters may be hit, if they worked out their deals expecting lower open market prices in April and May.

The total storage capacity of FCI and state agencies, as on April 1, 2013, was 72 mt — 53 mt covered and balance under Cover and Plinth (CAP). The MP government needs to arrange for hygienic warehousing on a massive scale.

Considering about 58 mt in the central pool by end June 2014, only 30 million is required by the Government for the targeted public distribution system (TPDS) and flour millers. The disposable/exportable surplus will be minimum 28 mt. At an economic cost of ₹20,000/tonne, its worth is ₹56,000 crore ($9.0 billion).

Bearish for export

The paradox is that government cannot afford to procure less in an election year, and yet cannot sell in the local market or export at a loss, as it could be accused of compromising the public interest. The net result will be excessive inventories as usual and build-up of inflationary pressure. The questionable output estimate of 100 mt has sent out bearish signals in the open market. This is bound to lower export realisation. It will be a challenge for public sector undertakings to realise prices of $270-275 per tonne. Finally, falling prices could stall exports on government account, while private players will export at lower prices.

There has been a significant improvement in overall quality parameters of Indian cargoes. Geographically, India is in a position to realise better prices in Mid-East, Africa, and South-Asia.

This year shipments to Far-Eastern markets may not be lucrative as buyers are importing cheap corn than wheat as feed.

Despite excessive stocks, the Food Ministry is not targeting large business volumes -- only 4-5 mt annually, which is about 3 per cent of world trade of wheat of 140 mt. A business volume of up to 10-15 mt can be achieved by adopting a market-friendly approach.

Incredibly, highest ever wheat production of 100 mt still means higher inflation, more wastage due to poor storages, poor liquidation of stocks due to slow pace of exports, though some better earnings for farmers.

(The author is a grains trade analyst)

Published on February 10, 2014

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