India: Despite talk of record wheat harvest, why are domestic prices rising fast?

Domestic wheat prices continue to climb higher, driven by a vastly higher official export target and a constant stream of import queries from countries looking for an alternate source to Ukrainian or Russian wheat despite the likelihood of yet another bumper harvest. Over the last week, domestic wheat prices have gone up by 5-7 percent in the wholesale markets, and are now poised to catch up with already high export prices.

Reports of lower than anticipated yields in the major wheat-growing states of Punjab, Haryana and Uttar Pradesh have changed all production and export estimates. The latest rise has made the entire wheat supply chain — from farmers, traders and exporters to even the government — anxious after nearly two months of planning to capture global demand.

From geopolitical implications of promising wheat to an array of nations in the wake of the Ukraine crisis to inflationary worries at home, a bad harvest this year has wide implications. Moneycontrol takes a deep dive into the issue.

Wheat exports from Ukraine, known as the breadbasket of Europe, stopped days after Russia invaded Ukraine on 24 February. This led to the stockpiling of the foodgrain in a large number of countries in Europe, North Africa, and the Middle East, which were dependent on Ukrainian wheat. Inclement weather in many wheat-growing parts of the world, high shipping rates and renegotiated contracts had already made wheat a valuable commodity in 2021.

Between April 2020 and December 2021, the price of wheat increased 80 percent, according to data from the International Monetary Fund. Meanwhile, the average price of wheat futures has risen to $1,105 per bushel of wheat as of date, up from $758, according to Trading Economics, a global data provider firm. Rising prices have meant that India earned $1.93 billion from wheat exports in the April-February period of 2021-22, up from $560 million in 2020-21 and just $62 million in 2019-20.

On 8 April, Russian wheat supplies to the global market were cut off after the country announced stockpiling. According to the United Nations Food and Agricultural Organisation, in 2019, after China (133.6 million tonnes) and India (103.6 million tonnes), Russia was the third-largest wheat producer globally (74.5 million tonnes), while Ukraine ranked seventh (28.4 million tonnes). However, large domestic demand ensures the majority of the crop is used to feed the local populace in India and China.

Meanwhile, much smaller populations and proximity to large trade networks have led to Ukraine and Russia cornering the largest share of the global wheat export market. Combined, Russia and Ukraine account for more than a quarter of global wheat exports.

India’s wheat exports have always been volatile, and subject to fluctuating domestic demand and the crop cycle. But in order to generate temporary farm income, and generate long-term contracts, India has been trying to tap buyers of Ukraine and Russia’s wheat. Not more than 10 days after the Ukraine crisis began, the Centre began discussions with various countries including Egypt, Turkey, China, Bosnia, Sudan, Nigeria and Iran for commencing wheat exports. Initial shipments have also begun to some of these nations. Egyptian officials approved India as a wheat supplier after completing their tour of India’s wheat storage facilities and farms earlier this week.

Inter-ministerial meetings involving Ministries such as Commerce, Agriculture, Railways and Consumer Affairs were organised and the Prime Ministers’ Office (PMO) also monitored the situation. The Railways has pressed into service additional rakes to meet immediate demand for transport, while port authorities have augmented dedicated terminals for dry bulk carriers to tow away wheat shipments.

Apart from these newer export markets, the traditional destinations of Indian wheat exports are also expected to see higher shipments this year.
These include nations in India’s immediate neighbourhood, such as Bangladesh and Sri Lanka, as well as South-East Asian nations like Malaysia, and the wider Middle East region. In the first 10 months of the current financial year, Bangladesh has bought 58 percent of India’s wheat allowed for exports.

Given the global demand as well as increasing domestic demand, the latest wheat procurement season has seen open market prices rising to their highest till date after government buying kicked off in Punjab, Haryana, Madhya Pradesh and Rajasthan in the past few weeks. For the current crop season (July 2021-June 2022), the government had last year hiked the minimum support price (MSP) of wheat by Rs 40 to Rs 2,015 per quintal. This is in stark contrast to the Rs 2,400-2,500 per quintal since February 8, at most major wholesale markets across the country.

On the other hand, even as they receive a deluge of new orders from overseas, Indian traders remain unsure about what the next few months would hold with regard to prices and supplies. Arguing that the Centre will be looking to prioritise domestic procurement at a time when farmers are not keen on taking their crops to the government, they say restrictions on wheat exports may kick in by May.

Should such restrictions be invoked, selling prices by farmers will immediately crash, forcing them to move towards government procurement. In anticipation of such a move, farmers are trying to sell off their crops even faster than the existing market framework would allow. While this excess supply should normally depress prices, the willingness of traders to buy up as much wheat as possible quickly before supplies are cut off, has elevated prices further.

Traders in major wheat export hubs such as Ahmedabad warn that the government would have to also hit its target of massive public grain distribution. Food Corporation of India (FCI) data show that the combined stockpile of wheat had risen to a record 603 lakh tonnes in July 2021. This has come down to 189.9 lakh tonnes, as of April 2022, data show.

Government stocks have been rapidly utilised over the past two years as massive public distribution of food grains for the poor was undertaken in the aftermath of the COVID-19 pandemic under multiple schemes, the prime one being Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY).

It is aimed at providing nearly 80 crore people with 5 kg free wheat or rice per person per month, along with 1 kg free whole chana per family per month. This is over and above the regular monthly entitlements under the National Food Security Act, 2013. Continuing the scheme will require major stockholding.

The Centre had extended PMGKAY till September 2022, with an eye on providing subsidies to the remaining 15.575 million households left out of the total target of 29.5 million rural homes.

Since February, both government and private bodies had predicted a bumper wheat crop in 2022. Highly favourable weather conditions in the major wheat-growing areas of northern India had been tipped to be the reason for this development. Early indicators had buoyed the government’s hopes of overseeing a surplus harvest for the sixth year in a row in 2022.

Last week, the US Department of Agriculture’s Foreign Agricultural Service said that wheat production will reach a record 110 million metric tonnes (MMT) from 30.9 million hectares in Marketing Year 2022/2023 (April-March), up from the previous year’s record 109.6 MMT from 31.1 million hectares.

A series of public engagements by the agriculture ministry had provided enough signals to the market that traders had booked advance export slots for wheat for the first time. However, once the harvest began in Punjab and Haryana in mid-April, their hopes had to face a rude reality check.

Ground reports from these states say that heatwave conditions in March majorly affected both quality and weight of output. At this time, the crop is in an advanced ripening stage, and the sudden change in temperature and climatic conditions have led to the grains shrivelling up. In other cases, the crop had not ripened fully.

Punjab, Haryana and Uttar Pradesh have reported a 10-35 percent fall in yield due to the early onset of the summer season and excess rainfall in December and January shrinking the grain size. According to the Punjab Agriculture Department, Punjab’s per hectare yield is estimated to have gone down between 270 kg and 546 kg, or around 5-10 percent on last year’s yield.

India is also facing shortage of fertilisers, partly fuelled by the war as Russia is one of the largest producers and exporters of fertilisers. India also depends on China for fertilisers but the country has blocked exports until late 2022 to maintain food security.

An acute shortage of Di-ammonium Phosphate (popularly known as DAP) hit parts of Haryana, and Western Uttar Pradesh a few months back. DAP is among the most preferred fertilisers in India since it contains both nitrogen and phosphorus which are primary macro-nutrients, and its shortage has led to stunted plant growth in some state.

Tags: wheat, India, yields, Punjab, Haryana, Ukraine, Uttar Pradesh, Russia, импорт, harvest, export, prices