Why wheat prices are skyrocketing despite bumper stocks

India’s CPI (Consumer Price Index) inflation rose to a 17-month high of 6.95 per cent in March 2022, exceeding the Reserve Bank of India’s inflation target for three consecutive months. The prices of wheat and wheat products in the country have gone up by 15-20 per cent while global wheat prices are at a 14-year high. The escalation in global wheat prices is driven by the ongoing geopolitical turmoil—Russia’s war on Ukraine, which has led to massive supply disruptions.

However, back home, the increase in prices comes on the back of five consecutive bumper harvests. Godowns are overflowing with wheat, which, amongst food items, forms a major component of CPI. Wheat/ wheat flour is lower than only rice in its weightage in CPI. India’s wheat output has been consistently high for the past five years. The country’s wheat inventory was reported at 23 million tonnes at the end of February 2022. Stocks of wheat with the Food Corporation of India (FCI) touched a record high of 60 million tonnes, much higher than the buffer norms for July.

Several factors are pushing wheat prices up at home. These include international prices of wheat and rising fuel costs, which have a spillover effect on commodities used for ethanol production, such as corn and wheat. With rising global wheat prices, there is a growing demand for wheat to be exported. Himanshu, an agricultural economist from the Jawaharlal Nehru University, New Delhi, says the rising prices make for a strong case for the government to continue with the free ration scheme to the poor till at least March 2023. The government had stated that the scheme will be offered till September this year.

Meanwhile, companies like ITC, Adani Wilmar and Hindustan Unilever are building their wheat stocks by buying in record quantities at a time when the Centre’s wheat procurement has declined by about 32 per cent to 69.24 lakh tonnes till April 17 of the ongoing rabi marketing year, as against 102 lakh tonnes in the year-ago period. The Centre had set a target of purchasing 444 lakh tonnes of wheat in the 2022-23 marketing year as against 433.44 lakh tonnes in the previous year.

The government’s procurement of wheat in Haryana was at 28 lakh tonnes till April 17 of the current marketing year, as against 44 lakh tonnes last year. In Madhya Pradesh, 9 lakh tonnes of wheat have been purchased so far as compared to 17 lakh tonnes during the same period last year. Farmers are selling to corporates, who are paying them more than the MSP (minimum support price). But as Himanshu warns, “The private sector is crowding out the public sector. Large corporates are stocking up wheat; they will hold it until the prices are higher and create an artificial scarcity in the market. It could spiral.”

Should the government sell its stocks in the open market? Opinion varies. Nilesh Shah, MD, Kotak Mahindra Asset Management Co. Ltd, says selling in the open market could bring down inflation while Himanshu believes the government needs to build reserves. With the Ukraine war on, the world could be staring at a food crisis, considering that Russia and Ukraine are Europe’s bread basket. For India, it makes all the more sense to have its coffers full.

Tags: Russia, prices, global, wheat, India, flour, inflation, rabi, Ukraine