February and March saw unseasonal rainfall in India’s wheat-growing regions. Following the damage to crops, the issue at hand is of “estimating” the quality and quantity of the nations’ wheat crop, that is due for harvest soon. In this process, truth has become a casualty while rampant speculation is swaying sentiments. However, the conjecturing, this time, is by the concerned state governments rather than the traders.
The apparent logic is if a state declares massive loss/damage, it strengthens its case for central relief for vote-banks politics—especially with farmers involved. State governments of Madhya Pradesh (MP), Rajasthan, Haryana, Punjab and Gujarat are all affiliated to the BJP, which leads the Union government. There is therefore a chance that, irrespective of the ground realities, the case for central assistance for emergency relief on account of crop failure could be favourably considered. Waiver of any farm loans will be in addition to this relief. Even the Congress party is ardently campaigning for compensating farmers. The controversy over the proposed changes to the land acquisition law is also another compulsion for the Centre to demonstrate a pro-farmer stand; in such a milieu, a crop failure compensation will be helpful.
The recent assessment of the agriculture ministry of damage to the wheat crop spread over 6.3 million hectare—of about 18-19 million tons of wheat (considering an average yield of 3 tonne/ha) of a total expected output of 95 million tonnes, or a near 20% damage—is at variance with the 4-5% damage indicated by the agriculture minister himself. The grain had matured before the untimely showers, and thus the loss or damage should be minimal after a delayed harvest. There is little clarity over how damage is being assessed—whether a complete loss is being considered or even crop with failing quality parameters is being considered as well. The surplus-like situation for wheat is reflected by the NCDEX futures on April 10, 2014—at about R1,424/quintal versus the MSP of R1,450/quintal. Prices at which trading is happening at futures exchanges are lower than the MSP and this suggests an abundant availability of good quality wheat in the open market. Future prices may even slide further when the new crop hits the mandis. The government’s estimate of the damage to the crop is incorrigible as this is not verifiable by market dynamics. So, the question arises: Why make traders nervous with political bargaining between the Centre and the states in the name of farmers?
Assuming (without admitting) that the crop is badly hit, the accompanying chart projects an upsurge in wheat production in FY14 in some states from the levels seen in FY11 when the output was around 87 million tonnes. The continued hike in MSP, supplemented by bonuses given by some states, has also shifted acreage to wheat. In MP and Rajasthan, acreages which could have been better utilised for oilseeds and pulses may have gone towards cultivating wheat due to the open-ended procurement by FCI and the ever-increasing MSP. Madhya Pradesh, which harvested around 14 million tonnes in FY14, is likely to produce about 15-16 million tonnes. If there is some shortfall in some states, this can be compensated by the increased production other states, thereby keeping the national output unaltered.
What happens to procurement, then? Even though FCI may prune direct purchases, state government agencies (SGAs) will ensure that the maximum tonnage is procured on behalf of the central government to take care of farmer’s interests. Mandi taxes in Punjab (14.5%), Haryana (10%), Uttar Pradesh (8.5%) and MP (8.2%) are charged over and above the MSP. This revenue indeed has to be earned and therefore even somewhat-compromised wheat will also be procured by SGAs. Except keeping the moisture content unchanged, at 14% maximum, the food ministry has accepted procurement of lustre-loss wheat and relaxed the caps for shrivelled/shrunken/broken grain. Under such circumstances, the procurement of 28-30 million tonnes is expected.
Wheat of the lustre-loss quality was procured ubiquitously between 2001 and 2004, and even exported by FCI. For the lay person, it hardly matters if the wheat is lustre-loss or not, because she is concerned with the quality of the flour which can be upgraded if required by appropriate blending with superior-quality wheat.
The MP government has reacted in a manner as if the state’s entire wheat crop is of substandard quality and this has unnerved flour millers, especially in South India. In addition to their normal annual import of 50,000-60,000 tonnes of Australian Premium White (APW) wheat in containers for specialised flour production, millers, sensing uncertainty, have reacted by covering about 100,000 tonnes in bulk cargos of 25,000-30,000 tonnes each. The price for this ranges between $265 and $270 (cost and freight landed at Indian ports)—or around R16,600-16,800 per tonne—as against Indian wheat available in the South at R18,000-18,500 per tonne. Commercially, such imports are fully viable and thus justified. (This also indicates that the South Indian market is more sensitive to the quality of wheat grown in MP than, say, Punjab, Haryana or UP). FCI prices are based upon the outdated concept of MSP and cannot be paired with international values. Only if the open market prices drop to the level of competition, imports will taper down and finally halt.
The world market is flush with about 900 million tonnes of wheat. So long as corn prices are determined by lower crude prices, wheat prices too will remain bearish. The temptation to import more grain, in a market with falling prices, shall remain—though the total quantum may not exceed 0.2 million tons which is minuscule to the total Indian availability of about 115 million tonnes, including the carry-in stocks of the FCI.
Apart from this political posturing on the crop failure of wheat between the Centre and states, the government has to think of what is to be done with the excess high-priced wheat hoarded in open and unhygienic warehouses. The current policy of incentivising more production, storing more and selling less defies common sense.
The author is a grains-trade analyst
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