MSP should be raised to augment higher production without neglecting importance of higher yields while attending to the vulnerabilities of cheaper imports.
Will India remain a long-term wheat importer? Is nation’s wheat security exposed to risk? Will the government intervene to curb or stop import? Should the government continue to increase minimum support price (MSP) of wheat despite cheaper grains available abroad? Will India turn exporter again? Data highlight that the answer to first question is, yes, India will remain a long-term importer of wheat. Wheat security, however, is not compromised as the government is allowing private traders to import to fill the gap created by supply-demand mismatch, and it is itself building official stocks from local procurement. Imports can be reduced or stopped by increasing customs duty from the existing level of 10%—which is the sole prerogative of the government—and any such intervention will create an upward swing in local wheat values. MSP should be raised to augment higher production without neglecting importance of higher yields while attending to the vulnerabilities of cheaper imports. But, it is difficult to say if India will once again become an exporter of wheat in the near future! From an exporter of 6.8 million tonnes (mt) of wheat in 2012-13, exports trailed to paltry 0.4 mt in 2016-17, while imports escalated to 6.3 mt in the same year, and are likely to be around 3.5- 4 mt in 2017-18 (see accompanying graph). Global estimates of 2017-18 point to wheat output of 735 mt; opening stock of 240 mt and annual trade 170 mt; consumption also at 735 mt. Thus, India’s demand is minuscule compared to surpluses available worldwide.
Imports are a natural outcome of international prices being lower than local costs after adding freight and handling expenses. There could be diverse reasons for the steep fall since 2014 in wheat values abroad, but this has been primarily due to higher output in Black Sea countries (comprising Russia, Ukraine and Kazakhstan) and an exceptionally good Australian crop last year. Trend reflecting fall in values of US SRW wheat since 2014 are showcased in the accompanying chart. Wheat values came down from $300 fob/tonne to $220 fob/tonne—down by 27%—as of now, but had touched a bottom of $170 fob/tonne in September 2016, a 43% decline. However, the Indian MSP climbed from Rs 1,400 per quintal in 2014 to Rs 1,625 per quintal, or 16% higher, while import prices fell to Rs 1,275-1,430 per quintal against India’s wholesale market price in North Zone of about Rs 1,550-1,800 per quintal. Since a bulk of imports land in South Indian ports, for millers, the wholesale traded value in the South are Rs 2,300 per quintal—while imported wheat with 10% duty is around Rs 1,800 per quintal. Open Market Sale Scheme (OMSS) price of Rs 1,790 per quintal plus freight also incentivises imports in preference to local deliveries from Food Corporation of India (FCI).
It makes perfect sense to blend cheap imported wheat from Black Sea. If the government hikes the MSP in the coming Rabi season, which it is likely to do, then cheaper imports will continue next year as well, unless custom duty is also raised to 25% or so. Prices abroad will remain weak as Russia and Ukraine may continue to apply downside pressure with their crops being $70+28=98/mt with aggressive pricing and weaker currencies. Though the Indian government has claimed wheat production of 93 mt and 97 mt in 2016-17 and 2017-18, respectively, market assessment is of 84 mt and 92 mt. Indian wheat procurement was 23 mt last year and 30mt this year—short of target by 7 mt and 3 mt, respectively. Firmer local prices, lower releases (4mt against demand of 8mt) by FCI in market through OMSS, official stocks touching near buffer norms on April 1, 2017 and rising imports are all indicative of tightness in availability of this grain, which substantiates assessment of market.
As per IGC London, Indian domestic consumption in 2017-18 is projected at 98 mt. We are, thus, producing less than what we consume. Ideas of cutting down wheat production in Punjab (which gives highest yield in the country of about 4.7 tonne/ha versus 2.5-3 tonne/ha in rest of the country) and substituting with other crops will definitely jeopardise wheat security. This year, Uttar Pradesh (UP) procured 3 mt grains for the central pool, though in the past UP contribution has been marginal. This may have shored up official stocks—but it crowded out market players who normally source their needs from UP. This also prompts imports because of limited availability nationally. Immediately after the end of wheat procurement season in June 2017, local prices touched Rs 1,743/qtl against an MSP of Rs 1,625/qtl. UP farmers suffered a notional loss of Rs 118/qtl. Already six cargos of cheap—low protein-Ukrainian wheat—of about 2,00,000 mt are sailing for South Indian ports, contracted at $216-220 cif/t (Rs 14,300/tonne) for arrival in August-September 2017. Existing stocks of wheat at the ports is getting liquidated.
The Black Sea harvest season is July/August, and prices might soften soon. There would be a new round of purchases. Indian local prices start moving up between November-March. Indian buyers are bound to take fresh positions. Australian output is forecast to 25mt—lower by 10mt—from previous year. Thus, Australia is priced out of Indian market at $275-280cif. The only fear that trade carries is that of uncertainty of import duty and abrupt changes in phytosanitary conditions. Considering that good wheat is facing scarcity locally with rising consumption pattern; MSP/OMSS/market prices are much higher than landed imported cargos; and also that India needs to build its official stocks. The government has to tread the path of any intervention cautiously, so as to keep a balance between interests of farmers and consumers.