Their View. Limited downside for wheat likely

Among all the agricultural commodities, the most preferred crop for frequent regulatory interventions is wheat. Policymakers have tweaked wheat import duties eight times between August 2015 and November 2017. Yet another import duty hike is eagerly awaited.

Apart from the frequent policy changes, wheat has also experienced change in trade dynamics. India has turned a net importer from a net exporter. It exported 6.8 million tonnes (mt) in 2012-13 but it had to import 5.9 mt of wheat in 2016-17, thereby raising doubts over the effectiveness of government regulations. Although India has ample wheat supplies, it would be difficult to export some of it due to low global wheat prices.

Carry-over stocks

A normal monsoon in 2016 (after two subsequent years of drought) and higher wheat prices induced farmers to increase acreage to 31.8 million hectares in the 2016-17 rabi season, leading to an output of 98.3 mt compared to 92.2 mt in 2015-16. A year of bumper output together with record high imports helped the country in building stocks in the range of 12-13 mt by the end of 2017-18 compared to 8 mt a year back. That partly explains why wheat prices didn’t move up much when the government raised the import duty to 20 per cent from 10 per cent in the month of November’17.

At present, domestic wheat is trading at ₹1,650-1,700 per quintal, below the support prices declared by the government (MSP at ₹1,735/quintal for April 2018/March ‘19) due to ample stocks with the millers and early arrivals of new season wheat crop.

The anticipation of prices turning firmer led to huge stocking by traders in 2017 when domestic prices were still low and imports were cheaper. In addition to comfortable domestic purchases, traders imported 1.75 mt of wheat in between April’17-October’17. India is likely to import 3.5 mt wheat in 2017-18.

But the government has not been successful in offloading its stocks in the open market. The FCI, through open market sale (OMS), could offload only 0.4-0.5 mt stocks out of the total procured wheat of 31 mt for 2017-18 compared to 3.25 mt stocks sold in 2016-17, thereby leaving 13 mt of wheat stocks in the government’s pool. Usually, wheat prices tend to move up between November and March, but the current year is in contrast to the long-term trend. In addition to adequate carry-over stocks, the arrival pressure from across the country has led to correction in prices. The new season wheat from Madhya Pradesh and Gujarat started 15 days early while Northern India will start shipment of new season’s wheat from late March onwards with peak arrivals likely in June.

Globally, the increased wheat supplies on expectation of a surge in production in Russia and the EU will more than offset the deficits in Australia and the US. The current year, 2017-18, should end with 15 mt more of carry-forward stock from a year before. The international wheat market is witnessing major demographical changes with traditional suppliers (Australia and the US) being replaced by Russia, which is set to become the top global exporter. Besides, Indonesia is now the top importer, replacing Egypt.

Output scene

Despite all the positive sentiment, the weather and government policies can play spoilsport, surprising the market. Between February 12 and 14, the yet-to-be-harvested wheat crops were reportedly under threat due to heavy showers, hail and thunderstorm in parts of central and southern India, with worst damage in Maharashtra. However, the estimates of the extent of damage have not yet been made public and it will be too early to predict the actual loss to the output.

The government is considering raising the import duty on wheat to 40 per cent to restrict any further erosion in wheat prices as the country gears up for harvesting. The odds of further hike in import duty are greater, considering the government’s need to off-load the excess wheat through OMS. If that happens, the bearish wheat market may find some support. Moreover, the commencement of government’s procurement operations from March 15-April 1 may raise the prices to some extent.

One major supporting announcement (subject to execution) is the declaration of a bonus of ₹200 per quintal over the MSP by the MP government. The catch here is that with MP being a surplus State, if it undertakes decentralised procurement with bonus offering, then the Centre will limit procurement from the State.

In the ongoing year (2017-18), the sowing area has declined by more than 4 per cent (year-on-year) to 30.43 million hectares, which could lead to a decline in the wheat output to 94-95 mt against the government’s estimate of 100 mt. The expectation of lower production in 2017-18 may provide the underlying support to wheat prices.

Overall, the reduced output expectations in the new season, government’s support measures such as procurement and import duty hikes and the ongoing unfavourable weather conditions may restrict the fall in wheat prices.

However, the upcoming arrival pressure and ample availability of previous year’s stock with traders/millers may keep the buying need-based and limit the price gains.

The writer is vice president and head of agriculture, food, and retail at Biznomics Consulting

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