Wheat was one of the top losers among agri commodities in 2016. The 10 per cent import duty imposed recently may not curb imports as the global market is oversupplied. However, the government’s plan for more procurement this year and a further increase in import duty should restrict fall in prices.

Excess supply

Despite being an irrigated crop (91 per cent), poor soil moisture due to deficient rainfall during the planting season (October-December), higher than normal day-temperatures during flowering and heavy rains during harvesting led to lower output in the last two years (86 million tonnes in 2014-15 and 92 million tonnes in 2015-16).

However, India is all set to produce 96.64 million tonnes (mt) owing to record planting at 31.8 million hectares, up 8 per cent (y-o-y) in 2016-17. The consumption is estimated at 94 mt on steady to increased demand from the food processing and dairy industry.

One-third of the marketed wheat is procured by the government and the rest is purchased by private players.

The arrival of new season crop in MP, Rajasthan, Gujarat and a few parts of UP has dragged wheat prices below the MSP of ₹1,625/quintal. The government’s rigorous procurement effort has provided some support to prices but arrivals from Punjab and Haryana may push the prices down again.

Govt procurement

The government’s stock stands at 9.4 mt as on April 1, ’17, down 44 per cent (YoY). This led the government to increase its procurement target for the rabi marketing season 2017-18 at 33 mt (April ‘17-March ‘18), 43 per cent higher than last year. Though UP is the largest producer, it contributes less than 4 per cent to government procurement (mainly due to inadequate infrastructure) compared to over 90 per cent by Punjab, Haryana and MP taken together. However, the creation of 5,000 procurement centres in the State by the new government is likely to change this situation.

Import duty

The expectation of a bumper domestic crop and the decade’s highest import at 5.2 mt (July’16-January’17) led the government to raise import duty to 10 per cent to support weak wheat prices.

In January alone, India imported more than 1 mt of wheat. The recent hike in import duty, together with procurement support from the government, has provided the much needed support (current wheat price - ₹1,640/quintal). With the upcoming arrival pressure to reach its peak, one may expect some slowing down of imports in the coming months. However, the flour millers, biscuit and confectionery manufacturers in southern India will continue to import their requirements from Australia and the Black sea region rather than buying from northern and central India because of lower international wheat prices and favourable rupee exchange rate.

Global supply

Following the USDA’s estimate of global production reaching an all-time high of 751.3 million tonnes (mt) in 2016-17 due to better crops from Russia, Argentina, Australia, and India, CBOT prices fell to a 10-year low at $3.86/bushel on August 31. Despite record-high global consumption at 740 mt, the higher production leaves the ending stock quite high at 252.3 mt, sufficient enough to put pressure on prices.

However, on account of lower planting of winter wheat in the US due to a prolonged slump in prices, we may not witness the kind of plunge observed last year. US farmers are switching to soyabean, corns and canola and that may reduce the supply from the US. That is likely to limit the price losses. Wheat prices have already recovered to $4.30/bushel at present but the fear of supply glut remains, which will continue to put pressure on prices.

Outlook

The arrival pressure from North India may pull prices down from the current level but bulk purchasers may buy at lower levels and limit the downside. In the near term, till arrival pressure persists, one shouldn’t expect any bullish move as abundant domestic supply, coupled with weak global prices (that will encourage imports), will limit price gains. Besides, the government (with enough procured stocks as targeted) will keep offloading wheat stocks through the open market to cool the prices when needed.

However, the downside risk is limited amidst abundant supply as the commodity is well supported by the government’s procurement and also imports may decline in the coming months.

The author is Vice-President and Head Agriculture, Food and Retail at Biznomics Consulting

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