Wheat market in the grip of uncertainty

Record domestic harvest keeps prices subdued while outlook is cloudy for the next crop



The Indian wheat market is at the crossroads. 2016-17 saw record planted acreage (30 million hectares) and resultant record domestic harvest reckoned at 98.4 million tonnes, according to the Agriculture Ministry although private estimates are 3-4 million tonnes lower.

The government’s procurement topped 30 million tonnes during April-June 2017 and as of October 1, FCI is holding close to 28 million tonnes.

Given the heavy inventory burden, prices in the open market have been hovering just a tad over the minimum support price of ₹1,625 a quintal, and at the commodity exchange, forward prices are not significantly different.

While the current situation is one of large production, burdensome stocks and subdued prices, the outlook for the next crop — planting for which will be done in November/December and harvest in April/May 2018 — is clouded by deficient south-west monsoon rains and inadequate soil moisture in the principal growing regions covering Punjab, Haryana, Uttar Pradesh and Madhya Pradesh.

The government has fixed production target at 97.5 million tonnes for 2017-18.

Given the subdued price situation, the big question is whether growers will be motivated to continue to plant wheat in record acreages one more year — in excess of 30 ml ha. And the other question is of weather.

Wheat crop will need winter rains during mid-December/mid-January and crop-friendly cool temperature during the growing period.

Weather risks

In other words, there are risks associated with weather over the coming months.

It is well known that Indian wheat is at the limit of heat tolerance and any unusual rise in day temperature during the growing period can potentially hurt yields.

A close watch on planting and crop progress is necessary. At this point in time, one must assume that the country may not be able to harvest a record crop in April 2018.

Meanwhile, the global wheat market is nursing multi-year high stocks of the fine cereal.

For 2017-18, the International Grains Council has estimated stocks at a new high of 248 ml t.

There is fierce competition among major exporting countries to garner maximum market share.

No wonder, offer prices for export are as low as $200 a tonne, equivalent to about ₹13,000 a tonne.

The Black Sea region covering origins such as Russia and Ukraine is holding unusually large inventory of wheat.

Exporters there are constantly looking for markets. India has been importing from these countries, given the competitive offers.

Imports

Wheat import into India is taxed with customs duty of 10 per cent ad valorem. At present, the landed cost of wheat is less than the procurement price fixed by the government. There is now a move to raise the rate of customs duty to possibly 25 or 30 per cent ad valorem so as to equalise the price of imported and indigenous wheat.

A duty hike may become inescapable so as to send positive signals to wheat growers. If open market prices were to move above ₹1,800 a quintal, it may offer some encouragement to growers.

At the same time, any move to hike the duty on imported wheat is sure to compromise the interest of wheat millers, especially in South India. If a duty hike indeed becomes imperative, it is necessary for the government to ensure adequate and uninterrupted supplies of domestic wheat at competitive prices to flour mills.

It is important that a large part of the current burdensome public stocks is liquidated in the next six months. The storage costs at about ₹200 a tonne per month are onerous. If warehousing space is not cleared, there could be serious constraints of storage capacity for the harvested crop that will be procured next season.

So, the outlook for wheat is marked by uncertainties.

The writer is a global agribusiness and commodities market specialist

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