Written by Shweta Saini and Siraj Hussain
On 13 May 2022, the Commerce Ministry’s order to ban wheat exports altogether came as a surprise to most observers, although there were indications that the Center was already discouraging exports by restricting rail traffic from wheat-surplus states to ports; However, senior officials still stated that exports would continue. This has reassured traders and farmers that a complete ban is not expected in the next 2-3 months. Many traders seem to have been persuaded to enter into agreements with exporters for the supply of wheat, but the sudden embargo could result in some losses.
However, trade still does not have to lose faith. India has been meeting the food security needs of its neighbors, especially Bangladesh, by exporting large quantities of wheat and rice. We think that these exports will continue this year as well. Indeed, India can also help meet Sri Lanka’s partial food needs. Exports to some African and Asian countries have been forecast on a diplomatic basis. It is unknown at this time what he will do after leaving the post. According to media reports, it appears that about 4.5 million metric tons (MMT) of wheat has already been contracted for export in FY23, of which about one-third have already been exported in April 2022. We believe that with its latest move, the Center will be able to limit the total wheat exports which, according to our assessment, are likely to reach around 10 mmt this year.
A day after the export ban was imposed, wholesale prices of wheat fell in all major markets except Punjab, Rajasthan and UP. On May 14, 2022, the highest one-day decline was observed in Mandi, Madhya Pradesh, where the price of wheat fell by about Rs 94 / quintal (from Rs 13,133 on May 13 to Rs 2,039 / quintal on May 14). Even in Haryana the price has come down to around Rs 53 / quintal. Interestingly, the price has gone up by Rs 31 / quintal in Rajasthan.
Despite this price restraint, we anticipate that wheat inflation may continue this year, mainly due to a smaller domestic crop and lower global supply of wheat. Compared to last year’s expectation of about 109.6 millimeters and this year about 111.3 millimeters, the crop may be less than 100 millimeters. On April 1, 2022, FCI’s wheat reserves were about 18.9 millimeters. India needs about 106.5 mmt per year (99 mmt wheat consumption and 7.5 mmt to meet buffer stock norms). With tight internal supply, prices will inevitably remain high this year. According to April 2022 CPI data, wheat inflation was around 9.6%. Globally, among other things, two events are shrinking wheat supplies – the Ukraine crisis, which has shrunk by about 28% of global exports, and low wheat crop forecasts in the coming months. Globally, wheat is expected to enter the market from the United States in June, the EU in July, Russia and Ukraine, Canada in August, and Australia in late October.
Due to high temperatures and dry conditions, wheat crops in the EU and spring wheat sowing in the United States are understood to have been affected. Argentina’s crops have already been damaged by the dry weather. Russia’s bumper wheat crop could enter the market by July, giving it some leeway. However, expectations of a deficit supply have already been created in the global wheat market. On the front, along with the wheat market, the center will do well by focusing on the upcoming kharif season. Although the IMD has forecast a normal monsoon, the threat of an oblique geographical spread and the possibility of a long dry spell seem real.
Also, any serious shortage of fertilizer availability could adversely affect cotton, paddy, soybean and tur kharif crops. The center should be revisited and the contingency plan updated and prepared for the best possible use of the monsoon. Millions of water tanks have been dug in villages across India. They need to be dirty and prepared to conserve rainwater. In addition, the Center should aggressively encourage the adoption of drought-tolerant crop varieties, at least in drought-prone areas.
Besides, a lesson is noticeable for states like Punjab and Haryana. In the accompanying graphic, we can see that wheat farmers in all the states except Punjab (and Haryana, to some extent) have benefited from the rising price rally (till May 14, 2022). It turns out that high transaction costs (about 8.5%) in Punjab have prevented private businesses from purchasing, with prices slightly higher than MSP but lowest among other states. States can learn from Madhya Pradesh, and possibly moderate transaction costs, so that their farmers can benefit from creating price dynamics.
The author is with Arcas Policy Research