Against the grain: Farmers may still be able to export some wheat

The May 13, 2022, order of the ministry of commerce to completely ban wheat exports came as a surprise to most observers, even though indications were available that the Centre was already discouraging exports by restricting the rail movement to ports from wheat-surplus states; however, senior functionaries were still giving statements that exports would continue. This assured the trade and farmers that a complete ban is not to be expected in the next 2-3 months. It seems to have persuaded many traders to enter into contracts with exporters for supplying wheat, but with the sudden ban, some of them may have to book losses.

However, trade should not lose faith yet. India has been meeting part of its neighbours’ food security requirements, especially Bangladesh, by exporting wheat and rice in large quantities. We think these exports will continue this year too. In fact, India is also likely to come to the help of Sri Lanka in partially meeting its food requirements. Exports to some African and Asian countries on a diplomatic basis are also predicted. Once allowed, it is not yet known if the government will allow the exports via its state trading enterprises as in the past, or allow private traders to export to honour the commitments. As per media reports, it seems that about 4.5 million metric tons (mmt) of wheat has already been contracted for export in FY23, out of which about a third has already been exported in April 2022. We think that through its recent move, the Centre will be able to restrict total wheat exports which, as per our assessment, are still likely to reach about 10 mmt this year.

A day after the export ban was notified, wholesale prices of wheat in all major markets, barring Punjab, Rajasthan, and UP, fell. On May 14, 2022, the highest one-day fall was observed in Madhya Pradesh mandis, where wheat prices fell by about Rs 94/quintal (from Rs 2,133 on May 13 to Rs 2,039/quintal on May 14). Even prices in Haryana fell by about Rs 53/quintal. Interestingly, prices in Rajasthan rose by Rs 31/quintal.

Despite this moderation in prices, we assess that wheat inflation is likely to continue this year mainly on account of, among other things, a smaller domestic crop and lower global supplies of wheat. Compared to about 109.6 mmt last year and an expectation of about 111.3 mmt this year, the crop may well be lower than 100 mmt. FCI’s wheat stocks on April 1, 2022, were about 18.9 mmt. India requires about 106.5 mmt (99 mmt of wheat consumption and 7.5 mmt for meeting buffer stock norms) annually. With tight domestic supplies, prices would inevitably stay high this year. As per April 2022 CPI data, wheat inflation was about 9.6%. Globally, inter alia, two phenomena are shrinking wheat supplies—the Ukraine crisis, which has shrunk about 28% of global exports, and the prediction of lower wheat crops in the coming months. Globally, wheat crop is likely to come to the market from the US in June, the EU, Russia and Ukraine in July, 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 US are understood to have suffered. Argentina’s crop has already suffered due to dry weather. There could be some respite if Russia’s bumper wheat crop enters the market by July. However, expectations of deficit supplies are already built into the global wheat markets. Going forward, in addition to the wheat markets, the Centre will do well in focusing on the upcoming kharif season. Even though the IMD has predicted a normal monsoon, threats of a skewed geographic spread, and possibility of long dry spells appear real.

Plus, any serious shortfall in availability of fertilisers may adversely impact the kharif crops of cotton, rice, soybean, and tur. The Centre should revisit and update contingency plans and prepare to make best possible use of the monsoon. Lakhs of water tanks have been dug in villages across India. They need to be desilted and prepared to conserve rainwater. In addition, the Centre has to aggressively encourage adoption of drought-tolerant varieties of crops in at least the drought-prone areas.

On the sidelines, a lesson for states like Punjab and Haryana is noteworthy. In the accompanying graphic, we see that wheat farmers in all other states, barring Punjab (and Haryana, to some extent), benefitted from the rising price rally (till May 14, 2022). It appears that higher transaction costs in Punjab (about 8.5%) prevented private trade from buying in the state, keeping the prices only marginally higher than the MSP but lowest among other states. The state may learn lessons from Madhya Pradesh, and possibly moderate transaction costs, to help their farmers gain from building price dynamics.

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