A Seshan: The oncoming wheat crisis-II

Much like what happened last year, the FCI is unlikely to be able to procure the amount of wheat it needs to.

This article is a sequel to the one published under a similar title a year ago (April 1, 2007). Unfortunately, the emerging scenario of a critical situation arising out of the stagnant production of wheat, unsatisfactory procurement due to hoarding by farmers in anticipation of better prices, and a rising trend in price, portrayed in the write-up, turned out to be true.

A similar situation appears to be developing in the coming year. April 1 officially marks the commencement of the marketing season. The Food Corporation of India (FCI) is reported to be planning a purchase of 15 million tonnes (mt) for the buffer stock. Its target was 15 mt last year too, but the achievement fell short by 4 mt. It claims that it would have 5.3 mt on April 1 against the norm of 4 mt. Considering that the releases from the buffer stocks for various purposes are of the order of 1 mt a month, the total availability of the grain with the FCI (including the norm at the beginning of April 2009), with a procurement of 11 mt, should be just adequate. However, an additional procurement of 4 mt ensures a sense of food security providing a cushion for open market sales when prices harden. The question is whether FCI can achieve its target given the current trends in output, local and global prices, and the general politico-economic situation. Economic decisions are made at the margin. A shortfall in supply, though marginal in magnitude, can have a large impact on prices.

Despite scientific crop-cutting experiments and long experience, the forecasting of output is still not satisfactory. It is difficult to understand the estimates of international agencies and the USDA differing from that of the Indian government. One would have thought that the foreign agencies get their data from the government. Recent press reports provide conflicting outlooks but they all centre around an output of 75 mt, which is more or less the same as last year's.

Incidentally, in the past, in order to arrive at the marketable surplus, there was a convention of deducting 12.5 per cent from the output estimate to account for seed, feed and wastage. This is no longer done. If this still holds good, the available output will be much less than 75 mt, straining the situation more. The marketed surplus would be further lower if farmers' own consumption and stock-keeping are reckoned with. The annual consumption is around 73 mt. Thus the demand-supply position is tight.

There is stagnant supply against rising demand influenced by the growth in population, changing habits of people in rice-eating states taking to wheat and the poorer sections shifting to it from coarse grains, thanks to the rise in incomes. The price is reported to be ruling around Rs 1,120 a quintal in north India. The wholesale price index has recorded a rise of around 5 per cent since April. There is a general tightening of supplies in the world due to the setback to production, partly on account of the weather in many countries and partly due to the substantial switch-over to corn in the US from wheat thanks to the demand for bio-fuels.

The finance minister pointed out recently that the international price of wheat had gone up by 88 per cent over the year. Food prices rose by 4 per cent in the US in 2007, the highest since 1990. As of December, 2007, 37 countries were reported to be facing food crises, and 20 had imposed some sort of price controls. Food riots have been reported in Burkina Faso, Cameroon and Egypt. Controls on exports of wheat have been imposed in Pakistan, Argentina, Ukraine and Russia. World stocks have hit the lowest level in relation to consumption in 25 years. Aggravating the situation further for decision-makers is the general inflationary situation prevailing in the country across sectors and the scheduling of elections in big states during the current year, followed by the one to Parliament next year, at the latest.

The minimum support price (MSP), which also doubles up as the procurement price, is Rs 1,000 per quintal "" Rs 150 more than what was paid last year. It is still below the current market price by Rs 100. It may be recalled that last year too, the price difference between MSP and the market price was around this level and the FCI found it difficult to realise the procurement target.

Pakistani farmers are reported to have demanded an increase in wheat procurement price from Rs 510 to the Rs 1,000 per 40 kg prevailing in international markets; otherwise, they would not sell their produce to government agencies. It is substantially above what the Indian farmer is assured of by the government, ignoring the differences in the cost of production. (One Indian rupee is approximately equal to 1.50 Pakistani rupees.) The farmers on both sides of the border in the Punjab would naturally be influenced by each other's thinking in such matters. The demand by the Indian farmer for higher prices is likely to get a further fillip from the fact that the government had imported wheat in the past by paying higher prices than what it was willing to give to the local farmer.

The main constraint for FCI procurement will be competition from private agencies like ITC and Cargill. The government can't impose restrictions on private parties buying wheat in the market lest it should antagonise farmers in an election year. So, the competition will be on the basis of price only.

The government should adopt a carrot-and-stick approach. Its increase in the purchase price is in the right direction. If it is not able to get a good response from farmers, it can announce a bonus after a month or so, depending on the amount procured. It may not announce it now. Later it will be possible to give the bonus to farmers who have already sold their crops to FCI since the records would be available in the regulated mandis.

There is a report to the effect that India might seek bids for wheat imports, using a call option to hedge against rising prices. A call option gives a buyer the right to purchase a commodity at a specified price within a specific time period. Prices are agreed in advance in return for a non-refundable premium. Thus, what the government foregoes in case it exercises the option and does not buy is the premium which it is worthwhile losing for strategic reasons. It may act as a deterrent to farmer resistance to sell wheat to FCI.

The food subsidy and the fiscal deficit will go up further if any bonus is paid to farmers. But it is a price that the government has to pay in an election year. It has to be incurred even if the grain is imported at high prices. The only difference is that imports will shift the burden to the balance of payments and have a contracting effect on money supply when the grain is sold. On the other hand, local purchases pump money into circulation. Objections to the violation of the legally-prescribed norm for fiscal deficit can be got over by citing the waiver provision in the legislation in case of an emergency!