Indian Wheat imports appear inevitable…

By Peter McMeekin

Wheat prices have jumped sharply across India in recent months as the reality of a harvest much lower than the government's lofty estimate hits home, seriously complicating New Delhi’s efforts to keep a lid on food inflation by ensuring an adequate supply of the diet staple.

While trade rumblings have been suggesting for some time that the government was drastically exaggerating production, the Roller Flour Millers’ Federation is the first to go public. Last week it reportedly pegged this year’s wheat harvest in the 101 to 103 million metric tonne range, based on the sparse supply of wheat in the domestic market. This is around ten per cent lower than the government’s official estimate of a record 112.74MT and much lower than domestic demand of around 108MMT. The problem has been compounded as the government overestimated last year’s harvest and allowed a spate of wheat exports before hastily introducing a trade ban.

The Ministry of Agriculture and Farmers’ Welfare increased its national production estimate from 112.2MMT late last month, despite lower yields from storm damage to crops in several key production regions. In February and March, torrential rain and hailstorms hit India’s northern, central and western plains, damaging the ripening wheat crop.

At the same time, the government was reporting that its wheat procurement program from the 2023 harvest was expected to be around 27MMT, more than 20 per cent short of its pre-harvest target of 34.15MMT. Over the past decade, the government’s procurement program has averaged 31.5MMT per season. Farmers seem to have been holding back their produce, expecting prices to rise after harvest, like last year.

The United States Department of Agriculture got caught up in the Indian government's enthusiastic output prognostications, lifting its production estimate from 110MMT to 113.5MMT in this month’s global supply and demand update. This was up from 104MMT last year, itself at least 10MMT higher than many private local estimates.

Domestic wheat prices reportedly hit 24,900 India Rupees (AUD454) per metric tonne earlier this month, prompting the Indian government to place limits on the quantity of wheat that retailers, wholesalers and processors can hold at any given time in a concerted effort to curb hoarding by “unscrupulous elements” and rein in the price hikes. Food Secretary Sanjeev Chopra said that the limits, the first in 15 years, would stay in place until the commencement of the next wheat harvest in March 2024.

According to the restrictions, each wheat trader can hold stocks equivalent to 3,000 metric tonne at any given point in time. Retailers can hold 10MT, while big-chain retailers can store 10MT for each of their outlets and a maximum of 3,000MT at all their depots combined. Millers and processors are permitted to hold the lesser of 75 per cent of their installed annual capacity or the quantity equivalent to their monthly installed capacity multiplied by the remaining months of the 2023/24 season. Any trader or processor holding more than the notified quantities must reduce them in line with the prescribed stock limits within 30 days. Farmers have been kept outside the purview of the limits.

The government has also announced that it will liquidate 1.5MMT of wheat from state inventories via open market sales operations at 457 depots across the country, commencing on June 28. This wheat will be sold in lots of 10MT and 100MT for IRs2,125 and IRs2150 per quintal (AUD387 and AUD93 per metric tonne), respectively. This compares to the economic cost of wheat from this year’s government procurement program, including freight, storage, carry costs and finance of around IRs 2,700 per quintal (AUD493 per metric tonne). 

Bidding in the e-auctions will be limited to local buyers by ensuring their goods and services tax registration is mapped through the auction process and validated before stocks are released. These measures have been introduced to provide a wider local reach for the stocks offered in a particular state. In order to control the hoarding of wheat, the government has decided that auction participants must hold a current Food Safety and Standards Authority of India licence and agree to make weekly inventory declarations in the government’s Wheat Stock Monitoring System portal. 

However, despite the domestic supply issues, the government has recently approved an export request from Nepal in April to buy 300,000MT of wheat in the 2023/24 season to plug a gap in domestic production. Last month the government ruled out the lifting of the ban on wheat exports introduced in May 2022, but did keep its options open to transactions with landlocked neighbours such as Bhutan and Nepal by saying requests via diplomatic channels and government-to-government deals would be considered on a case-by-case basis.

While the government continues to “confidently” state that stocks will be sufficient to meet domestic demand and imports will not be required in 2023/24, they did leave the import door slightly ajar last week. On Friday, the chairman of the state-run Food Corporation of India, Ashok Meena, stated that the import duty may be cut if required. According to Meena, the government has several options under consideration to tame domestic cereal prices, including a reduction in the wheat import duty of 40 per cent, which has been in force since April 2019.

The government says it currently has wheat reserves of 8.7MMT for market interventions and other purposes after accounting for public distribution requirements and the prescribed government buffer holding. That is not much, considering more than 17 per cent will go in the upcoming e-auctions and the harvest procurement program is not long finished. The government offloaded 3.4MMT of wheat in January to tame prices ahead of this year’s harvest.

While retail inflation appears to be coming under control, save for some key food staples such as wheat, a building El Nino and the possibility of this year’s monsoon playing truant is foremost in the government's mind. With elections lined up in a number of major states over the next six months culminating with the general election in 2024, it seems inevitable that the world's second-biggest producer of wheat will turn importer in the second half of 2023 to keep food inflation in check, appease the general population and ensure economic stability.

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