In Commodity News 03/02/2016
Despite weather concerns surrounding India’s current wheat crop, history suggests that India’s food security relies mainly on policy.
The potential for a wheat shortage in India this year may invoke memories of the 2006/07 marketing year during which India imported nearly 7 million tonnes of wheat, the largest volume since 1975/76.
While the market has flagged the South Asian country as a potential catalyst to boost global wheat demand this year, present Indian wheat crop losses are perhaps more closely linked to unfavorable weather in back-to-back seasons rather than government policy.
However, it is vital to understand how legislation led to the depletion of wheat stocks in the mid-2000s because policy has been instrumental in shaping India’s food security for well over 200 years. It is only a matter of time before policy comes into play again.
INDIA’S PATH TO THE 2006 SHORTAGE
In the late 1990s, production began to outpace consumption and wheat stocks were driven to record-high levels by 2001. By mid 2002, government-owned Food Corporation of India (FCI) held almost three times the required minimum amount of wheat in storage.
Perhaps recognizing both the massive inventory and its potential profitability, the government substantially subsidized exports between 2000 and 2004, resulting in a huge spike in exports. At the same time, another large quantity of wheat was sold to domestic traders, also at a subsidy.
Also at the beginning of the decade, farmers were encouraged by the government to plant less wheat and rice in favor of oilseed and vegetable crops, citing both the higher export value than grains and the growing grain stockpile.
The farmers were also incentivized to plant less wheat due to the relative stagnation in the Minimum Support Price (MSP). As a result, harvested area of both wheat and rice was suppressed in the early 2000s.
Stocks were drawn down even further by a sharp reduction in procurement by FCI. During 2000/01, FCI procured nearly 30 percent of India’s wheat crop, but this number dropped to 13 percent by 2005/06.
The huge push to engage deeper in international trade, the reduced production efforts by farmers, and the decrease in FCI procurement resulted in a wheat stockpile of just 2 million tonnes by March 2006, roughly half the amount of the desired buffer. This was the smallest volume of wheat in storage since 1964.
Although India’s 2004 through 2006 wheat harvests faced some weather hardships resulting in disappointing yields, the production loss is nowhere near the magnitude of the loss in stocks and therefore would not explain the surge in imports.
Stocks were ultimately restored to levels far above the desired buffer in the following years with an increase in the MSP, a better string of harvests, and a boost in government purchases.
PRESENT RISKS
The Minimum Support Price is probably the biggest threat to the overall health of the India’s wheat market.
By nature, the MSP does not allow the domestic market to self-regulate, particularly in relation to world markets, and the global wheat supply picture becomes distorted.
In comparing the India wheat MSP with the price of global wheat futures, the disparity is crystal-clear: domestic prices are drastically higher, and domestic producers and consumers suffer the most as a result.
One good example of the distortion caused by MSPs is Chinese corn, where massive stockpiles have artificially padded global supply in recent years. Similar to India, domestic prices are nearly unaffordable compared with the international market
However, China has recently responded to this by first cutting the MSP in September 2015, and then announcing late last month possible plans to eliminate the MSP.
China perhaps concluded that it may be better for the market to determine the price. India may not be too far behind, given the similarities between the two countries’ self-sustainability goals.
If India were to eventually eliminate the MSP, and if the move came while global wheat prices were still relatively low, it could initially make wheat unprofitable for Indian farmers. This would surely create demand on the international market.
That demand could be massive, as India’s 1.3 billion people rely on cereal grains such as wheat and rice for more than half of their daily calories.
