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The oncoming wheat crisis
Apart from the problems associated with the recent weather patterns, the larger problem is the declining proportion of the crop that public agencies buy.

The latest estimate of wheat production in the country is around 72 million tonnes. Wheat output in India, the world’s second largest producer, stood at 69.4 million tonnes last year — down from an expected quantity of 73-74 million tonnes. The government’s optimism is buttressed by the substantial rise in wheat acreage in the rabi season obviously encouraged by the higher prices for the commodity. However, there is a view that despite a seven percent increase in the area under wheat diverted mostly from groundnut, yields are likely to come down due to the recent aberrations in weather.

Procurement and Stocks

The estimated proportion of public procurement of wheat as a percentage of production has declined in recent years. After rising from 21.4 per cent in the crop year 1999-2000 to 29.6 per cent in 2000-01 it declined to 26.2 per cent, 24.0 per cent, 23,3 per cent, and 20.6 per cent between 2001-02 to 2004-05 ending at 13.3 per cent in 2005-06. April-May are the two crucial months for wheat procurement by the government agencies as the crop arrivals will stop after the onset of the monsoon in June. In 2006 the procurement was 9.22 million tonnes against 14.79 million tonnes in the previous year. In fact the bulk of the procurement at 8.7 million tonnes was done in April. In May it trickled down to 0.5 million tonne.

Wheat stocks are reported to have come down to 6.2 million tonnes by February 1, 2007. Though they were higher than the level of 4.8 million tonnes a year back they were still below the norm of 8.2 million tonnes. By the end of March the stocks with government would be considerably down, especially after the recent release of 3.65 lakh tonnes for open market sale to consumers besides distribution through the public distribution system and kind payments in welfare-related schemes.

Till February 12 the State Trading Corporation imported 4.99 million tonnes of wheat. The rest of the 5.57 lakh tonnes is expected to be imported before the end of March. Will the government be able to move the imported grain expeditiously to nearly half-a-million ration shops? The government claims that it will have around 4 million tonnes in buffer stock on April 1. The date makes the claim all the more suspicious! It is a hand-to-mouth situation. Private trade doesn’t seem enthusiastic about duty-free imports as the international market prices are not to its liking. Thus a severe crunch in government stocks will be faced in April. Procurement starts in that month and it would take several days for those stocks to reach the public distribution system. There were reports to the effect that the government has advised the corporate sector to keep away from the market in order to help the Food Corporation of India in its procurement. However, a spokesman of a private sector firm which made nearly half a million tonne of procurement in the last season has contradicted this report and says it will need to procure wheat locally for making atta, popular with consumers, as the imported wheat is good only for making biscuits. In any case, the government cannot impose any restraint on the private sector purchases as it will be treated as anti-farmer. And it is election time in UP—a wheat-growing state.

The price of Rs 850 per quintal, offered by the government, is not attractive to the farmer since the market price is hovering around Rs 1000-1100. Additional imports may solve the problem to some extent in the latter part of the year but the crunch will be faced in a couple of months. The international environment is not favourable either. According to an FAO report, the foodgrain scenario in 2007 is likely to be marked by tightness in supplies and prices. At the current forecast level, the world stocks-to-use ratio is likely to hit a historical low of just over 19 per cent.

Norms of Buffer Stock

The buffer stock norms themselves need to be looked into afresh taking into account the changes in the economy since they were fixed. The secular rise in the consumption of wheat in the traditionally rice-and-millet-eating areas needs to be reckoned with. The entry of multinationals in agricultural processing for the preparation of breakfast and other ready-made cereal foods is another important factor. Thanks to increased incomes and both husband and wife working in most households, particularly in big cities, such convenience foods are consumed on a large scale despite high prices. In fact the difficulty in public procurement of wheat last year was attributed to the multinationals, besides traders, paying higher prices than the government and mopping up the available surplus.

The rise in population is, of course, another factor that is generally taken into account. Further, the income elasticity of demand for wheat is high as seen from the replacement of coarse cereals by wheat in the food habits of poor families in many areas. The real income per capita is reported to have gone up by 7 per cent last year. Certainly it would have contributed to a substantial growth in the demand for wheat.

Immediate Steps

The immediate issue is coping with shortages in the coming two months and the consequent price rise. Today, thanks to the communication revolution, farmers and traders are well informed from hour to hour on prices in important mandis and can form their own judgements on the basis of the available data on production and buffer stocks. A study made by this writer while working in the RBI showed that the proportion of total market arrivals in the early days after harvest showed a declining trend over the years since the 1970s. This is because the average wheat farmer in Punjab and Haryana, the two states contributing to the bulk of wheat procurement, has the economic clout to hold the produce for a better market either with his own funds or borrowings from institutional agencies, which carry much lower rates of interest than those from moneylenders. Big farmers are traders too.

Some state governments have already put in place stocking norms for traders but they need to be augmented by the administration by undertaking rigorous inspections to check on compliance in order to bring out the hoarded stocks and increase supplies. The RBI needs to revive credit control on wheat advances under the Banking Regulation Act so that bank funds are not available for violating the government order. The control may be simple and may operate on the basis of a stiff minimum margin only, without invoking the level of credit and minimum interest rate stipulations of the past. Incidentally, the action will have a favourable cosmetic spin-off assuring the public that the central bank continues to do something about inflation.
MGR Archive 1.4.2007
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