RAMESH CHAND

I

has turned the wheat market out of control of the government for the first time after the late 1960s when the government started playing an active and dominant role in foodgrain management. Even wheat import of much larger magnitude than the shortfall in production failed to ease the pressure on wheat supply and prices.

India is going to have a normal harvest of wheat this year but there are no signs of wheat prices falling to the usual low level of post harvest weeks. This raises several questions related to wheat supply, prices and procurement, role of private and public agencies, and above all, food security. Why are wheat prices not returning to their normal level? What is the gap between production and requirement? What are the options available for to stabilising wheat prices and procuring wheat for the PDS and other requirements? Are wheat prices pointing to a larger and impending food crisis in the country? This paper examines and addresses some of the above and related issues.

Demand and Supply

Demand for wheat consists of food demand and demand for non-food uses like feed, industry, seed, etc. Further, wheat as food is consumed in various forms like atta, maida, suzi, rawa, sewai, noodles, bread, bakery, etc. The quantity of wheat consumed in such uses at the household level is available from National Sample Survey Organisation (NSSO) data on consumer expenditure. NSSO data do not include wheat content of meals taken outside home at own cost or at public cost. However, it is a fact that demand for the latter is increasing at a fast rate. NSSO data on wheat consumption shows that per capita consumption of wheat has declined slightly during the last two decades in both rural as well as urban areas (Table 1). The per capita consumption is about 7 per cent higher in urban areas. Overall consumption of wheat in the country was 55.3 kg during 1983 and is reported to be 53.4 kg during 2004-05. Though the long-term trend in per capita consumption of wheat shows an annual decline of 0.16 per cent, this may not be true if meals taken outside home are taken into account.

Another indication of the trend in wheat demand is available from official statistics on per capita net availability, which is computed by setting aside fixed proportion of production (12.5 per cent) for seed, wastage and other uses and adjusted for net trade and change in stock. Trend in per capita availability, which can also be considered as demand, is presented in Figure 1. Per capita availability sees a rising trend except during four years – 1998-99 to 2001-02 – when an excessive rise given to MSP and a resulting increase in PDS and open market prices forced consumers to cut down consumption, which lead to an adverse impact on nutrition [Chand 2005; Chand and Kumar 2006]. This trend shows that overall per capita demand for wheat increased in the country during 1983-84 to 1989-90 and thereafter, presents a mixed picture with cyclical fluctuations largely determined by prices and availability.

Based on the above evidence, it can be safely inferred that per capita demand for wheat as food has been rising at a rate slightly lower than the population growth

Table 1: Trend in Wheat Consumption asFood at Household Level

Sources:(a) NSSO reports, various rounds, ministry of statistics and programme implementation, GoI, New Delhi.

Economic and Political Weekly May 12, 2007 rate, if food taken outside home and demand for wheat in other uses are not considered. When total demand is considered, there is no evidence of decline in per capita demand. This implies that domestic production must increase at least as fast as population growth to keep pace with growth in aggregate demand.

On the supply side, wheat production reached a peak level of 76 mt during the agricultural year 1999-2000 and after that, hovered around 70 mt. On a per capita basis, wheat production started declining around the triennium ending (TE) 2000-01, and the downward trendes seen to continue until TE 2007-081 (Figure 2).

Wheat production started falling short of growth in demand around the year 200102 but its impact could not be felt as a large stock of wheat was available with public agencies to augment domestic supply. As shown in Table 2, the buffer stock of wheat between April 1, 2002 and April 1, 2003 declined by more than 10 mt. Excluding export, there was a net addition of 6.73 mt in the domestic supply of wheat from stock. Similarly, domestic production was augmented to the tune of 4.6 mt during 2003-04, 0.9 mt during 2004-05 and 1.24 mt during 2005-06. Because of replenishment of production by drawing on the stock, shortage of wheat could not be felt for a couple of years. The level of the buffer stock reached a very low level –2.0 mt, on April 1, 2006.

The information on production, trade and stocks can be further used to arrive at some estimates of normal requirement of wheat in the country to meet domestic demand. As there was no abrupt increase in price of wheat during 2003-04 and 200506, wheat supply in these years (i e, production adjusted for net trade and change in stock) can be treated as normal demand. This comes to 70.37, 73.05 and 69.85 mt during these years with an average of 71.09 mt (Table 3). With a population growth rate of 1.50 per cent, as reported by the registrar general, census of India, the normal demand during the financial year 2006-07 works out to be 73.2 mt as against production of 69.5 mt. As the level of buffer stock had reached a dangerously low level on April 1, 2006, about 2.5 mt wheat is reported to be added to the stock till April 1, 2007. This leaves a shortage of 6.3 mt to meet normal demand. A large part of this shortage has been met by imports, which are reported to be 5.5 mt during the year. After taking into account import, the shortage comes to 0.8 mt which is just 1 per cent of normal demand.

Compared to the magnitude of shortfall in supply, increase in wheat prices during 2006-07 was quite substantial (Table 4). During 2006-07 wheat prices were 13 per cent higher compared to the year 2005-06 whereas the general price index showed only a 5.4 per cent increase. In real terms, wheat prices showed 7.2 per cent increase during 2006-07 over 2005-06 whereas real prices during previous five years showed a decline. Similarly, wheat prices between April 2006 and March 2007

Economic and Political Weekly May 12, 2007

Figure 1: Per Capita Net Availability of Wheat Figure 2: Per Capita Production of Wheat

74

70.0

72

1983-84

65.0

1986-87

1989-90

1992-93

1995-96

1998-99

2001-02

2004-05 Quantity (kg)

70

68 66

Kg/person/year

64

62

45.0

60 5840.0

35.0

1993-941995-961997-981999-20002001-022003-042005-062007-08

TE Financial Year

Triennium ending

Source: Department of agriculture and cooperation, ministry of Source: Agricultural Statistics at a Glance, ministry of agriculture, GoI, New Delhi. agriculture, GoI, New Delhi.

showed a 20.7 per cent trend growth rate on an annual basis which is the highest since 2000.

The issue of interest here is why wheat prices showed such a abnormal increase during 2006-07. How much of this increase in wheat prices can be explained by the shortfall in supply, which was just 1 per cent? Some clue to this can be found from the price elasticity of wheat. There is a wide variation in elasticities reported by various studies but the most acceptable estimates vary around -0.50 [Radhakrishna and Ravi 1992]. This level of price elasticity implies that the impact of a 1 per cent shortfall in supply on price would be around 2 per cent. As can be observed from Table 4, the increase in wheat prices has been much larger than this, which needs further explanation.

Reasons for Sharp Increase

The slowdown in production of wheat was first reflected in prices during the year 2005-06 when wheat prices in monthly data showed a trend growth rate of 17 per cent on an annual basis between April and the following March. Official circles did not pay much attention to this as until then, wheat production during 2006 was expected to be around 72 mt. However, the futures market started giving signals of a price rise in the following months and the private sector was quick to notice that. It became clear towards the end of April 2006 that India is going to face a shortage of wheat, and by then market prices had become much higher than the MSP in the wheat surplus regions. Large private companies such as Cargill, ITC, Hindustan Lever, and several medium sized players actively participated in wheat procurement and little wheat was available for official agencies at the MSP. The government then raised procurement price by Rs 50/quintal but it was too late to attract farmers to sell wheat at that price. Thus, government agencies could procure only 9.2 mt as against a target of 15 mt. This did not leave enough stock with the government to put a check on the sharp increase in wheat prices in the subsequent months. This caused hardship to consumers while the private sector harvested rich dividends. Farmers with marketable surplus also benefited from this price rise to some extent.

Coming back to the issue of prices, the very sharp increase in wheat prices during 2006-07 is ascribed to a couple of factors. One, it is suspected that actual production during 2006 was much lower than the reported production of 69.5 mt. It is very difficult to ascertain the accuracy of production estimates but the need to improve the reliability of agriculture statistics is being felt increasingly. Two, the high level of international prices and their transmission to domestic prices is another reason for the high rate of increase in wheat prices in India. International wheat prices in dollars during the year 2006 were 17 to 26 per cent higher compared to 2005. This made import costlier and has been a factor driving the increase in domestic prices. Three, imports came quite late, when prices had already risen very high. Till January 2007, only 1.2 mt of imports reached the country and the remaining 4.3 mt were imported towards the end of the financial year. Four, the entry of the private sector in wheat trade seems to have somewhat aggravated the increase in wheat prices as the private sector tactfully released supply to take advantage of the increase in prices.

Outlook for 2007-08

Weather has been favourable for wheat during 2006-07 and wheat production this year is expected to cross 73.50 mt. This level of production is only slightly lower than the normal level of demand estimated at 74.32 mt during the year 2007-08. However, the shortfall of similar magnitude created a large increase in prices last year. The main reason was that the government did not have enough stock with it to stabilise prices and to counter market sentiments created by the private sector. The import reached late and slowly and in relatively small consignments to put strong pressure on domestic prices.

The inflation fuelled by the sharp rise in wheat prices during 2006-07 made the government more cautious about procuring an adequate quantity of wheat during 2007. To achieve this, the government first raised the MSP recommended by Commission for Agricultural Costs and Prices by Rs 50/ quintal and then declared a bonus of Rs 100 over that. This way, procurement price of wheat for 2007 is Rs 850/quintal. This price is close to the international price of good quality wheat and is higher than medium and low quality wheat. Still, there is a worry and anxiety about official agencies meeting the targeted procurement of 15 mt.

Wheat started arriving in the markets in surplus states in the first week of April and market arrival this year in first three weeks of April has been lower than in the corresponding period last year (Table 5). In Punjab and Haryana, which are the major contributors to the central pool of wheat,

Economic and Political Weekly May 12, 2007 remaining target of 40 lakh tonnes. So far, UP is a puzzle for the official agencies as prices in several markets are quoted lower than the MSP but produce is not available to official agencies. In western UP, in most of the markets, prices are sticking to the level of the MSP. This indicates a scope to procure wheat by official agencies. With all said and done, the signal from the market is that actual procurement this year would definitely be higher than last year but it may not be large enough to meet the procurement target of 15 million tonnes. Further, as shown in Table 3, there is a deficiency to the extent of 0.8 mt. Thus, there is a need to plan for wheat import right now.

The group of ministers have already recommended to the central government to import up to 5 mt during the year 2007-08. The central government has already floated a tender for import of 10 lakh tonnes of wheat. International prices of wheat in dollars during January to March 2007 were 14-19 per cent higher than previous year, which indicates pressure on global supply. Our calculation shows that landed price of imported wheat in coastal states, which are deficit in wheat, does not turn out to be more than cost of wheat purchased at present level of MSP from Punjab and Haryana when transport and others cost are added to the MSP. Therefore, any shortfall

Aspect Punjab Haryana

Market arrivals till April 23 2006 57.0 25.5 2007 47.6 22.2

Market arrival whole season 2006 81.0 29.7 Est 2007 90.0 50.0

market arrivals this year, till April 23, were

47.6 and 22.2 lakh tonnes as against 57 and 25 lakh tonnes last year. Procurement by FCI till May 7 was 60 lakh tonnes in Punjab and 27.7 lakh tonnes in Haryana compared to 68.7 and 22.2 lakh tonnes last year. In the other states, official agencies are able to procure a large proportion in the northern parts of Rajasthan adjoining Punjab and Haryana but the level of public procurement is awfully low in Uttar Pradesh (12,000 tonnes) and merely one thousand tonnes in Madhya Pradesh as the private sector is buying almost all market arrivals.

The main reasons for lower procurement during April this year are (a) wheat harvest this year was extended; and (b) due to the very high price of chaffed wheat straw during the last four months, farmers prefer manual harvest rather than harvest through the Harvester Combine. This has delayed arrival in the market.

Total procurement in the country by the first week of May was 9 mt, which is close to total procurement over the same period last year.

Market trends available so far indicate that government agencies in Punjab would be able to procure around 70 lakh tonnes. Based on the expectation of last year, farmers, especially large farmers, would like to hold back stock to take advantage of the expected off-season increase in prices. This may lower market arrival in the procurement season, and hence official procurement, by about 10 lakh tonnes. Official procurement in Haryana is likely to cross 30 lakh tonnes. With only a small quantity available from Rajasthan, the hopes are pinned on UP to meet the

Implications for Food Security

The sharp increase in wheat prices witnessed during last year has sensitised the country to the fact that production is not keeping pace with demand. The situation is turning equally bad for other staple food (cereals and pulses). As can be observed from Table 6, per capita production of cereals, on a five-year basis, since 1971, kept increasing till the mid-1990s. The first slowdown occurred during 1996-2000. Per capita production of cereals during the first five years of the 21st century is found to be 7 per cent lower than the last five years of previous century. Pulses, which are major source of protein for the Indian population, particularly for the common man, have showed a decline since 1971. As pulses are not grown widely in other countries, it would turn increasingly difficult to meet domestic demand from the international market.

If these downward trends in cereal and pulse production are not reversed, there could be a serious threat to the food security of our large population. Further, depending on the global market to meet domestic shortfall is likely to become costlier. In the past, warnings about global shortfall in food have been proved wrong and food production has risen faster than the growth in demand. As a result, international prices generally followed downward trend in real terms. This may not happen in future despite low levels of productivity or high potential for growth in large parts of the world, and high sounding promises of biotechnology. The reasons are (a) global warming and climatic change are throwing formidable challenges to counter their adverse effects on food production; (b) a part of output and area under cereal crops is likely to be diverted to biofuel production; and (c) natural resource base for agricultural production is degrading and stress on natural resources, particularly water, is increasing. All these factors underscore the need to pay adequate attention to wheat and other staple food crops to ensure that their production grows at least at the rate of 2 per cent per annum. If this does not happen, the basic food security of the country would be under threat.

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Email: rc@ncap.res.in

(iii) The last date for sending the full paper is 15th July 2007.

The Coordinator SCODER: Urbanisation Indira Gandhi Institute of Development Research Goregaon (E), Mumbai 400 065, INDIA Tel: 022-28401337; Fax: 022 - 2841 6399 Email: scoder_urbanisation@igidr.ac.in URL: www.igidr.ac.in

Economic and Political Weekly May 12, 2007