Why wheat prices have shot up despite India’s huge reserves

Context: One side effect of Russia attacking Ukraine has been a rise in global wheat prices. Wheat importers are struggling.

Significance of wheat

The consumer price index (CPI), which measures retail inflation, has two entries for wheat, wheat/atta-PDS (public distribution system) and wheat/atta-other sources.

This takes into account the wheat sold both through the PDS and in the open market.

The wheat entry for ‘other sources’ has a weightage of 2.56% in the index, implying that wheat is a significant part of the overall consumption basket of an average Indian.

Is there a shortage of wheat in India?

No.

As of 1 April, total wheat stocks in FCI’s central pool stood at 19 million tonnes. This is far more than the required operational and strategic stocks of around 7.5 million tonnes.

Also, in May-June, as Food Corporation of India (FCI) buys rabi harvests that will start reaching wholesale mandis, its wheat stocks will grow.

Hence, there doesn’t seem to be any shortage of wheat, as per FCI data.

So, why have the wheat prices gone up?

Free foodgrains scheme: Union government in the aftermath of the covid pandemic has been running a 5kg per month free foodgrains scheme. This explains why FCI wheat stocks are down, even though they are more than what is officially required.

No selling of FCI stocks in open market: Further, typically when wheat (or rice) prices start going up, the government sells FCI stocks in the open market to cool down prices. That hasn’t happened this year, primarily because of the free foodgrains scheme. Nonetheless, FCI has enough stocks to do both, and this is something that the government should be looking to do soon.

Export of wheat: The total amount of wheat exported from April 2021 to February 2022 during fiscal year 2021-22, stood at around 6.7 million tonnes. This is more or less similar to the total amount of wheat exported from 2014-15 to 2020-21, a 7-year span.

– Impact of the Russia-Ukraine war: The majority of the wheat export was done during October 2021 – Feb 2022 period. This means that countries which do not produce enough wheat began to stock up once the chances of Russia attacking Ukraine went up.

• Moreover, Russia and Ukraine are the world’s largest and fifth-largest exporters of wheat and this supply has been negatively impacted due to their conflict.
• Also, Russia is the world’s largest exporter of fertilizer. And fertilizer prices have risen by more than 40% since January-end. This will further feed into foodgrain inflation in particular and food inflation in general.

– Import of wheat by Egypt: Recently, Egypt, the world’s largest importer of wheat, announced that it had decided to import wheat from India. This has led to private wheat traders stocking up on wheat from the open market, pushing up prices.

Fall in production in India: India’s wheat production from the rabi crop is likely to be around 10% lower. Multiple reasons are being offered for this fall in output, including unseasonal rains, recent high temperatures, a shift in cropping pattern away from wheat, among others.

What is the way forward?

International wheat prices are unlikely to fall so long as the war in Ukraine continues.

Hence, to cool prices down of this dietary staple, the Indian government needs to release some wheat from FCI stocks into the open market.

Also, any export commitments must be carefully worked out to ensure that it doesn’t end up creating a wheat shortage in the country.

Source: This post is based on the article “Why wheat prices have shot up despite India’s huge reserves” published in Livemint on 20th Apr 22.