February 2, 2009

 

India's decision to raise wheat procurement prices will be popular ahead of national elections, but it has dashed the country's hopes of returning to the export market despite the likelihood of a bumper crop.

 

With domestic prices already above international levels, a further hike in prices during the next harvest will make it impossible for exporters to procure wheat at competitive prices, traders and analysts said Friday (January 30).

 

The government late Wednesday raised the minimum support price for wheat - the guaranteed price at which the state will buy the grain from farmers - to INR1,080 (US$22.05) per 100 kilograms, up from INR1,000/100 kg last year.

 

That would work out to a farm gate price of US$220.50/tonne, while Pakistan last month bought food grade wheat at a landed price of US$213.5/tonne. With such a large difference, it would be impossible for Indian exporters to penetrate the global market if they buy wheat from farmers at the newly set prices.

 

The rise in the support price would mean Indian farmers will be reluctant to sell at prices lower than that, while traders would be unwilling to buy at those prices for exports.

 

"Last year, the minimum support price was raised to align local prices with global prices. Now, international prices have come down by about 40 percent from last year's levels," said Vinod Kapoor, a producer of wheat flour and past chairman of Wheat Products Promotion Society of India.

 

"The country needs a consistent policy on wheat trade, wherein the interest of the farmer as well as that of global trade is taken care of," Kapoor said.

 

Wheat exports are currently banned but with the likelihood of a good crop for the second year in a row, exporters are expecting the restrictions to be lifted by April.

 

Exports are usually allowed if the country has an opening stock of 4 million tonnes on April1, the start of the new marketing year. Industry analysts expect opening stocks to hit 7-8 million tonnes this year.

 

Some analysts say the failure to export wheat in the next marketing year starting April will result in a glut in the domestic market, potentially resulting in downward pressure on domestic prices in the longer term.

 

"There could be a glut, depending on how the final wheat output turns out," said M.K.Dattaraj, president of Roller Flour Millers Federation of India.

 

The country, which produced 78.4 million tonnes of wheat last year, is expected to produce a similar crop this year. India's wheat crop is sown around early November and is harvested from March.

 

A higher support price at a time when global prices are lower than last year could result in a 10 percent jump in government procurement this year, traders said. The government bought 22.6 million tonnes of wheat last year.

 

If the state ends up buying around 25 million tonnes of wheat from farmers during the next harvest, the revision in prices could cost the government an additional INR20 billion.

 

The government buys wheat to maintain its strategic reserves as well as to distribute the grain to poor consumers at subsidized prices through its public distribution system.