The Hindu Business Line : Lower wheat crop to spark price spike

Contrary to initial claims of a large crop of 74 million tonnes, the Agriculture Ministry's second estimate is lower at 72.5 million tonnes. One should not be surprised if the final outturn of crop is even lower.

The Union Government's crop estimates have a tendency to be overstated initially and pared down subsequently.

Even if we do eventually harvest 72.5 million tonnes as currently estimated, it would only be a slight improvement over last year's 69.5 million tonne and totally inadequate to meet the country's requirement.

May affect FCI Buying

Lower crop size would also mean higher prices - driven partly by rampant speculation - which in turn would affect Food Corporation of India's procurement.

Minimum support price of Rs 750 a quintal (up by Rs 100 from last season) would mean the opening price for the ensuing season would be not less than Rs 850 a quintal, inclusive of taxes and various levies.

Despite higher assured price, farmers may not be enthusiastic to offer to the Government.

If the experience of the last season is any guide, private trade would surely pitch in to procure at prices higher than Rs 850 a quintal, primarily to build inventory and also profit from an imminent price rise in the months to come.

On current reckoning, FCI is going to find it rather difficult to procure say even a modest quantity of 12 million tonnes.

Rub-off

Bullishness in wheat prices could surely rub-off on other grains too. Supplies of coarse cereals and pulses are in any case tightening.

Lower crop size and threat of lower procurement would combine with speculation to push prices higher. Wheat prices breaching Rs 1,200 a quintal towards the last quarter of the year cannot be ruled out.

The Government would be forced to import wheat this year too. Duty-free imports valid till February 28 will have to be extended almost indefinitely. Import of anything less than 5 million tonne will cause domestic price escalation.

Clearly, a serious `political risk' is developing for the grains market.

Going by recent experience, there would be knee-jerk reactions from government to which the grains market should get used to.

Outlook for world wheat production for 2007 is favourable on current reckoning, with a 3.5 per cent projected expansion in area planted.

Favourable outlook

Production would be in excess of 600 million tonne (589 million tonne).

However, stocks are rather low. Winter crop in Europe and CIS may be vulnerable to damage.

With Indian crop conditions and import dependence becoming increasingly clear, world wheat prices are unlikely to retreat.

Imported wheat would land here at not less than Rs 11,500 a tonne. Overseas suppliers are waiting eagerly.

India could pay a heavy price - both within the country and outside - for its failure to address agriculture related issues.