Dampen food prices to stop inflation spreading across crops goi’s wheat stockpile must be mobilised firmly

Dampen food prices to stop inflation spreading across crops goi’s wheat stockpile must be mobilised firmly

Wheat, the world’s most important source of food calories, is currently the focal point of anxiety about food inflation. The World Bank’s Commodity Markets Outlook has forecast that wheat prices this year will increase over 40%, hitting a record high in nominal terms. India, despite its large stockpile of wheat, has already begun to feel the effect. GoI expects to procure about 19.5 million tonnes of wheat in the ongoing exercise, less than half of what was initially forecast. This dip in procurement is disproportionately large, as wheat production is expected to fall only 6% in relation to last year.

Global wheat prices are surging on the heels of drought in parts of North America and the Russia-Ukraine conflict. After a few years where India’s market prices were largely in line with GoI’s MSP, or lower, the trend has reversed. Procurement has dropped because traders are offering farmers rates higher than MSP in anticipation of wheat prices rising in the future. GoI in turn is preparing for the season ahead by calibrating the release of its wheat stock. The first step has been to switch to extra rice in place of wheat, in its cereal allocation to 11 states.

The risk going forward is that the wheat price trend will spill over to other crops. This can happen on account of input substitution – because fertiliser, land etc to an extent can be used across crops. Input substitutability in agriculture often results in co-movement of prices in some commodities such as edible oil as farmers switch in response to price signals. The next sowing season for wheat will begin around November when market price is expected to be high. It could nudge farmers to reallocate land from other crops to wheat, which will put upward pressure on the price of those crops.

Area allocated to wheat has been around 30-32 million hectares in the last few years, representing about 56% of the area under food grains in the rabi season. The other key crops in terms of land allocation are gram and coarse cereals. Given the dominance of wheat in the rabi land use, even small shifts can have a big price effect on other crops. India has a sizeable international trade in agricultural commodities. Therefore, domestic prices in November will also be influenced through the trade channel. Against this backdrop, a well-judged release of GoI’s wheat stockpile must play an important role in dampening food inflation this year.