Time to take stock of wheat
V. SHUNMUGHAM & NAZIR A MOULVI

http://www.thehindubusinessline.com/2008/02/19/stories/2008021950140800.htm
Fluctuating fundamentals, increasing population and rising incomes have led to dwindling of wheat stocks in both India and China. The differences in emerging consumption trends may offset the effect of a probable slide or stagnation in Chinese production, while a decline in Indian output may prove disastrous to the country’s economic planners, say V. SHUNMUGHAM and NAZIR MOULVI

When the costs of basic raw materials rise without a corresponding hike in the consumer’s earning level to make up for the rise, it makes human life costlier. The same seems to be happening in Indian wheat, which is traded in a partially closed market disconnected from global markets in terms of prices but pretty much connected to them in its response to global signals.
Despite the projected higher production this year compared with last year, wheat prices seem to be holding firm on weak stock positions not only in India but also globally. China too faces a similar situation inspite of having a decent stock. However, the Chinese authorities seem to be managing the situation better.

Hence, we explored the Chinese wheat market with the hope that we may get a lesson or two to learn from the policies employed by Chinese food grain managers. We came up with a few pertinent linkages that were missing in the sectoral management of the economy, which deserve the attention of Indian planners and policymakers alike.

With an annual output of 70-75 million tonnes, India ranks second in the world wheat chart with China on top with 90-104 million tonnes as of today. Since 2000-01, population and income levels in India have risen by 1.73 and 11 per cent, respectively, vis-À-vis 0.72 and 16 per cent in China.

This indicates that given the efforts of both the governments to keep the market flat or let it move marginally up, there is a strong probability for a potential build-up in demand in these two world’s most populous nations due to augmented economic growth.

Productivity enhancement
As reported by USDA, in 2006-07, China produced 4.5 tonnes of wheat per hectare, nearly double that of India’s 2.66 tonnes. A study by Huang and Rozelle (1998) concluded that though institutional innovations are important, government investments have contributed the highest to China’s yield growth during 1976-95.

Although India’s public research is committed to developing hybrid varieties of wheat, there has not been significant breakthrough to match the China-like success. Besides, in India, private investment in wheat productivity improvement research has been hampered by lack of adequate protection of private investment interests, commercial feasibility of investment in wheat improvement research, etc.

Consumption patterns
Coupled with the production instability (volatility in India and China at 7.92 and 7.63 per cent, respectively), the constant surge in population has led to unstable per capita wheat availability in both the countries. The same in India and China varied from 64.2 kg to 71.5 kg and 67.0 kg to 79.2 kg, respectively, between 2000-01 and 2006-07. With the current rural demand in China exceeding urban demand, analysts feel that urbanisation would dampen consumption. However, Indian statistics offer an inverse picture.

A comparison of NSSO statistics on rural India’s wheat intake as a percentage of total cereal consumption between 1993-94 and 2003-04 shows that it has been stagnant at 35 per cent during the decade compared with urban India’s gradual rise from 44 to 50 per cent, indicating that as India gets more urbanised, its wheat consumption would rise.

Though our analysis suggests that India needs to spend very little in terms of subsidies to bridge the urban-rural divide in wheat consumption, an increasing burden of low-income urban population makes it sensitive to the government.

Further, the government should focus on measures such as diversification of the urban consumption basket, promotion of healthy alternatives to wheat, reduction of post-harvest losses, increased processing, and scientific storage, which can raise wheat availability.

Tapering procurement
Despite the rising wheat output, both India and China have recently been facing difficulties in procuring the grain to meet their buffer stock norms. In 2007, China procured only 29 million tonnes (against 40-45 million tonnes in earlier years) from 104 million tonnes that was produced.

India procured just about 9.23 million tonnes from 69.35 million tonnes produced in 2005-06, while the average of last five market year procurement quantities was double at 17.41 million tonnes. This trend of falling procurement has sent out a loud message: Farmers in India and China are no longer ill-informed distress sellers.

They have become smarter with increased market awareness and holding power, thanks to the relentless efforts of commodity futures exchanges, in the form of effective price discovery and efficient dissemination of price signals through developments in information and communication technologies (ICT).

In India, wheat prices this year (2006-07) are lower than last year due to higher production of 74.89 million tonnes against 69.35 million tonnes in 2005-06 (see Table). However, in China, prices have gone up despite higher output (104 million tonnes in 2006-07 against 97.5 million tonnes in 2005-06).

This apparently absurd situation is partly attributable to lower procurement by the Chinese government, and partly due to farmers’ reluctance to sell at low prices, as price signals from futures exchanges have made them hold their stock to benefit from likely price rises in the future, amid their rising income levels.

The lessons learnt
A combination of fluctuating fundamentals, increasing population and their rising incomes has led to dwindling of stocks in both India and China.

However, the differences in emerging consumption trends may offset the effect of a probable slide or stagnation in Chinese production, while a decline in Indian output may prove disastrous to the country’s economic planners. Public sector research needs to be focused on priorities in grain research in India, as that of China. Also, public-private partnership in agricultural research deserves encouragement.

Though currently not traded on the futures platform in India, wheat trade in the past and that in Zhengzhou Commodity Exchange had made farmers in both the countries smarter to earn better by simple means of price sensitisation. This has been furthered by the recent strengthening of the wheat markets across the globe.

Further, with the development in ICT, awareness about the benchmark global markets and developments are today at the fingertips of smart farmers in most of India’s wheat belt, which had denied a significant fall in prices (exports window closed) despite an 8 per cent rise in wheat production last year.

Increasing urbanisation would put pressure on India’s economic planners to better manage wheat economy as consumption is expected to increase, and prices are likely to be on the boil in the years to come. Hence, it would pay to effectively manage stocks and thus, the price situation.

(The authors are Chief Economist and Analyst, respectively, with the Multi-Commodities Exchange of India. Their views are personal.)