There may be no real relief from food inflation in the near to medium-term despite the ongoing harvests in the northern hemisphere. Supply tightness is set to continue in case of grains like rice and maize (corn) while relief in wheat may be just modest.
Several factors operating simultaneously are likely to keep crop prices at fairly elevated levels although arrival pressure may exert a softening effect in the short-term.
Low availability of grains
Adverse weather, risk of lower supplies from Black Sea region because of continuing war and indication of a drawdown in global stocks have combined to reduce global availability of grains. No wonder, grain prices have started to pick up in recent days, moving slightly above their levels at the beginning of the year.
Extreme weather in major grain-producing countries is a reality. The US corn production estimate for 2022-23 has been cut by the USDA from the August estimate of 364.7 million metric tonnes to 354.2 million metric tonnes in September, a 10-year low. This follows drought-like conditions most of this year. Not just grains, but cotton crop too has been adversely affected. In Europe, France this year has suffered its worst drought in six decades with yields dropping to multi-decade lows.
La Nina
South America is facing dry conditions because of La Nina weather phenomenon for the third time in a row (triple dip La Nina). Argentina is facing planting delays, while conditions in Brazil are fragile and fraught with possibilities. The importance of Brazil and Argentina for crops like soybean, corn, wheat and cotton is well recognized.
No wonder, the London-based International Grains Council, an intergovernmental body, has forecast global corn stocks to dip to 300 million tonnes representing just 80 days’ consumption next year, the lowest in more than 10 years.
The Russia-Ukraine war continues to create uncertainties in wheat supplies. Although shipments have resumed on a modest scale, ships are reported to be averse to going to the conflict zone. Large wheat stocks are now lying in Black Sea ports awaiting loading.
There is also fear that Russia may go back on the agreement and stop shipments. Any disruption would be bullish for the global grain market.
Strong dollar
At the same time, a strong US dollar weighs on prices and is seen capping the upside risk. There are fears of global recession early 2023 which may indirectly impact demand for grains to an extent, especially for animal feed. While supplies have turned rather uncertain, the demand too faces some concerns.
Closer home, the government has admitted that rice production has fallen to 105 million tonnes, well below the target of 112 million tonnes. The trade believes production could be closer to 100 million tonnes. Coming soon after a lower harvest of wheat in April/May this year (105 million tonnes against the target of 112 million tonnes), tightening availability of the two fine cereals is likely to keep market rates firm.
In pulses, at 8.4 million tonnes there is little growth in production from last year’s kharif season. Oilseeds too have underperformed. Maize crop is also seen by several value chain participants – large feed users and starch manufacturers - as 10 percent below the government estimate of 23.1 million tonnes.
Given the above scenario of tightening global supplies, lower or no growth in domestic harvest and a substantially weaker rupee, the signs are ominous. Crop prices may moderate slightly with heavy arrivals, but once the arrival pressure wanes, there is risk of upward surge in grains and pulses.
(G. Chandrashekhar is a policy commentator and agribusiness specialist. Views are personal)