After one-and-a-half decades, India may be heading to become a net importer of wheat this fiscal. This can be attributed to climate change taking a heavy toll on food production across the world and the pandemic triggered scheme of free distribution of wheat for over a year to 80 crore Indians.

The question is not whether India would require to import a few million tonnes of wheat to protect food security of its BPL (below poveerty line) families, but whether the country should plan for the eventuality of back-to-back failure in the substitute staple — rice. The time is just right to book a major part of potential imports through options derivative contracts on foreign bourses like CME Group-owned CBOT platform.

The situation is almost identical to the one the country faced in 2006-07, when India ended the year importing 6.7 million tonnes (mt) of wheat (USDA report). At that time, India’s wheat stocks had fallen to a paltry 2mt as on April 1 and procurement was at a multi-year low of 9.23 mt.

India’s exports had been at multi-year highs in the prior years — 3.7 mt in 2002-03, 4.1 mt and 2 mt in the two subsequent years — that led to a gradual drawdown in inventories in the wake of lower output.

This compares with the current buffer stock reaching a 14-year low of 28.5 mt as on July 1, only 1 mt higher than buffer norms, thanks to 7mt exports in the previous year and over 3mt in the first quarter of this fiscal before the government banned exports on May 13.

Apart from exports, the continuance of the pandemic-time scheme of 5-kg foodgrains to 80 crore people also led to a big drawdown of central pool stocks. In addition, it has caused an around ₹1-lakh-crore hole in the treasury. Sensing the impending supply tightness, the Centre has replaced part of free wheat with rice in some States.

The crisis began earlier this fiscal when the government, buoyed by the 7mt record exports in the previous year, announced export of 10-12 mt in the current year. The decision was taken in haste based on a record crop estimate of 111 mt, but without taking stock of domestic granaries and assessing the current crop being harvested.

In less than two weeks, severe heat-waves significantly hit the rabi output, and in a knee-jerk reactionthe government banned all exports. Since then, the government has been allowing overseas shipments to only some neighbouring nations and others having severe food-security problems.

Meanwhile, the Centre has scaled down the estimates of domestic rabi wheat output by 5mt to 106 mt, while the USDA has pegged the output at 99mt and trade associations, at 90-95 mt.

Domestic prices surge

While the estimates will take time to be finalised, wheat prices hit record highs twice within a span of two months despite the export ban. While global wheat prices have fallen 35-40 per cent from May highs, Indian wheat prices continue to surge amid dwindling stocks. Currently, wheat prices are hovering at a record ₹26/kg in some markets against the minimum support price (MSP) of ₹20.15/kg.

Even the rice crop in the ongoing kharif season, which was expected to cushion the decline in wheat, is facing a severe crisis as sowing is down a whopping 13 per cent even as half of the four-month monsoon season is over.

The sharp rainfall deficit means rice production will also be much lower in the current crop year, which may lead to even rice stocks plummeting in the rest of the year. As a result, the free foodgrains scheme is unlikely to be extended beyond September.

However, replenishing the granaries remains a challenge due to the significantly higher prices in the domestic market. The probability of importing wheat is rising with every passing day. In this backdrop, it would be worth revisiting some of the out-of-the-box steps followed in the previous crisis of 2006-07.

Hedging wheat import prices on the US commodity exchange via call options through a government agency was a step taken then, and it was highly successful. While detailed information was never published, sources in the Food Ministry had revealed that some 180,000 tonnes of wheat were secured in advance via call options at a much lower price than the price that prevailed at the time of actual imports.

Under the call option in the commodity derivatives market, the buyer, the Centre in this case, gets the right to buy the commodity at a selected future date at a pre-fixed price.

To lock the purchase-price, the buyer needs to give a small one-time premium, similar to that on an insurance policy. If prices of the commodity rise significantly towards the expiry, the buyer gets the benefit in the form of increased premium. But if prices fall sharply, only premium value is lost in part or in full.

Premium on call option

Currently, wheat is down over 35 per cent from its recent record high of $12.8 per bushel (1 bushel equals 27.2 kg). Accordingly, the premium on call option in November-December series, when imports are likely to happen, has also softened significantly.

If the situation turns favourable in the form of conducive weather in rest of this kharif and rabi sowing seasons, or with the end of the Ukraine war, the key driver of foodgrain inflation, or better-than-expected crops of wheat followed by kharif rice, then the call options can be squared-off at prevailing premiums, which may lead to some loss.

However, such an act can help the government manage a huge risk of supply crunch, which has a potential to hurt food security. The solution to overcome the potential wheat shortage lies in the derivatives market. Though the Centre has already suspended major agri-derivatives on the domestic commodity exchanges, it is aware of the benefits of such platforms in managing the price and supply risks.

Hence, the government should not hesitate to use the world’s largest derivatives exchange, the CME Group, to lock-in prices of at least a significant part of the potential import.

The writer is a columnist who writes on commodity markets and agricultural marketing