The prospect of wheat largely depends on the actions of the Centre than the fundamentals. Wheat futures prices had been trading firm in the six months leading to December 2018 — gaining as much as 22 per cent — helped by more-than-targeted procurement and support price hikes. Tight global supplies, especially from top exporting countries such as Russia, aided the positive sentiments.
In the near term, with expectation of better wheat crops due to cold winters and the arrival season due in a couple of months, the prices are likely to trade steady to downside. However, another round of record procurement in the run-up to the 2019 Parliamentary election is likely to restrict the extent of price correction.
Bettering supply prospects
Till mid-December, weather conditions were believed to be unfavourable for the growth of wheat as India received 9 per cent less than normal monsoon. As a result, wheat output was expected to fall to 91-92 million tonnes (MMT) in 2018-19 compared with 99.7 MMT in 2017-18 (as per the fourth official advanced estimate released on August 28, 2018).
However, lower-than-normal temperatures in day and colder nights, coupled with clear skies, are expected to negate the effect of low soil moisture and boost the vegetative growth of wheat and enhance the yield. Furthermore, lower temperature helps retain soil moisture which could have been lost in case of a hotter winter.
Favourable weather and timely sowing of crop has increased the probability of a good harvest in crop year 2018-19 (MY2019-20) despite a small reduction in acreage. The government has reported wheat sowing in 29.72 million hectares as of February 1, 2019, compared with 29.93 million hectares in the corresponding period last year. An increase in the support prices by ₹105 per quintal to ₹1,840 per quintal for MY2018-19 by the Centre influenced farmers to shift their acreage from pulses to wheat.
The crop condition is good in key wheat-producing States such as Punjab, Haryana, Uttar Pradesh, Madhya Pradesh and Rajasthan. Market experts estimate that if the same climatic conditions prevail, it will prevent the occurrence of yellow rust disease in North India and the wheat crop may cross 100 MMT.
That is expected to weaken the price in the coming months. Prices may even correct to the level of the revised support price, but it is unlikely to sustain below MSP as the Centre would back it up with increased procurement, keeping electoral calculations in mind.
Govt hold on supply
In an effort to support wheat prices that were facing the pressure of excess supplies due to good harvest and to keep the farmer vote bank happy amid major State elections, the Centre procured 35.5 MMT in MY2018-19, surpassing all previous highs of procurement.
However, abundant supplies with the Centre will always pose a threat to any unexpected rise in wheat prices as they can sell wheat in large quantities any time through open-market sale to rein in prices.
As of December 1, 2018, the Central pool holds 30.63 MMT of wheat stocks which is the highest in the past four years and 41.4 per cent higher than the reserves a year before.
Out of the Centre’s offer to sell 5.86 MMT of wheat since July until the fourth tender in January, 5.82 MMT of wheat was sold. The government has set the sale price for wheat reserves at ₹1,950 per quintal for the January-March 2019 quarter.
Tight global supply
The world wheat market looks firm on lower production from major producing regions. The International Grain Council expects global production at 737 MMT in the 2018-19 season, down 4 per cent from 2017-18. The expectation of thinning supplies from the Black Sea region and the weakening dollar have further increased the export opportunities for US wheat suppliers, a positive for CBOT futures.
Outlook
The expectations of better output, conducive weather in major growing regions and the fear of government releasing parts of its huge wheat reserves are expected to keep the tone of the market steady to low. However, firm global cues and procurement support from the Centre in an effort to not let the prices slump below the MSP will keep the downside limited.
The writer is co-founder, Director, and Head of Agriculture,Food and Retail atIndonomics Consulting