Professional Documents
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Report on Wheat
Table of Contents
2
Wheat
India has a very long tradition of commodity futures. It was having sporadic of
futures markets almost all over the country in not only such diverse cash crops as
Cotton, Oilseeds, and Raw jute and their products but also food grains. Futures
trading started with the setting up of Bombay Cotton Trade Association in 1875.
The organized futures trading started in 1922 by the East India Cotton
Organization. More and more commodities were added between 20’s and 40’s,
for futures trading like Groundnut, Groundnut oil, Raw jute, Jute goods, Castor
seed, Wheat, Rice, Sugar, Gold and Silver. This was indicative of a very long
tradition of commodity futures in our country.
Futures trading in wheat have been taking place since long back at various
renowned commodity exchanges of world like Chicago Board of Trade (CBOT)
in Chicago; USA, Winnipeg Commodity Exchange in Canada, Kansas City Board
of Trade in Kansas, USA, Minneapolis Grains in Missouri, USA and many other
exchanges located in Japan, Australia, and East European Countries.
This bears testimony to the fact that the food grains are suitable for futures
trading. With evolution of scientific grades and standards, scientific warehousing
systems and practices, advances in transportation and communication, trading,
clearing and settlement systems provides the necessary environment of
competitive futures market.
3
Wheat
Wheat is one of the most important staple food grains of human race. India
produces about 70 million tones of wheat per year or about 12 per cent of world
production. It is now the second largest producer of wheat in the world. Being
the second largest in population, it is also the second largest in wheat
consumption after China, with a huge and growing wheat demand.
It is cultivated from a sea level up to even 10,000 feet. More than 95 percent of the
wheat area in India is situated north of a line drawn from Bombay to Calcutta
and also in Mysore and Madras in small amounts.
4
Wheat
The Major Wheat producing states in India is placed in the Northern hemisphere
of the country with UP, Punjab and Haryana contributing to nearly 80% of the
total wheat production (Chart 1).
Chart 1
Others
Gujarat 6%
Bihar 4%
Uttar Pradesh
5%
34%
Rajasthan
9%
Madhya Pradesh
10%
Haryana Punjab
13% 19%
(Source: www.agricoop.nic.in)
5
Wheat
US Avg. Lok-1
Hard Red Spring Northern Bread Spring None
Wheat Plains
Durum Wheat Northern Spaghetti, Spring Desi (Durum)
Plains macaroni,
pasta
White Wheat Pacific and Cakes, Spring Dara, Kalyan,
Northwest Cookies, &Winter Mexican,
snacks Sharbati, 147-
Avg, Lok-1
Production of Wheat in India as can be seen from Chart 2 has shown a rising
trend in the past 5 decades. However, there was a steep jump in production of
wheat during 1960-70 to 1970-1980 by nearly 109%. The Green Revolution in the
1960’s contributed to this phenomenal rise in wheat production in the country
over the decade. However, following 1980’s, there has been a consistent
declining trend in production of Wheat in India. For instance, the production of
Wheat rose by just 61% from 1970-1980 to 1980-1990. In recent years, there has
been a worsening trend with wheat production actually growing by just 7% from
2000-01 to 2001-02. (Please refer to Table 1)
6
Wheat
Chart 2
70
Production (in million tonnes)
60
50
40
30
20
10
0
19 -51
19 -54
19 -57
19 -60
19 -63
19 -66
19 -69
19 -72
19 -75
19 -78
19 -81
19 -84
19 -87
19 -90
19 -93
19 -96
20 -99
20 -02
07 5
8*
20 4-0
-0
50
53
56
59
62
65
68
71
74
77
80
83
86
89
92
95
98
01
0
19
(Source: www.agricoop.nic.in)
For nearly a decade, i.e. up to mid 70’s agricultural production had stagnated.
The spectacular yield growth recorded in the post-Green Revolution years in
Punjab and Haryana has receded into history. Food grain production in the
frontline agricultural states of Punjab, Haryana and western Uttar Pradesh,
comprising the country's food bowl, has decelerated. The miracle that began with
wheat was replicated in rice.
The area under production of Wheat has increased from a mere 12.93 million
hectares in 1960-61 to 27.49 million hectares in 1999-2000, an increase of more
than 100% over the past 5 decades. The production of Wheat at the same time,
increased from 11 million tones in 1960-61 to 76.37 million tones in 1999-2000.
The yield (kg/hectare) on the other hand, increased from 851 in 1960-61 to 2778 in
1999-2000, an increase of around 3.56 times. This indicates that although wheat
production over the past 5 decades increased by 6.87 times but the yield of wheat
has actually increased by only half of this figure.
7
Wheat
80 66
78
64
76
74 62
Demand
Supply
72
60
70
68 58
66
56 Total Supply
64
62 54
Demand
94/95 95/96 96/97 97/98 98/99 99/00 00/01
Years
Since 1998 India’s share in world wheat production is around 12% to 13%, at the
same time. India’s share in world wheat consumption is around 10% to 11%. It
proves that some sort of extra stock (around 1% to 2%) arises every year. The
demand-supply gap which is open at a rate of about 1 to 2 per cent per year is
equivalent to 0.7 to 1.4 million tones of wheat, growing larger over the years.
Resultantly the ending stocks of wheat have been increasing and the same thing
can be visualized from the following chart
8
Wheat
Since the Green Revolution, Indian production of cereals including Wheat has
been on the rise with the production of wheat rising from a mere 8.6 million
tones in 1960-61 to 73.53 million tones in 1999-20001. A study of the supply and
demand trends over the past decade also indicates that there is always a 1%-2%
surplus in Wheat. The MSP for Wheat has also increased from Rs. 275 in 1992-93
to Rs. 620 in 2002-03 (Please refer Table 2).
The MSP has risen over the past decade substantially above Cost of Production
leading to price distortion. For instance, in 2000-01, the MSP was set at Rs 610
(Rs/qtnl.). As against this, the C2 (Cost of Production i.e., all costs including the
imputed costs of family labour, owned capital and rental on owned land) in case
of Punjab was Rs 422 leading to a margin of Rs 188(Rs/qtnl.) Similarly, 2the C2 in
UP was at around Rs 439 leading to a margin of Rs 171 (Rs/qtnl.) In addition, the
fragmentation of the Wheat market has resulted in further widening of price
differentials between the North and South regions of the country.
1
agricoop.nic.in/statistics
2
Data index, Abhijit Sen, “High Level Report of Foodgrains”, Ministry of Food Processing, GOI
9
Wheat
Table – 2
Ratio of FCI’s Economic Cost to MSP
From the above table it is clear that during the 90’s MSP has shown a steadily
rising trend and at the same time economic cost has increased physically, but the
ratio of FCI’s economic cost to what it pays for wheat has gradually decreased.
TABLE 3
MSP, Procurement and Stocks – Wheat
The distortions in prices are evident from the above table also. If consider
Wholesale Price Index 127.2 as base during 96-97 when MSP was Rs. 380/- per
quintal for both wheat and rice then MSP in 2001 should have been Rs. 481.90 as
against Rs.610/- per quintal.
10
Wheat
The demand of Wheat in the country is pretty stable over the past few years with
the average demand of Wheat staying at around 63 MMT over the past 4 years.
(Please see table 4) On the other hand, the supply of Wheat has also remained
steady at 77 MMT (approximately) over the same time period. This condition is
highly conducive to commencement of futures trading in wheat with better
chances of price discovery. The reason being stable demand and supply would
help correct the future forecasting and future spot price fixation. This in turn
would lead to convergence between futures price and future spot price and
hence correct risk management mechanism.
11
Wheat
Chart – 4A
700
600
MSP Prices (Rs 620/qntl.)
500
Prices (Rs./qntl.)
400
300
HA RVESTING-- SOWING OF
SLACK SEASON--MAY-AUG
SUP P LY o f WINTER WINTER
200 WHEA T Wheat
100
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Months (2002)
As can be seen from Chart 4A, the MSP is always higher than the Mandi Prices in
entire year of 2002 indicating that the MSP prices are not reflecting actual
demand-supply of Wheat in country.
12
Wheat
Chart – 5
% Share of Country
Others
China
Pakistan 13%
22%
3%
Turkey
4%
Italy
4%
Australia
4% India
Canada 13%
5%
Russian Federation
6% Romania USA
6% France 13%
7%
Source: USDA
Wheat production in India has increased by over ten times in the past five
decades and India has become the second largest wheat producer in the world.
Today wheat plays an increasingly important role in the management of India’s
food economy.
Since 1998-99 India’s share in world Wheat production hovers around 11%
to13%.
13
Wheat
TABLE – 5
India’s Position in the World Wheat Market
Starting from 1998-99 till date India’s share in world wheat export shows a rising
trend. Not only share, India’s physical export is also sharply rising. India’s
percentage share in both world total exports during 2001-02-July was 2.79 (i.e.
around 3%).
TABLE – 6
India’s Wheat Export
Since wheat prices at procurement level and at disposal level are placed under
controlled mechanism with defined objectivity, scope of general price trend
analysis also becomes govt. policies centric. The related price in the open market
has got a substantial relationship with the prices of wheat traded in the open
market. Therefore our presentation on this aspect has a notion that the price
elasticity of demand has got direct relationship on prices of wheat of other
14
Wheat
Purchases
The policy of Minimum Support Price (MSP) supports economic growth. MSP is
a critical policy component of the Indian Economy. It generates broadly different
purchasing power, health and wealth. Governments works out the MSP giving
due consideration to all the economic factors like cost of input, power, capital;
and labour with reasonable going margins. With the certainty about the support
price, farmers expend better effort and resources provide confidence and
motivation to the growers. MSP and commodity options are consistent with the
requirements of the produced economy.
Table – 7
Procurement of Wheat (Central Pool Account)
(Figs. In Lac Tonnes)
Marketing 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002-
Year 95 96 97 98 99 2000 01 02 03
Wheat 119 123 82 93 126 141 163 206 #190.2
Source: fciweb.nic.in/procurwheat.htm
Table – 8
State-wise Procurement Of Wheat By FCI
(In Lac Tons)
State 1999-2000 2000-01 2001-02
Punjab 78.31 94.24 105.60
Uttar Pradesh 12.61 15.45 24.46
Haryana 48.70 44.98 64.07
Rajasthan 6.37 5.39 6.76
Other 5.44 3.50 5.41
All India 141.43 163.56 206.30
15
Wheat
Sales/Liquidation of Inventories
The prime objective of MSP of providing assured market to the growers achieved
and production kept on upward swing which culminated into comfort level of
food security and posed much more serious issues. One of them was the slower
pace of replenishing the inventories. Pricing policies of disposal of stocks were
thrust on the social commitment of the Government. Government kept on
pumping wheat stocks at the issue price, which need to be lower than MSP
through States machinery of Public Distribution channels throughout the country
that has helped to sustain the high growth rate and maintain regular, supply of
Wheat and Rice.
Besides above stocks were earmarked for various other welfare schemes by the
Government like Jawahar Rojgar Yojona, Mid Day Mill Scheme etc.
When the impact of Government policies on pricing started showing little effect
on the wheat market; it was more or less stabilized, but at the same time off take
by states in PDS either steady or slightly showing downswing, resulting into
burgeoning and inventories with the Govt. agency (FCI). Therefore Govt. for
minimizing subsidies decided release first old grain or below quality grain and
then superior quality grain in Open market at the best available market rate on
commercial terms.
16
Wheat
Exports
ISSUE PRICE
APL BPL
Futures as well as MSP and OMSS (Open Market Sales Scheme) are price risk
management mechanisms with the same objective to help remove uncertainties
arising due to price volatility in Wheat. However, in light of administered price
regime, futures trading in Wheat cannot kick off. Futures trading in Wheat
would help in proper price discovery only if the market is allowed to determine
the prices based on demand-supply factors affecting Wheat. The reason is that in
case of an administered price scenario, the futures market would not trade freely.
That is, if the MSP is say Rs 620/qntl., then the trading in market would not go
below Rs 620 in any case distorting the functioning of futures market. Even if the
International markets were trading lower, the Indian markets would still stay
above the Rs 620 mark.
As can be seen from Chart 8, the Issue price of Wheat, which is administered by
FCI, was at around Rs. 525 per quintal for 2002. A comparison with FOB prices of
17
Wheat
US Wheat prices in the same time period indicates that the US Wheat Export
Prices are more subsidized and competitive against Indian Wheat.
In the light of the above discussion, MSP and Issue Price should not be enhanced
in the future but kept constant and removed in a phased manner over a time
frame. In its place, futures should be introduced as price management
mechanism correlating International and domestic wheat markets to avoid price
distortions.
CHART – 8
India Wheat
200 Prices (Rs/1ntl)
600
180
500
160
Price (Rs/qntl)
140
400
120 US Wheat
Prices
100 ($/qntl) 300
80
200
60
40
100
20
0 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Months 2002
The Government fixes an issue price for Export of wheat for one year (Please see
Table -9). In case of 2002, the Government declared an issue price for export at
Rs. 5250 per tone (525 Rs/qntl). In comparison with the US FOB prices of Wheat
for exports, it can be seen from Chart 8 above that from January-July 2002, the US
Wheat FOB prices were much below the Indian Export Issue Prices. One reason
18
Wheat
could be that although wheat export is subsidized in both India and USA, it is
highly subsided in case of USA. In addition, in 2002, the MSP (Procurement
price) by FCI was set as high as Rs. 620 per quintal (Please see Table 2 of report).
This resulted in high procurement cost for FCI.
TABLE – 9
Year Issue Price of Wheat
Export (Rs./tonnes)
1999-00 4910
2000-01 5110
2001-02 5110
2002-03 5250
2003-04* 5550
Again during November and December of 2002 as seen in Chart 8 US and Indian
prices moved in opposite direction in starting of December, Indian prices
indicated an upturn because of Food Corporation of India’s (FCI) decision to stop
sale of sound wheat under the OMSS scheme till March 31st, 2003.
19
Wheat
Growers
Traders through
Mandis
Exporters
FCI Industry
(Flour Mills &
Retailers
Chakis)
PDS PDS*
Consumers
Consumers APL (Above
BPL (Below End- Users
Poverty Line)
Poverty (Consumers
Line) )
At present, there are various channels of Wheat active in the market at different
levels. The Government procures Wheat from Growers through agencies such as
(FCI) Food Corporation of India. This wheat thus procured is distributed
through State PDS (Public Distribution System). The PDS system at grass root
level is well defined and organized sector set up at state level. FCI being the
major player in wheat procurement and distribution; procures nearly 18% of
wheat from growers and maintains buffer stocks in the Central Pool with a key
role in maintaining price stability.
20
Wheat
The balance 82% of the Wheat produced is marketed through various channels
such as commission agents at mandi level, stockists, semi-wholesalers, retailers,
manufactures, small flourmills, and large-scale manufacturers such as bread
makers and flour mills (maida-suji). Though the Government procures 18% of
the wheat but in comparison to the remaining sector, it is the largest organized
buyer in the Wheat market. Therefore, the Government can greatly influence
prices of Wheat for the entire market.
The phasing out of Government’s involvement in the wheat market would result
in increased participation of the Private Sector in this market. This would lead to
two-fold benefit----reduction in Government subsidy to this sector and in turn
alleviation of Government’s burden in this area.
21
Wheat
Such a futures market would not only provide management of price risks
through hedging but also assist in efficient discovery of prices, which could serve
as reference for trade in physical commodities in both domestic and international
markets.
22
Wheat
ANNEXURE – 1
Comparative study of Indian and US Wheat Types (on basis of uses)
India :
Type of Wheat : Emmer Wheat
Area Grown : Maharastra, Tamil Nadu & Karnataka
Seasons : Winter
USA:
Type pf Wheat : a) Soft Red Winter Wheat (SRW) & b) White Wheat
Area Grown : SRW is grown in Great Lakes Area of USA and White
Wheat in Northern Plains
Seasons : SRW is grown in Winter & White Wheat Spring as well as
in Winter
India :
Type of Wheat: T. Durham (Desi) Wheat
Area Grown: Punjab, M.P. (Max), Tamil Nadu, Gujarat, Karnataka,
West Bengal and H.P.
Seasons: Winter
USA :
Type of Wheat: Durham
Area Grown: Northern Plains
Seasons: Spring
3) Bread :
India :
Type of Wheat: Common Bread
Area Grown: Punjab, U.P. Bihar & parts of Rajasthan (Bulk of Crop)
Seasons: Winter
USA :
23
Wheat
Type of Wheat: a) Hard Red Winter (HRW) & b) Hard Red Spring
(HRS)
Area Grown: HRW in Northern Plains & HRS in Southern Plains
Seasons: HRW in Winter & HRS in Spring
US Seasons of Wheat:
DORMANT
Winter Wheat RESUMES GROWTH
HARVESTED
SOWN
Seasons:
Winter: Nov---Mid-Feb
Spring: Mid-Feb----May
Summer: May---Mid-Aug
Fall: Mid-Aug----Nov
SOWN
Spring Wheat
Jan Feb March April
May
Dec
June
Nov
July
Oct Sept Aug
HARVESTED
24
Wheat
Harvesting
March April
Feb May
Jan June
July
Dec
August
Nov Oct Sept
Sowing
25