Wheat production in India, spurred by government production incentives and supply management, has reached new record highs each year for the past five years.
In addition, wheat production has outpaced wheat consumption four of the past five years.
Storage for all this wheat in India is inadequate, so a significant amount is stored in the open, covered only by tarpaulins, and vulnerable to bad weather and pests.
Now India is poised to produce its second largest wheat crop on record at 93.0 MMT.
In 2006, India’s problems were quite different. For a decade, yields remained stagnant and planted acres steadily declined. As a result, production lagged behind consumption for five years, resulting in beginning stocks dropping from a record 23.0 metric million tons (MMT) in 2002/03, to a 40 year low of 2.0 MMT by 2006.
By that time, domestic wheat prices in India had spiked to record highs and there were widespread reports of hoarding by grain dealers and market speculators.
In order to control wheat prices and help boost production, the Indian government implemented several strategies over the next two years.
The government banned wheat exports and abolished the country’s applied wheat import tariff of 60 percent, effectively allowing wheat imports for the first time in five years.
The government also banned wheat futures trading from 2007 to 2009 to help curb speculation, lowered the share of wheat production it bought for government stocks from 23 percent to 14 percent and raised the minimum support price the government paid for wheat 33 percent to 8,500 rupees per MT ($211 per MT).
By 2008, India produced more wheat than it consumed for the first time since 2001. India’s government continued to work to boost wheat output over the next five years. From 2006 through 2012 wheat acreage increased at an annual rate of more than 445,000 hectares per year, while yields increased at a rate of 2.7 MT per hectare per year.
To keep domestic wheat prices stable, the Indian government has been forced to purchase a larger percentage of the crop each year since 2008 to keep excess supplies off the private market. Government purchases are expected to reach 47 percent in 2013.
To help alleviate the growing wheat stocks problem, India lifted a ban on wheat exports and started selling wheat from government stocks in 2011.
This strategy has been somewhat successful thanks to lower production in the Black Sea Region and high world prices. Indian wheat has moved into feed markets and markets that seek lower quality wheat.
The U.S. Department of Agriculture (USDA) estimates that India will export 6.5 MMT this marketing year and even more in the 2013/14 marketing year. However, analysts predict that India’s aged and unreliable infrastructure, in addition to congestion at its ports, will limit wheat exports to a maximum of 8.0 MMT. That appears to be too little to stop the continued growth in stocks.
The global wheat market has been speculating about how India’s government will face this challenge. This week, the government signaled its intention by announcing plans to offer 5 million MT of wheat at a price that traders say equates to about $314 per MT FOB.
If the Indian government sells wheat for export at an export price that is below its minimum support price, the result is an export subsidy. India committed to establishing no export subsidies under its World Trade Organization agreement.
Instead of letting the market work by allowing domestic prices to go lower, the Indian government once again appears ready to artificially support cash wheat prices and purchase more wheat from its reserves.
And, sadly, the policies significantly distort the world wheat market and send an artificial signal to Indian farmers to keep growing wheat when other crops may, in fact, be more profitable, more in demand and more sustainable to produce.
(For a recent look at world markets, see Soft red winter wheat prices attracting world buyers).