CEREAL INFLATION – Why are rice and wheat stocks depleting all around

Arshad Shaikh studies the ever-increasing prices of wheat, rice and edible oils. Their stocks seem to be depleting raising fears of shortages and worst-case scenario. What is causing this problem and who is to blame? The most important question is – what should the government do? While experts are trying to assure us that all…

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Arshad Shaikh studies the ever-increasing prices of wheat, rice and edible oils. Their stocks seem to be depleting raising fears of shortages and worst-case scenario. What is causing this problem and who is to blame? The most important question is – what should the government do? While experts are trying to assure us that all is well, the market sentiment is not so optimistic. People have started stock-piling, although there is no panic buying yet. Cereal inflation must be tamed. Sooner the better.

Cereal inflation in India is at its highest level since 2013. At 11.5% year-on-year in September, it is causing a great deal of anxiety to the market as well as policymakers. Adding to the misery are reports that the stock of wheat and rice in government godowns have reached a five-year low. Data from the Food Corporation of India (FCI) shows that the wheat and rice stocks in their possession are around 51.1 million tons (MT). A year back, it was a comfortable 81.6 MT. The following table illustrates the situation about our Public Cereal Stocks (in MT) on 1 October.

2016201720182019202020212022Minimum required
Wheat21.325.835.639.343.746.822.720.5
Rice15.817.419.727.624.734.728.310.2
Total37.243.355.366.968.481.651.130.7

This situation is in sharp contrast to the manner in which India was aggressively exporting wheat until March this year. Then on 13 May, the government announced a ban on the export of wheat, citing a threat to food security. The next wheat harvest is due only in March next year. As can be seen in the table, our wheat stocks are at a six-year low. They are slightly above the bare minimum. The minimum requirement is a 3-month operational stock plus a buffer to cater to procurement shortfalls.

Our rice stocks, in contrast, give us some relief. They are reasonably above the minimum requirement. However, the inflation of non-PDS rice was 9.2%. That of non-PDS wheat was found to be 17.4% while the vegetables subcategory inflation was pegged at 18%. It is important to understand the reasons behind this unprecedented situation. Can the government do anything to remedy the situation? What are the other aspects that are linked to cereal inflation and their dwindling supply in the market?

A GLOBAL PHENOMENON

Food inflation is a global phenomenon. It is affecting both poor and rich countries. According to the FAO Food Price Index, the cost of cereals went up by 13% in 2021. Meat went up by 17%, while sugar increased by 20%. Vegetable oil shot up 37%. From the lows of 2020, food prices have overall spiralled 47% last year itself.

One reason for food inflation is that the costs involved in every process of the food supply chain namely growing and nurturing the crops, their transportation, hiring farm labour and packaging have been rising steadily. The global shipping industry is straining itself for timely delivery of goods with the number of containers at its disposal being maxed out.

International fuel prices have increased tremendously. Ammonia and nitrogen are the major ingredients of fertilizers, the prices of which have gone up due to an increase in the price of natural gas. The cost of transportation goes up with the rise in fuel prices. In many countries, like the US, Brazil and Germany, if fuel prices become lucrative, farmers are incentivised to divert food production to fuel production. Therefore, large quantities of maize, vegetable oils, and sugar are diverted to produce biofuels. This leads to a reduced supply of food and feed and a consequent price rise.

Adding to our woes are periodic droughts, floods, unseasonal rains and extreme temperatures due to climate change.

The war in Ukraine has disrupted the oil and market for sunflower oil, maize, barley and wheat. Food exports from Ukraine have halved since the war began.

THE DOMESTIC SITUATION

Experts opine that many of our farmers who grow wheat have withheld their produce in the expectation of higher prices. Another reason is the aggressive purchase of wheat by the private sector at prices above the MSP (Minimum Selling Price).

Opinion is divided on the rise in the price of wheat. Some say that it is because of a decrease in the production of wheat while some blame it on the influence of a hike in international prices of wheat over the domestic market.

Another sore point is the sudden U-turn taken by the government over wheat exports. India’s Prime Minister had boldly announced in April 2022 that India had the power to “feed the world” if the WTO permitted. Then suddenly, a month later, citing domestic food security, India, which exported around 7 MT of wheat in 2021-22, suddenly stopped all exports from May 2022. This policy flip-flop was not well received by the international community.

This also contributed to the ongoing turbulence in the cereal market. The aim to achieve cropping and dietary diversification has received a setback because of this disruption in the markets. India is still facing the brunt of monsoon deficits and unseasonal rains. The Gangetic plains witnessed heavy rains from mid-September when the Kharif crops were to be harvested. The rains have also damaged the crops in Punjab and Haryana.

THE MARKET MECHANISM

What can the government do? It has limited options. Importing is not feasible, as the cheapest wheat would cost up to `30 a kg. However, ultimately it may have to import a couple of million tons to replenish our godowns on government account.

With a ballooning Current Account Deficit (CAD), the government is trying to encourage farmers to maintain and increase domestic production of cereals by raising the MSP of all mandated Rabi crops. An oft-ignored issue is the effect of commodity trading on food prices.

According to data by the CME Group – “Commodities have rallied this year, outperforming equities and underscoring their credentials as a hedge against rising inflation.” Their research shows that “the S&P GSCI, a composite of 24 commodities representing sectors from energy to agriculture and livestock to metals, has surged 34% since the start of 2022, and is up 213% from its 2020 low during the pandemic.”

This dichotomy between the financial economy and the real economy leads credence to accusations of the stock markets being the driving force for “casino” economies where traders bet on the prices of commodities without any actual buy and sell. The effect of this “gambling” like trading in these exchanges on food inflation is a matter of research and needs to be probed further.

Thankfully, the government has suspended futures trading in commodities for the last 11 months. There is immense pressure to restart from several industrial associations who claim that there is no direct relationship between inflation and futures commodity trading. Several committees and panels have attested to that.

The Prophet Muhammad ﷺ appointed a lady by the name of Al-Shifa as the “market controller” of the market in Medina. Her job was to ensure that all business transactions were ethical and conformed to the values of justice and fairness. We need to introduce the parameter of “moral soundness” in regulating markets. There has to be a middle ground between laissez-faire and complete price control.