Strong demand may bring down closing stock of major farm goods by FY23-end

Experts feel this could keep prices of major farm commodities and products dependent on them, such as poultry and meat, at an elevated level for quite some time

By the end of this financial year or perhaps even earlier, depending upon the crop cycle, India might be staring at a multi-year low closing inventory levels of several key farm commodities.

Stocks of sugar, wheat, cotton and oilseeds both, with traders and in government-run warehouses are fast depleting due to sharp spike in domestic and export demand and lower-than-anticipated production due to uneven weather conditions.

Several experts feel this could keep the prices of major agricultural commodities and products dependent on them, such as poultry and meat, at an elevated level for quite some time.

Some observers also feel food prices might not come down swiftly even if the current Russia-Ukraine crisis gets resolved in the next few months, because input prices, particularly those of plant chemicals, fertilisers, diesel for irrigation have been rising for almost a year.

“This (impact of rising inputs costs) had to definitely show up in the final farm produce at some point of time, which it is doing now,” a senior agriculture economist associated with a leading think-tank told Business Standard.

While low stock levels and high prices could spur farmers to plant more of the crops mentioned above in the next crop cycle, it can also keep policy makers and the market in a tenterhook over fear of losing the cushion of backup inventory in the event of a bad crop year.

Wheat

Among the major crops, that could see a significant drawdown in inventory this year is wheat.

Wheat production in the current marketing year that started from April 1 is likely to be much lower than the earlier estimated 111 million tonnes.

This is mainly due to sudden rise in temperature since the first week of April and the shift in acreage towards mustard earlier in the season.

Some farmers said untimely rains during the pod filling stage is also impacting their output.

While on the one hand, production is expected to lower, on the other, demand for Indian wheat has risen manifold globally with the stoppage of supplies from Russia and Ukraine due to the war.

This while has ensured a healthy rise in price for farmers, which is seldom seen in grains, but has also pushed down the government's annual official wheat procurement to a multi-year low.

Domestically, demand is also steady both from regular PDS needs and also on account of the extension of the free food grains distribution scheme for another six months starting from April 1.

The net result of this is that India’s wheat closing stocks at the end of FY23 is now projected at being just adequate to meet the buffer and strategic reserves norms of 7.5 million tonnes.

If this turns out to be true, then it will be one of the lowest wheat inventory levels in Central pool in recent times.

However, the saving grace is there is no such trouble with rice and if push comes to shove, then the Centre can redraw the wheat and rice mix that is distributed to the poor, more in favour of the latter to manage its inventory.

Cotton

India usually is left with 4-5 million bales of cotton (1 bale=170 kg) at the end of the annual marketing year in September.

However, this year in March itself the inventories began dwindling due to lower-than-expected production, exports and rising demand from millers.

As on March 31, 2022, India was left with around three million bales as stocks in the pipeline, against a normal of 5-6 million bales, while another five million bales were with the farmers.

This would have made a total pipeline stock of about 8 million bales, which was good enough to last the next 3-4 months, that is till June or July.

“The new crop is expected to come only around October, which means that to run our mills and spindles, we will need to import at least 4 million bales of raw cotton soon at zero duty,” a senior industry official had said a few weeks ago. 

The situation has worsened as actual cotton production is lower than initial estimates due to damage to the standing crop.

The Centre had initially estimated cotton production in 2021-22 at 36.25 million bales, while traders said that actual production was much lower, at 33-34 million bales.

The Cotton Association of India (CAI) expected production to be about 34.8 million bales.

The cotton consumption this year (2021-22) was expected to be around 35 million bales, though some traders said it could be around 33.5 million bales.

The consumption is estimated to be around 35 million bales and production at the lower end of the band is around 33.5 million bales.

Then the total cotton closing stock at the end of the current season is expected to be around 1.5 million bales, after accounting for 4 million bales of exports.

This level of stocks would have been lower than the 4.5 million bales of minimum stock levels required at the end of any cotton season.

Seeing prices rising sharply due to demand-supply mismatch, the Centre very recently allowed duty free imports of raw cotton till September 30 to ease the price spike.

Sugar

Though sugar production in the 2021-22 season that ends in September has been revised upward to over 35 million tonnes, it will still lead to one of the lowest closing stocks of about 6.8 million tonnes due to a record over exports of over eight million tonnes of exports and rising diversion towards ethanol.

The stock levels being anticipated will still be higher than the normative requirement of 4.5-5 million tonnes of sugar or two months of consumption that the country needs to have before a new crushing season starts.

In the 2020-21 sugar season, closing stocks of sugar was 8.2 million tonnes.

The last time when sugar closing stocks was lower than the expected levels in 2021-22 was in 2016-17 when the closing stock was around 3.4 million tonnes.

However, it might not have a big upward impact on prices because the sowing for the next season as per trade sources is at a record high which should ensure another year of bumper crop.

Oilseeds and edible oils

The edible oil and oilseeds stock with traders and farmers is also expected to draw down significantly by the end of the season due to rising prices and bumper demand. 

However, in the case of soymeal, which is a key ingredient of feedmeal, traders said there is no shortage of availability and the inflated demand projections  made by the user industry (which in this case is the poultry sector) is exaggerated and meant to facilitate imports. The user industry feels otherwise.