Wheat spot prices move north

The government's decision to increase the minimum support price (MSP) of wheat to Rs 1,000 per quintal (from Rs 750 this year), while assuring the farmers of a handsome return next year, has induced a bullishness in the wheat spot market.

Wheat prices have perked up by almost 5 per cent from Rs 1,000 to Rs 1,050 per quintal in a week. The flour industry is feeling the pinch from this sudden rise in prices.

"The flour industry's margin gets impacted with a sudden spurt in wheat prices since product prices do not increase correspondingly. Moreover, we cannot review commercial commitments every now and then to absorb such price fluctuations," said Veena Sharma, joint secretary, Rollers Flour Millers Federation of India.

Even though the prices have jumped by 5 per cent, there is no significant increase in daily arrivals at Delhi's Lawrence Road mandi. This means that those holding back wheat anticipate the prices to go up further, added Sharma.

However, the new MSP will certainly help raising domestic wheat output. Wheat production, which increased by 8 per cent to 74.39 million tonnes over last year (according to the fourth advance estimates released by the ministry of agriculture), would rise further with increased sowing by farmers.

A higher output will also mean better procurement by the Food Corporation of India (FCI), the government's foodgrain procurement and distribution agency, and a check in import dependence. "The price of Rs 1,000 is certainly good and we hope to have higher procurement next year," Alok Sinha, the corporation's chairman and managing director said on Wednesday.

The corporation procured about 11 million tonnes of wheat this year, which though better than last year's 9.2 million tonnes, was significantly lower than the 14.8 million tonnes procured in 2005.

The higher base price for wheat would, however, force market players to pay even higher prices to farmers in the next procurement season that in turn may fuel inflationary pressure.

"Higher support price for wheat is a double-edged sword. It may lead to higher production, but it would also result in a sharp rise in market prices," an official with a multinational trading firm said.

He said at a base price of Rs 1,000 a quintal, wheat would cost about Rs 1,180 for traders in Punjab, after adding state levies and other costs.

"After taking into account the carrying costs, the cost of wheat would rise to at least Rs 1,250-1,280 a quintal by October next year, much higher than the current prices of about Rs 1,010-1,040 a quintal, and that too if the harvest is good," the official said.

Such high wheat prices would push up prices of related commodities such as flour, maida, besan and chana, thereby fuelling inflationary pressure. The government has been importing wheat for the past two years to ensure higher domestic supplies, and curb price rise. Wheat rates had shot up to about Rs 1,200 a quintal in Delhi in November 2005 on tight supply, forcing the government to import 5.5 million tonnes of the food grain to cool down prices.

Wheat prices are likely to flare up much higher next year due to the higher support price, and the government's attempt to control prices would bear little fruit despite a bigger harvest.

Since last year, the government has imported about 6.8 million tonnes of wheat to meet the shortfall in domestic procurement. As on October 1, the central pool had a wheat stock of 10.08 million tonnes.