Food security to create permanent wheat shortage by Nidhi Nath Srinivas

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published Published on Jul 28, 2011   modified Modified on Jul 28, 2011

From next year, atta,bread,biscuits ,snacks and everything made from maida and sooji will become seriously more expensive. Even after a bumper crop, there just won't be enoughwheat for us. ET helps you join the dots. The trigger for wheat inflation that will hit each one of us is the Food Security Act, which kickstarts next year. The Food Corporation of India (FCI) will need substantially more wheat to supply three out of four Indian households, meet the new buffer stocking norms that stipulate larger quantities, and also keep aside a strategic reserve for emergencies.

Unlike rice, wheat cultivation is limited to less than a dozen states.FCI already buys one out of every two bags sold by Indian farmers. In Punjab and Haryana, it buys virtually every kilo for sale. To meet its new obligations, FCI will have to redouble purchases across Uttar Pradesh, Rajasthan, Madhya Pradesh and Bihar. That leaves less wheat for traders and food companies that also buy from the same areas. Traders purchase about 40% of wheat that arrives in the markets of Madhya Pradesh and Rajasthan, and 80% of the wheat sold in Uttar Pradesh. This share will rapidly decline.

When a commodity is in short supply, a bidding war breaks out. Wheat prices will rise across India. Anxious food companies will not just pay more than the FCI's minimum support price but also compete against each other to secure wheat supply. Companies that cannot afford to pay will either have to buy from the relatively inaccessible markets of eastern India, thereby incurring more cost, or curtail production. Both are a nightmare. FCI ensures that mills aren't starved of wheat by frequently selling some of its own grain in the open market. But with the new food security commitment, it may have little to spare.

In short, the market that caters to the Indian food industry and people outside the Act's purview will be starved of supply. Can this supply be increased? The options are limited. India can allow free import of wheat. But the world market is notoriously volatile and prone to weather-related crop disruptions. FAO says global wheat prices are 80% above last June's . Only 18% of total global production is traded. If India decides to buy, prices will shoot through the roof. So, imports won't significantly lower local prices. India could raise its own wheat production.

However, that is easier said than done. In the last five years, productivity has not risen by even 1% as pest attacks and high temperature affect yield. The National Food Security Mission has yet to achieve its target of extra eight million tonnes by 2011. Agriculture ministry is spending sleepless nights over how to ensure adequate wheat supply while climate change, lacklustre agriculture , crop diversification, urbanisation and rising food demand take their combined toll. Coping with additional pressure would be impossible . Crop failure for any reason would magnify the crisis.

Eventually, wheat productivity may improve as better returns coax farmers into investing in better seed and farming technology. Higher acreage would, however, come at the cost of oilseeds or coarse grains. Meanwhile, consumers have no respite. Given the massive leakages in ration distribution and the new attractive price of . 2 a kilo, cynics might expect open market to soon be adequately supplied. But black marketing can't be an acceptable solution. Also, no respectable company would touch such supplies. The upshot is that the Food Security Act could have an unexpectedly dramatic impact on several business models. Exporters can abandon hope of the country shipping grains.

Importers might get a fillip . Local traders and distributors will have to cast their purchase net wider and also arrange for more expensive working capital to meet higher costs. Food companies such as Britannia, Nestle ,ITC and Parle, hundreds of bread, biscuit and snack makers, restaurants and fast-food chains are already caught between consumer resistance to high prices and expensive raw material. The cost of wheat alone is 15% of Britannia's net sales, according to analyst estimates.

Imagine the impact of further price rise on margins and bottom lines. This won't be a temporary problem either. Pricier wheat will first hit the urban poor and migrant labour eating dal-roti and samosas by roadside . Middle class will follow. And every Indian will bear the inflationary impact of the government's . 95,000-crore grain shopping bill accompanied by a Budget deficit. UPA-II will deliver cheap grain to poor families. But only by snatching away glucose biscuits, snacks and pav from their kids. It might be an expensive bargain.

The Economic Times, 28 July, 2011, http://economictimes.indiatimes.com/policy/food-security-to-create-permanent-wheat-shortage/articleshow/9391239.cms


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