Indian wheat inventories held in government godowns entered 2024 at a seven-year low, as two seasons of falling production and increasing demand forced the government to dip into state-held reserves to cool domestic prices instead of facilitating imports by abolishing the state’s wheat import tax.

According to official data, the Food Corporation of India and other government agencies were holding 16.35 million metric tonne on January 1, 2024, down from 17.17mmt a year earlier and the lowest for that date since 2017, when stocks were reported at 13.5mmt.

However, the New Year stock holdings are higher than the minimum government-advised bulwark for the start of the calendar year. The January 1 buffer stock requirement is 13.8mmt formulated to cover three months of domestic market demand estimated at 10.8mmt, plus a strategic reserve of 3mmt to meet any procurement shortfalls, demand spikes and new crop harvest delays.

While global wheat prices fell by more than 35 per cent last year, prices in India, the world’s second-biggest producer and consumer, continued to rally, increasing by more than 20 per cent in the last quarter of 2023. This is despite a wheat export ban introduced in May 2022 to curb the outflow of the country’s staple by local exporters looking to take advantage of the spike in global wheat prices following Russia’s invasion of Ukraine.

Another contributor to the upward price pressure was a disparity between actual wheat output from the 2023 harvest and official estimates. According to several industry officials and global trade analysts Indian wheat production in the 2023/24 season (April to March) was at least 10 per cent lower than the farm ministry’s estimate of a record 112.74mmt. Supporting that claim were the relatively low state procurements of 26.2mmt from the 2023 harvest compared to the government’s target of 34.15mmt.

Furthermore, as offtake for government food security programs increases the government has been rapidly auctioning state reserves under the Open Market Sale Scheme (OMSS) to bulk consumers, such as flour millers and biscuit makers, in a concerted effort to open up the market and quell domestic food inflation. The state-run Food Corporation has marketed at least 8mmt to domestic consumers via the public sales program since they began in June last year. An additional 2.15mmt remains of the original 2023/24 government e-auction allocation for calibrated release through to the end of March.

But with farmers entirely sold out months ago and miller inventories almost exhausted, the government may be forced to increase supply by extending these auctions to meet domestic demand and keep food inflation in check ahead of this year’s harvest.

The government does have an additional 2.5mmt available for sale under the OMSS in the January to March period if deemed crucial to market stability. However, according to local market pundits, this would push closing 2023/24 stocks (as of April 1, 2024) below 6mmt, their lowest level since 2007 and well below the government’s desired end-of-season buffer of 7.46mmt.

The significant fall in global prices only adds market pressure to reduce the import tax and initiate an international procurement program to supplement domestic supplies and suppress prices. But with national elections expected sometime in April or May this year, the government is not likely to change trade policies despite new crop production concerns. The farmer vote is critical to Narendra Modi’s election success in the large wheat-producing states, and the ruling party is unlikely to anger them by engaging in the import discussion as that will weigh on the prices received for their produce once harvested in a few months.

Instead, the government has again looked to internal controls to manage the nation’s overall food security, curb hoarding and unscrupulous speculation, increase supply and moderate prices. On February 8, the Ministry of Consumer Affairs, Food and Public Distribution announced that the wheat stock limit in all states and territories had been revised down from 1,000 metric tonne, itself reduced from 2,000 mt in December last year, to 500mt for traders, wholesalers and big chain retailers.

The wheat stock limit for processors has been fixed at 60 per cent of their monthly installed capacity multiplied by the months remaining in the Indian marketing year, concluding March 31. Before the change, the wheat stock limit for processors was 70 per cent of monthly installed capacity multiplied by the months remaining in 2023-24. No change has been made for retailer-owned sites, with the wheat stock limit kept at five metric tonne for each outlet.

All entities holding wheat stocks must register on the government portal and update the stock position on Friday of each week. Any unregistered entity dealing in wheat, or violations of the stock limits will be subject to suitable punitive action under the Essential Commodities Act,1955. When stocks are above the prescribed limit for a particular entity, it will have 30 days to reduce stock holding to fall within the new government regulations.

India’s early sown wheat crops are well advanced, and total production is on track to exceed that of last year’s unofficial number following recent improvements in growing conditions after erratic monsoons delayed planting in some regions. Whether output is as big as the government’s lofty forecast of a record 114mmt following the early season issues is highly questionable. The government pegged the planted area at 34 million hectares, up from 33.8 million hectares last year, but most local traders and analysts see the planted area lower year-on-year.

Nevertheless, the wheat crop is entering a critical growth stage. It is highly susceptible to moisture stress and temperature spikes, especially during March when the grain is forming and filling. A sudden and sustained rise in the mercury when the kernels are building starch and proteins can drastically impact crop yields through premature ripening, as occurred in 2022. A repeat of that, or even last year’s heavy and untimely March rains, could exacerbate problems from exhausted wheat reserves and rampant cereal inflation, making imports in 2024/25 almost inevitable.

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