Demand for wheat in India is huge and it was the primary reason behind announcement of India’s ban on wheat exports on May 13th 2022. Reason was spelled out as food security issues but reality is that ban was in light of skyrocketing prices of wheat flour (atta) in Indian market. Aim of Indian government was to cool down prices of atta in domestic market and this ban did just that.
Spike in wheat flour (atta) prices
- Recent spike in wheat flour prices is not an India specific phenomena but spike in atta prices in India in April was not normal. Since January 2010, April 2022 saw steepest rise in price of atta on the back of dipping production and stocks.
- Stocks of wheat in India is at safe level but just because of fear of fall in production instilled by abnormal heat wave caused surge in prices of wheat, such is the demand of atta (wheat flour) in India. Health conscious people prefer atta made bread over rice, this is primary reason for rising demand of atta.
- Speculation that heat wave caused by unusually early onset of summer may hit wheat yield, has spiked up prices.
- 30% of total global demand is met by wheat from Ukraine and Russia and after Ukraine-Russia war started this wheat got blocked. As a direct consequence of blockage of wheat from Russia and Ukraine, wheat almost immediately became a commodity in short supply and as direct fallout of this short supply, price of wheat started surging globally. When price rise of wheat in India became unbearable for government of India then as a kneejerk reaction, Indian government banned wheat exports from India.
- Wheat was trading at price of Rs. 2400 per 100 kg till recently, which is about Rs. 400 per 100kg above declared MSP of wheat in India. This happens rarely in India.
- Demand and price of wheat and wheat flour attained such heights that tractor sales went up 44% in initial two months of 2nd quarter of 2022, year on year. Most of the profits earned by farmers are on account of sales in open market and not to Food Corporation of India.
As per the economic theory, high demand of any commodity causes rise in prices of the said commodity and traders involved in trade of the commodity earn better profits. Same is the case with wheat traders. Indian wheat demand comprises of domestic demand and global demand. Both domestic demand and global demand is huge. Situation in India right now is peculiar for wheat traders. Following are noteworthy facts about predicament of wheat traders in India:
- Wheat traders are raking in the moolah on account of high domestic demand and incurring losses on account of zero global demand due to wheat export ban.
- Domestic demand is high but prices are falling on account of wheat export ban. Wheat traders had bought wheat on premium prices to export but sudden ban on wheat export made their stocks a big burden. Wheat traders will incur losses if they sell their stock in domestic market.
- Wheat exporters found a novel idea to get rid of their excess stocks accumulated on account of wheat export ban. They started converting their excess wheat stockpile to wheat flour stock and exporting. This modus operandi was adopted by wheat sellers who sell bulk wheat online too. Tradologie.com next generation B2B marketplace has provided assistance to every wheat exporter registered on its platform, interested to export bulk wheat flour by providing database of tens of thousands of wheat flour importers ready to import wheat flour.
- Wheat traders are staring at huge losses on account of transportation cost incurred to bring back truckloads of wheat back from ports.
- Wheat ban was clamped on May 13 and only those wheat traders who obtained credit guarantees before May 13 are permitted to export wheat now. Traders whose stocks are lying at different ports of India without credit guarantee are badly stuck. On one hand they will incur losses on account of transportation charges and on the other hand nose-diving domestic prices of wheat will hit them badly.
- Some exporters may have found a novel idea of converting wheat stockpile to flour stockpile and then export but that is also not very encouraging for exporters whose wheat stock is stuck at different ports. For them conversion cost is not the only cost incurred. Two way transportation cost to transport wheat from port to mills and then wheat flour back to ports is just too much.
- Some exporters are thinking of selling their stock to government obviously at a loss. Wheat was selling above MSP in open market and most traders bought wheat from open market at a premium to earn windfall profits. So, selling to government at MSP will be a loss making proposition.
- Some UP wheat traders who were stocking wheat solely for exports in hope of windfall gains are exasperated now and are thinking of selling their stock to government to lessen their loses. They were stocking wheat solely for exports but once government banned wheat exports they have no option but to get rid of their stock by selling in domestic market. These traders had bought wheat at a premium in hope of windfall gains but now they are compelled to sell to government at MSP, as prices in open market have fallen at least by 19%. When they had bought wheat, prices were Rs. 400 per 100kg above MSP and quite naturally they will incur losses.
- Even farmers have not been spared of losses on account of wheat export ban. Some farmers were holding their wheat produce in the hope of windfall gains by selling on premium prices for exports. Such farmers are repenting now as prices of wheat has fallen in open market and they have no option but to sell to government on MSP. There was a time when farmers could have sold their wheat at Rs. 400 per 100kg above MSP in open market but now they have to sell to government at MSP.