(Reuters) - Unfavorable weather and dwindling stocks may cause India to import a record volume of wheat over the next year.
Following the second consecutive below-average monsoon, India has been facing dry conditions for this year’s wheat crop. Periodic heat spells since planting have also added extra stress to the plants.
Indian wheat farming relies heavily on a sufficient monsoon prior to the start of planting in October. The monsoon, or rainy season, typically lasts from July through September.
Wheat stocks are also falling. In order to protect food security and sustain the price support program, the government-owned Food Corporation of India (FCI) buys and stores a lot of the country’s wheat crop, but the total amount held by FCI has fallen each year since 2012.
When it comes to its two major grain crops, wheat and rice, India has been rather self-sufficient over the past 30 years and is usually able to produce and store enough grain to feed its growing population.
But as the stockpile wanes and if weather hardships become a predominant theme this season, an Indian wheat deficit could help ignite a pulse in the world wheat market for 2016/17.
Between 2012 and 2014, India reached wheat production volumes near 95 million tonnes per season, and it is the world’s second-largest, single-country wheat producer behind China.
Last year, Indian wheat production suffered its second biggest year-on-year drop in 56 years, when production fell by nearly 7 million tonnes owing primarily to warm and dry weather throughout the season (tmsnrt.rs/20vnWJY).
The 89 million-tonne crop in 2015 was no match for the swelling domestic demand of 94 million tonnes, which diminished stocks to the current levels just below 12 million tonnes, as estimated by the U.S. Department of Agriculture.
India’s 2016 wheat crop is already off to a rough start as sowings were down 7 percent from normal levels by the end of December due to the dry soils. Unless yield can pick up some of the slack, the 2016 harvest could amount to a lower volume than last year.
Assuming that consumption is unlikely to fall, India could be up to 10 million tonnes short after the 2016 harvest which could drive Indian wheat stocks to the lowest levels in at least 56 years.
In terms of weather, both upside and downside risks still remain. There is enough time for the outlook to improve, as weather over the next couple of months will critically impact wheat yield. Additionally, India’s wheat belt, positioned across the north of the country, has received a much-needed reprise from the heat in recent weeks (tmsnrt.rs/1Se4aBI).
But even if weather improvements do prevent some yield losses, wheat quality is always at risk until the day of harvest. Near the end of 2015’s disappointing though not disastrous season, particularly heavy rains persisted and considerably lowered quality.
This prompted the largest import of wheat in almost a decade, as Indian flour mills and global trade groups bought 500,000 tonnes of high-quality Australian wheat between April and June of 2015. So for the 2016 harvest, both quantity and quality could spark the need for imports.
Domestic wheat prices in India began to rally in mid-2015 in response to both the shortage of high-quality wheat and the minimum support price becoming increasingly disproportionate compared with international rates.
Following the associated import surge and feeling the pressure from falling global wheat prices, the government imposed an import duty on wheat of 10 percent in late July 2015.
The duty is intended to protect the interest of wheat farmers by discouraging imports. This was the first time such a duty was in place since 2006.
In order to ensure that importing wheat could not be profitable in any way, the Indian government increased the duty to 25 percent in October 2015.
This tax is set to expire on March 31, so even if supply or quality issues become of concern, it is unlikely that any wheat would be tendered prior to this date. It is also unknown whether the Indian government has any plans post-expiration.
India does have a decent amount of wheat in the system, but there is a chance it might not be any good. Despite FCI procuring at least 28 million tonnes last year, it has been reported that the vast majority of that wheat is of relaxed quality, below milling grade.
If India does ramp up imports, quality and proximity make Australian wheat a key target. The weakness of both the euro and the ruble make French and Russian wheat potentially attractive options.
Reporting by Karen Braun in Chicago; Editing by Matthew Lewis