Not a socialist analysis, but an insightful perspective from India, where water stress, declining soil health and global warming have made wheat production unsteady for six or seven years
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By G. Chandrashekhar
From Business Line, a daily published by the The Hindu group of publications in India, May 7, 2008
A structural transformation is taking place in the global grains market. The ongoing changes are expected to have far-reaching implication for the market in the coming years. How ready are grain sector stakeholders to meet the emerging market dynamics? The international seminar on ‘Wheat and Wheat products: Vision 2020’ that concluded a few weeks ago in Bangalore brought together a diverse group of participants, including Indian policymakers as also industry an d trade representatives from within the country and outside.
The meeting took note of the emerging issues of the wheat sector and possible responses to address the challenges. The effect of climate change was one of the key issues for scrutiny. Grain prices, in general, and wheat, in particular, have reached new highs in recent times. Across the world, there are howls of protest against rising food prices. Why are grain prices so high?
Clearly, demand-side and supply-side factors are at work. Traditionally a food crop, wheat is currently used as food, feed and fuel. Asia has emerged as major consumer of wheat for food purposes.
Two of the world’s most populous countries, China and India, are the top two wheat producers and consumers. Wheat demand as feed is also rising rapidly. Expansion of the livestock industry in Asia and the West is leading to rapid growth in feed consumption.
Emergence of bio-fuels — bio-ethanol, in particular — has also meant diversion of wheat for fuel purposes in the US, Canada and elsewhere. Wheat is one of the minor feed-stocks for ethanol, which is produced mainly from either corn (maize) or sugarcane. So, the demand side looks rather robust with diversified and expanding uses of the grain. The supply side, on the other hand, is becoming increasingly uncertain.
Weather aberrations, competition for acreage and trade barriers skew the market. Weather has emerged as a big risk factor in the last two years, sending the grains market into a tailspin. For instance, one of the important suppliers to the world market, Australia, suffered drought two years in a row in 2006 and 2007, which affected availability and, consequently, prices.
Some others too suffered minor weather hiccups. India, for instance, had a less-than-satisfactory crop in 2005 and 2006. Competition for acreage is becoming increasingly fierce. In the US, one of world’s largest producers and exporters of grains, wheat, corn and soyabean compete for acreage.
Market prices, speculation
Last but not the least, rising market prices have encouraged countries to impose trade barriers. While import-dependent countries have opened up their borders, exporting countries have imposed export taxes or follow a quota system. Such restrictions have distorted the market further.
With expanding demand and persisting supply uncertainties, global wheat stocks have declined to some of the lowest levels in recent times. By the end of last year, the stock-to-use ratio was down to about two months’ requirement. Preliminary information points to an increase in world wheat output and easing of supply tightness in 2008-09. But one has to wait and watch how the fundamentals pan out in the coming months.
In addition, there is speculative capital playing a role in the futures market. Huge funds have begun to flow into the agricultural commodity trade. Agricultural futures markets are generally speculative. But the level of speculation has heightened in recent months because of the price performance of such commodities as wheat, corn, soya bean, oil and cotton.
The net long position of non-commercials or speculators as a percentage of net open position in the futures markets is large. It is axiomatic that in a market that is tightly balanced, even a small change in either demand or supply, or both, will exert a disproportionately large impact on prices. Funds enjoy tracking and investing in such markets where the rewards for speculation can be attractive. Of late, wheat has become a favourite of many a fund.
While deciphering the recent trends, one must bear in mind that in the commodity market, high and low prices are not rare. Also, history tells us that high prices tend to be short-lived. This is because there will be supply response to prices.
In commodities such as crude and metals, the supply response may not happen soon because of the long time lag between investment and output. But agricultural crops are different. Their production cycle is short — 4-6 months. At any given time of the year, crops are either being planted or harvested in either the northern or southern hemisphere. So, one can reasonably expect supplies to catch up soon. Having said that, one must emphasize that the spurt in prices of major food commodities is unprecedented in recent history, especially compared to the multi-year low prices witnessed early this decade.
Wheat prices, for instance, have simply doubled from what they were, say, in early 2007. The record spurt in prices of wheat, corn, oilseeds, and so on, has sent ripples through the value chain or supply chain of the food sector. No wonder, prices of not only grains but also related commodities such as milk and meat are soaring.
Processors and consumers are scurrying to cover their requirements and save themselves from further price increases. Relief from agricultural commodity inflation (called ‘agflation’) is unlikely anytime soon. Governments have recognized the threat from high food prices and have begun to take precipitate action to contain the damage.
China, for instance, banned the use of grains for bio-fuels in June 2007. Russia imposed an export tax on wheat. India too has taken a series of steps to shut out exports and augment imports. As a fallout of food inflation, the ‘food versus fuel’ debate is becoming shriller. Should traditional foods be diverted for burning as fuel? How ethical is it to burn food when millions across the world are hungry and cannot afford high-priced food? This debate is likely to continue for a while until the market returns to more sensible levels.
Climate change and global warming have added a new dimension to the already unnerving market uncertainty. There is heightened awareness about the pernicious effects of rising average temperatures. Global warming, admittedly a slow phenomenon, can devastate agriculture. Tropical countries are at greater risk of being affected by climate change. Adaptation and mitigation strategies need to be put in place to fight global warming.
India’s concerns relating to grains, in general, and wheat, in particular, are becoming more serious as time goes by. While demand continues to expand rapidly — driven by income growth, demographic pressure and changing food preferences — output has turned unsteady in the last 6-7 years.
Weather has turned suspect and water stress is becoming endemic. In frontline States such as Punjab and Haryana grain mono-cropping has resulted in deterioration of soil health. The water table has declined to alarmingly low levels. An ecological disaster is waiting to happen. The demand-supply mismatch follows rising demand unmatched by production. This has an effect on market prices. There is now creeping dependence on wheat imports to augment domestic availability and rein in prices. India may not exactly be food insecure today; but the widening supply gap does raise concerns over food security in the coming years. The per capita availability of food grains today is less than it was 15 years ago.
Grains are becoming inaccessible and unaffordable for the poor. So, the future looks uncertain and somewhat scary. Rising energy prices too contribute to food inflation globally as the cost of food production rises. Synthetic fertilizers, use of energy for mechanized farming and transportation costs rise with higher energy costs. So, high energy prices lift grain prices worldwide; and India cannot remain insulated.
Wheat could be one of the crops most seriously affected by global warming. Under Indian growing conditions, wheat is at the limit of heat tolerance. Any further rise in average temperatures during the growing season December-March can potentially affect yields.
Indian maize, in addition to wheat, is another important grain that is susceptible to global warming.
We need to take cognisance of this looming threat, in addition to several others that already exist. The research priorities are clear. We need heat-tolerant varieties that consume water efficiently. Farm scientists have their task cut out.
Copyright 2008, Hindu