Wheat Seasonal Report - Karvy Commodities · 2006. 7. 18. · Wheat is grown on more land area...

____________________________________________________________________ Seasonal Outlook on Wheat

Seasonal Outlook on Wheat

Disclaimer The report contains the opinions of the author, which are not to be construed as investment advices. The author, directors and other employees of Karvy and its affiliates cannot be held responsible for the accuracy of the information presented herein or for the results of the positions taken based on the opinions expressed above. The above mentioned opinions are based on the information which are believed to be accurate and no assurance can be given for the accuracy of these information. There is risk of loss in trading in derivatives. The author, directors and other employees of Karvy and its affiliates cannot be held responsible for any losses in trading. KARVY Comtrade Ltd is engaged in commodities broking business in India. For opening a commodities trading account, contact 91-40-23388708, 91-40-23312454 or any of the nearby Karvy branches. Mail us at [email protected]

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Lower carry over stocks of 2 million tons and lower production estimates at 69.48 million tons may lead to further rally in wheat prices. Meanwhile, demand is likely to be well above 70 million tons. The wheat season may therefore end with lower carry over stocks for next year. Based on these fundamentals we can expect wheat prices to trade in the range of Rs.900-950 levels during the months of August and September. Wheat Outlook Reasons

Supply

• Shortage of stocks of 2 MMT till new arrivals.

• Production for 2005-06 estimated at 69.48 million tons.

Demand • Demand continues to rise above 70 MMT annually

Price August – September – Rs.900-

950

• Lower production estimates, increasing demand and population


Wheat is a cereal plant of the genus Triticum of the family Gramineae (grass

family) that produces a dry one-seeded fruit commonly called a kernel. The kernel obtained from this spiky grass-like grain, is ground to make flour and is consumed throughout the world as one of the most important staple foods. It is the second largest cereal grain consumed worldwide. Today cultivated in more than 30,000 varieties, its cultivation began in the Neolithic period. Bread wheat is known to have been grown in the Nile valley around 5000 B.C., and its later cultivation in other regions (the Indus and Euphrates valleys by 4000 B.C., China by 2500 B.C., and England by 2000 B.C.) indicates that it spread from Mediterranean centers of domestication. The civilizations of West Asia and of the European people have been largely based on wheat, while rice has been more important in East Asia. Since agriculture began, wheat has been the chief source of bread for Europe and the Middle East.

Wheat is an annual crop cultivated in summer and winter seasons in different countries. For its early growth, wheat thrives best in cool weather. Among the more ancient, now less frequently cultivated, species are einkorn (T. monococcum), emmer (T. dicoccum), and spelt (T. spelta). Modern wheat varieties are usually classified as winter wheat (fall-planted and unusually winter-hardy) and spring wheat according to the season; and hard wheat (high gluten content) and soft wheat (high starch content) based on content.

Flour from hard wheat (varieties evolved for the most part from T. aestivum) contains a high percentage of gluten and is used to make bread and fine cakes. The hardest-kernelled wheat is durum (T. durum); its flour is used in the manufacture of macaroni, spaghetti, and other pasta products. White- and soft-wheat varieties are paler and have starchy kernels; their flour is preferred for piecrust, biscuits, and breakfast foods. Wheat is used in the manufacture of whiskey and beer, and the grain, the bran (the residue from milling), and the vegetative plant parts make valuable livestock feed.

Wheat has different names in several Indian regional languages such as, Gehun, Kanak, Gandham in Hindi, Gehun, Gahang in Marathi, Godhumalu in Telugu, Godhi in Kannada, Godumai, Godumbairisi in Tamil, Gendhkum, Godamba in Malayalam. Of the total 25 species identified across the globe, only five species are grown in India, in specific climatic conditions. The details of these species are as follows.

1. Bread Wheat: Triticum aestivum This wheat is grown in all wheat-growing regions. It was introduced in India by Dr. N.E. Borlaug of Mexico and is called Mexican dwarf wheat. The Indian crop primarily consists of this type.

2. Common Bread Wheat: Triticum vulgare This type of wheat is mainly grown in alluvial soils of the Indo-Gangetic plains i.e. Punjab, U.P., Bihar and parts of Rajasthan.

3. Macaroni Wheat: Triticum durum This type is drought tolerant and cultivated in Punjab, M.P., Karnataka, Tamil Nadu, Gujarat, W.B and H.P. It is used to make into suji.

4. Emmer Wheat: Triticum dicoccum This wheat is grown in Maharashtra, Tamil Nadu and Karnataka. 5. Indian Dwarf Wheat: Triticum spherococcum This is grown in limited areas in the states of MP and UP in India and in Pakistan. It is characterized by very short and compact heads with shorter grains.


International scenario Wheat is grown on more land area worldwide than any other crop and is a close third to rice and corn in total world production. It is cultivated in about 120 countries. The major wheat producing countries are China, India, USA, Russia, Canada, and Australia. Asia contributes nearly 36% of total world wheat production, where as about 17% comes from Europe and 16% from North America. World wheat production ranges between 550 and 600 million tons with an area of 200-230 million hectares. However, production has declined in the past 7-8 years, while it had increased during 2004-05 to record production levels of 625 million tons. The decline came as a result of a decrease in the area under cultivation as crop growing shifted from wheat cultivation to other commercial crops. Stagnant yield has also led to a continuous fall in production. For the year 2006-07, the Foreign Agriculture Service division of the United States Department of Agriculture has estimated world wheat production at 599.83 million tons, down by 22% compared to last year’s production.

World Wheat Production

World Area, Production & Yield of Wheat

0

100

200

300

400

500

600

700

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Are

a (

mha)

& P

roduct

ion (

mt)

2500

2550

2600

2650

2700

2750

2800

2850

2900

Yie

ld (kg/ha)

Area Production Yield

From the above graph, it may be observed that the area under wheat cultivation has been declining in the last 3 years. The reason for this was diversion of land to other crops in major producing regions. Further, due to unfavourable weather conditions, the yield of wheat declined resulting in a fall in global wheat production. Table 1: Area and Production of Wheat in major countries

Area (1000 Ha)

Production (1000 MT)

Countries 2003 -04

2004-

05 2005 -06

2006-

07 2003 -04

2004-

05 2005 -06

2006-

07 EU-25 22043 23243 23243 22900 106878 136774 136774 122590 China 22000 21626 21626 23100 86490 91950 91950 97450 India 24860 26620 26620 25000 65100 72060 72060 72000 USA 21474 20234 20234 18671 63814 58738 58738 57280 Russia 22150 24200 24200 23500 34100 45400 45400 47700 Australia 13067 9862 9862 10500 26132 25860 22600 24500 Canada 10467 13768 13768 12800 23552 22600 25860 26800 Pakistan 8034 8216 23243 8300 19183 19500 19500 21500


Share of Major Producers

EU-2527%

China20%India

16%

USA12%

Russia10%

Australia5%

Canada5%

Pakistan5%

Among the major producers of wheat in the world, the European Union – 25 has the lion’s share at 27%. Other key producers are China (20%), India (16%), and the USA (12%).

International Trade Since the USA, Australia and Canada are ranked 4th, 6th and 7th respectively in global wheat production and are also the top exporting countries, these three play a vital role in international trade. The USA contributes 22% of total global wheat exports, followed by Canada and Australia contributing 17% each. Interestingly, Australia exports nearly 75% of its wheat production, while the USA exports 50% and Canada 68% of its wheat, respectively. Egypt, the EU – 25, Brazil and Japan are the major importing countries. All the other producing and consuming countries import wheat to meet their shortfalls.

Share of Major Exporters (2006-07)

United States22%

Canada17%

Australia17%

EU-2515%

Argentina9%

Russia6%

Others14%


Global Balance Sheet Particulars 2003-04 2004-05 2005-06 2006-07

Beginning Stocks 166.00 131.87 150.33 144.00 Production 554.60 628.76 621.86 599.83 Consumption 588.72 610.30 628.20 615.87 Ending Stocks 131.87 150.33 144.00 128.24 Stock/Use Ratio 22.40 24.63 22.92 20.82 Stock to Use Ratio

Stock/Use Ratio

500

520

540

560

580

600

620

640

2003-04 2004-05 2005-06 2006-07

Pro

duct

ion &

Consu

mtion

(MM

T)

18

19

20

21

22

23

24

25

Sto

ck/Use

Ratio (%

)

Production Consumption Stock/Use Ratio

If we examine the production, consumption and stock/use ratio, we observe that over the years consumption has regularly exceeded production, except in 2004-05. Increasing consumption (compared to production) has resulted in declining stock to use ratio. For the year 2006-07, stock to use ratio is expected to be at 20.82% from 22.92% recorded last year. Declining stock to use ratio indicates that while production is decreasing, the demand for wheat is on the upswing.

The Indian Scenario India is the third largest producer of wheat after the EU-25 and China, constituting 16% of the global production. The Indo-Gangetic plains are conducive for the cultivation of wheat not only because both well-drained loams and clay-loams are suitable for the cultivation of wheat, but also because cool winters and hot summers are necessary for the crop to flourish. Wheat can be grown in both irrigated and dry lands; the long-duration variety of the crop is grown under irrigated conditions, whereas the short-period varieties are cultivated under dry conditions. Under irrigated conditions, the crop requires 4-6 irrigations. Wheat is a Rabi crop in India. Sowing begins with the start of the winter season (October-November) and harvesting takes place in March-April. The different types of wheat cultivated in India are Triticum durum, Triticum aestivum, Triticum vulgare and Triticum dicoccum, among which, Triticum aestivum contributes 95% to the total production. Although, India has the largest area under cultivation in the world (12%), followed by China, productivity is low at 2690 kgs per hectare. The area under wheat production increased from a mere 12.93 million hectares in 1960-61 to 27.49 million hectares in 1999-2000, an increase of more than 100% over the past 5 decades. Simultaneously, the production of wheat increased from 11 million tones in 1960-61 to 76.37 million tones in 1999-2000. The yield (kg/hectare) on the other hand, increased from 851 in 1960-61 to 2778 in 1999-2000, an increase


of around 3.56 times. This indicates that although the area under wheat production has increased by 6.87 times over the past 5 decades, but the yield has actually increased by only half of this figure. Wheat season in India

Oct

Nov Dec Jan Feb Mar Apr

Planting

Harvesting

Sowing Harvesting

Area, Production & Yield of Wheat in India

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

Are

a (

mha)

& P

roduct

ion (

mt)

2300235024002450250025502600

265027002750

28002850

Yie

ld (

Kg/ha)

Area (M Ha) Production (MT) Yield (kg/ha)

The above graph indicates that while wheat-production area ranges between 25-27 million hectares while production is fluctuating. The reason for the fluctuation may be attributed to changing climatic conditions during the plant’s growth stage.

Percentage share production of Wheat in India (2002-03)

UP37%

Others7%

Haryana14%

Rajasthan7%

Punjab22%

Bihar6%

MP7%


The major wheat producing states in India are Uttar Pradesh, Punjab, Haryana, Madhya Pradesh, Rajasthan and Bihar. Together they account for around 93% of total production, with Uttar Pradesh being the primary contributor. It accounts for 35% of total production, followed by Punjab (22%) and Haryana (14%). The major wheat markets are located in Punjab, Uttar Pradesh and Haryana. The value chain for wheat includes the farmer to the village-level trader or wholesaler to the consumer, through primary wholesale markets, millers and retailers. The produce is transported from the producing states to the non-producing states like Andhra Pradesh, Karnataka, Tamil Nadu, Maharashtra, Orissa and the other consuming states. Wheat Production during 2005-06 Export and Import of wheat The external trade of wheat largely depends upon overall domestic production and buffer stock requirements. Therefore, export of wheat increased between 2000-2004 even as production declined, due to higher buffer stocks. However, in the last two years with production falling to the lowest levels in 7-8 years, exports diminished affecting the major importing countries of Indian wheat - Bangladesh, Indonesia and other Southeastern nations. India, on the other hand, has not imported any major quantity of wheat in the last six years as it had sufficient stocks to meet consumption requirements.

With good post-monsoon rains, the acreage under wheat

cultivation rose to 26.90 million hectares in 2005-06 from 26.50

million hectares planted in 2004-05. Production was estimated at

75.5 million tons. However, in second advanced estimates the

Government of India pruned the production estimate to 73.06

million tons due an early summer in northern India, which is bad

for wheat. Later un-seasonal rains and hailstorms across the

country further disrupted the crop, especially in Madhya Pradesh

where it had already reached the harvesting stage. This resulted in

a further decline in wheat-production estimates to 71.54 million

tons, lower than last year’s production of 72 million tons. Once

again Indian Government has pruned the Indian wheat production

to 69.48 million tons.


Wheat Imports and Exports

ImportsExports

0

500000

1000000

1500000

2000000

2500000

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

Import

s (T

onnes)

0

1000000

2000000

3000000

4000000

5000000

6000000

Export

s (T

onnes)

Wheat Imports For the first time in six years, in February the Indian Government decided to import wheat to meet depleting stocks in FCI warehouses and to keep a check on soaring wheat prices in the domestic markets. Initially, India imported about 5 lakh tons of wheat. Later it decided to import an additional 30 lakh tons to meet rising demand. However, the Central Government clarified that the import would be used to maintain the buffer stock and was not intended for the open market. In response to a global wheat tender, India received 8 bids from different agencies, with none of the firms bidding for the entire quantum of 3 million tons. The STC received a bid for 2.68 million tons at varying costs. Finally, the Government approved two bids for the supply of 8 lakh tons. Of this quantum 5 lakh tons is from Australia and 3 lakh tons is from Switzerland and fixed the import cost at $187/ton for Australian wheat and $197-198/ton for Switzerland. After this, the Government floated an additional tender for the remaining 2.2 million tons of wheat. This time the STC received encouraging response because it relaxed quality norms. In addition, the Indian Government reduced the import duty from 50% to 5% and allowed private firms to import wheat, duty free. Supply and Demand of Wheat in India

Total Supply and Demand for Wheat in India

60.0065.00

70.00

75.00

80.00

85.00

90.0095.00

100.00

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

Tons

Supply

Demand


The supply and demand of wheat has narrowed in the past three years. Supply increased from 2000-2004, despite flat production, thanks to lower carryover stocks from previous years. Demand remained constant over the period even though population climbed, mainly due to the consumption of more wheat substitutes like rice and other cereals.

Government Policy:

The Government of India has included wheat under its controlled commodities. The reason for this is that wheat is the staple food for millions of people and is used to maintain food security in India. Some of the Government’s intervention schemes are:

Minimum support prices (MSP) or procurement prices are announced by the Government at the beginning of every wheat season. These prices are based largely on the cost of cultivation, which is systematically studied on the basis of farm- level information provided every year by the Commission on Agriculture Cost and Prices (CACP). The issue prices is the price at which the grain is released to the government’s Public Distribution System (PDS), is fixed and revised from time to time. The distribution is conducted mainly by state governments through thousands of fair price shops spread throughout the country in both the urban and rural areas.

The total procurement of wheat ranges from 8 - 14 million tons, accounting for about 11- 20% of the total production. Thus, the government handles only a small portion of the total wheat production, while the larger amount is left to private merchants. Yet the support price operation and the PDS play a significant role in maintaining reasonable and stable food-grains prices in the country for both the producers and consumers. Substantial stocks are sometimes accumulated in the process - these could rise to almost 20 million tons after the harvest and market arrivals, but may decline over the rest of the year. The off-take under TPDS is spread across a large number of states. Some of the states that are high on demand for wheat are Maharashtra, Uttar Pradesh, Bihar, Delhi, Gujarat, Kerala and Rajasthan.

The presence and effectiveness of the government procurement and distribution systems play an important role in providing a reasonably stable market for farmers, especially where there are significant surpluses. It also provides a stable supply at reasonable prices to consumers spread over a huge area. Since wheat prices at procurement level and at disposal level are placed under controlled mechanism with a defined objectivity, the scope of general price-trend analysis also becomes government-policy-centric.

The related price in the open market has a substantial relationship with the price of wheat traded in the open market. Therefore our presentation on this aspect has a notion that the price elasticity of demand is directly related to the prices of wheat of other varieties (whatsoever be the size of share in total production). However, availability of a targeted variety of wheat (Mexican/Dara) may increase, if the Government withdraws gradually from procurement at minimum support price.

The Central Government is considering allowing the user industries to directly import wheat under the Open General License (OGL) scheme and has slashed customs duty on wheat imports from 50 % to 5 %, so as to contain the surging prices. The user industries include biscuit and bread manufacturers, and flour millers.

Wheat Procurement As part of Government intervention, the Food Corporation of India will procure wheat on behalf of the Government. Low stocks with the FCI has prompted the Government to import wheat. This procurement is to supply wheat to those segments that are below the poverty line at concessional rates, in order to maintain food security in the


country. So far, FCI has procured 6.8 million tons of wheat this year, which is the lowest since 1994-95. The procurement of wheat over the years is depicted in the corresponding graph.

Wheat Procurement by FCI (Million tons)

11.90

12.30

8.20

9.30

12.6014.10

16.30

20.60

19.00

15.80

16.80

14.80

6.80

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

Price Outlook The price of wheat largely depends upon the overall production, buffer stocks and government intervention. In the last few years, production has marginally declined in India. Wheat production for 2005-06 is estimated at 69.48 million tons as against 72.4 MMT in the previous year, owing to un-seasonal rains across the country during March. The agency procures about a quarter of India's total wheat production, as farmers retain half the output for consumption, re-sowing and trading in exchange for other commodities. The remainder is sold in the open market. Wheat prices at Delhi market

Wheat Spot Prices in Delhi

500

550

600

650

700

750

800

850

900

950

1000

APRIL MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. JAN. FEB. MARCH

Rs/

Qu

inta

l

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

The graph above depicts the monthly price movement of wheat in the Delhi market over the years. It may be observed that wheat prices are the highest this year compared to other periods. This is due to lower carry over stocks and depleting stocks in FCI warehouses. Generally, prices are higher during December-March, because availability of the commodity is low in the sowing period, and prices decline as fresh crop arrivals begin after March. In the futures market, the prices have been firming up over the past two months along with the spot prices, despite arrival pressure. Spot prices are increasing because of a decline in supplies and depleting government stock. The lower production estimates at 69.48 million tons has also fueled soaring wheat prices in


both spot and futures market. The spot prices are expected to trade in the range of 850-950 level in the months of August and September.

Yearly Average Price of Wheat in Delhi

600

650

700

750

800

850

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Rs/

Qu

inta

l

If we see the yearly average of wheat prices in the Delhi market, it exhibits a continuous rise. This is because of a declining gap between supply and demand. Price Outlook

• August – September - Rs.900 – 950 – Despite import, wheat prices are expected to reach Rs.900 – 950 per quintal during the months of August and September. The reason for higher prices (when compared to present levels) is that imported wheat costs more than domestic wheat.

Wheat Seasonal Report - Karvy Commodities · 2006. 7. 18. · Wheat is grown on more land area...

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