VIEW: Food inflation may rise in 2016 on rabi crop moisture woes

G ChandrashekharAfter a general respite in 2015, food inflation may rear its ugly head again early 2016 as Rabi crops face the threat of a decline in production in the face of moisture stress and risk of a fall in planted area. Wheat, pulses and oilseeds are the major crops harvested in the Rabi season, planting for which takes place between mid-October and mid-December and harvest during March-April. Rainfall across the country (except southern region) has been lower than the long period average in the last three months. Out of the 36 meteorological sub-divisions, 25 sub-divisions that account for three-fourth of the total planted area have received deficient to scanty rains as of mid- December. Soil moisture conditions have left much to be desired in northwest and central parts of the country, essentially the country’s ‘breadbasket’. Unless soil moisture conditions improve with winter rains, yields run the risk of reduction. The progress of planting is a cause for concern. Rabi planting of major crops is lagging. As of December 18, the status is: Wheat: At 24.0 million hectares this season so far, wheat plantings are below 26.8 million hectares planted this time last year. Wheat is generally planted in an area of 28-29 million hectares which means there is still some way to go. Delayed planting would mean delayed harvest which in turn can expose the crop to adverse weather during the growing period. It is known that Indian wheat is already at the limit of heat tolerance.Pulses: After humungous hue and cry over spiraling prices in the last three months, pulses have attracted attention. Currently, planted acreage for pulses is estimated at 12.4 million hectares versus 12.2 million hectares this time last year. Normal area in the Rabi season is 13.6 million hectares.Specifically, Chana (gram or desi chickpea) is the largest pulse crop generally accounting for close to 50 percent of the aggregate annual pulses production. Chana planting stands at an estimated 7.9 million hectares, slightly ahead of 7.6 million hectares this time last year. The crop’s normal planted area is 8.8 million hectares. Oilseeds: Oilseeds planting is also lagging as compared with last year. As of mid-December, the area planted was an estimated 6.9 million hectares versus 7.3 million hectares this time last year. Planting of rapeseed/ mustard, the principal Rabi oilseeds crop, is lagging at 5.9 million hectares versus 6.4 million hectares last year. It must of course be conceded that the aforesaid acreage numbers are by no means the final planted area for the Rabi season. Acreage data will be updated as and when more information flows in from different parts of the country. But the pattern is clear – there is a clear lag in area planted for major Rabi season crops; and if the lagging pattern persists the harvest size will be impacted. A lower Rabi crop would be potentially explosive from price and inflation perspective. We are already reeling under tightening market conditions following a tepid kharif season performance. The country’s kharif crops (mainly rice, coarse cereals, oilseeds and cotton) suffered production decline because of prolonged dryness in July, August and September triggered by El Nino conditions, after a fabulous onset of southwest monsoon in June.Another threat that cannot be overlooked is the possibility of unseasonal rains and hailstorm during Rabi harvest in March and April. Both in 2014 and 2015, Rabi crops – especially wheat and pulses – faced significant damage due to adverse weather. There is nothing to suggest that such freak weather will not recur early next year. The policymakers, industry and trade, indeed all stakeholders must take cognizance of the emerging situation. As the Indian market is largely integrated with the global market, global cues will also impact the domestic market. Although 2015-16 global wheat supplies are comfortable, a reduction production is expected in the Black Sea region. There is also the risk of winterkill. India is the world’s second largest producer of wheat and the world market is aware of concerns within India regarding wheat prospects. Rise in global wheat price can potentially rub-off on Indian market price.As for oilseeds and vegetable oils, although international market prices are somewhat subdued because of heavy stocks of palm oil, El Nino in Southeast Asia will impact future yields and production of palm oil. Already palm production has entered the lean season which will last until April next year as a result of which prices are expected to firm up significantly in the coming months. Crude palm oil prices can potentially spike by about $ 100 a ton to over $ 650 a ton. Additional demand for palm oil comes from implementation of biodiesel mandate in Indonesia. South American soybean crop deserves to be monitored. Sugar: Sugar prices also face some upside risk, not from global factors, but because of lower production (at least one million tons less) expected in 2015-16 in India, the world’s second largest producer. Government’s ethanol policy and mandated sugar exports are also likely exert upward price pressure. Indeed, sugar prices have risen by a fifth in the last three months. Pulses have been in short supply for over three decades. India is the world’s largest producer, consumer and importer of pulses. With Rabi crop prospects not looking very bright, one can expect market prices to continue to stay at elevated levels and indeed spike if prospects were to deteriorate. In sum, essential commodities of mass consumption such as wheat, edible oil, pulses and sugar – all with high weightage in consumer price index – run the risk of price escalation in the coming months driven by domestic and global factors. Currency plays an important role in inflation. A weaker rupee can potentially make edible oil and pulses import so much more expensive even while supporting sugar export. In recent days, the rupee has shown signs of weakening. This can add to price pressure. A potent combination of less-than-satisfactory Rabi crop prospects, weather risks and weakening currency is at play. The take home message is clear: Caution over food inflation in the coming months. Policymakers as well as business houses have to remain alert. Food inflation or food price risk can potentially translate to policy risk which in turn can morph into business risk. (The author is Economic Advisor, IMC and Director, IMC-ERTF)