The Indian government’s decision in early July to allow exports of 900,000 metric tons (MT) of wheat and 650,000 MT of wheat products by March 31, 2010 and reversing the decision two weeks later because of concerns about a weak monsoon season sent a ripple through world food grain markets. While India is usually a minor player in world wheat trade, the quick change of plans brought back memories of just a year ago with high wheat prices and limited supplies. This episode indicates there is much that can be done to lessen trade distortions from government stocks and price management programs for agricultural commodities.

This government policy story began in February 2007 with a ban on exports of wheat in an attempt to contain food price increases. It was followed by an October 2007 ban on wheat product exports. India’s wheat crop is planted in October and harvested the following April-June, and India had record wheat crops in 2008 and 2009. According to the U.S. agricultural attaché in India, by July 1 of this year government wheat stocks were at 35 million metric tons (MMT), double the required minimum of 17 MMT. This combined with record large rice stocks has led to a shortage of storage facilities for government grain. That is what likely precipitated the decision to allow some wheat exports which had been approved in February by a panel of government ministers.

Exporting some wheat was a good decision from a stocks management standpoint, but India’s summer crops depend on monsoon rains that begin in June. The U.S. agricultural attaché reported that rains were 46 percent below average for June, with the northern plains and central India shortest on moisture with rainfall 50-80 percent below average. Because of the late arrival of rain, summer crop plantings are 30-60 percent behind last year. Wheat is not a summer crop, but the fear is that the summer crops will be planted late and not harvested early enough for timely planting of wheat in October. Wheat is widely consumed in India and along with rice is part of the food guarantee for families with incomes below the poverty line.

Not much Indian wheat would actually have been exported because at $230-240 per metric ton it is not competitive with world wheat prices closer to $200 per MT. The minimum government purchase price was increased for the 2009 harvest and a record 25 MMT were put into government storage. The government has been adamant that it will not subsidize wheat exports. If world wheat prices strengthen and the government reverses its policy u-turn, the U.S. agricultural attaché believes a million tons of Indian wheat could move to Bangladesh, Sri Lanka, the Middle East and South East Asia where it has a competitive freight advantage.

Over the last four years Indian wheat exports have averaged only 230,000 MT per year, but India cannot be ignored in the world wheat market. In the 2008/09 marketing year India was the third largest wheat producer at 78.6 MMT after the European Union at 151.6 MMT and China at 112.5 MMT. India was also the third largest wheat consumer in 2008/09 at 70.3 MMT down from 76.3 MMT in 2007/08 and 73.4 MMT in 2006/07. It exported 1.6-5.7 MMT per year from 2000/01-2004/05. India then imported 6.7 MMT of wheat in 2006/07 after two short crops in 2005 and 2006 at 68.6 MMT and 69.4 MMT, respectively. Imports were 1.9 MMT in 2007/08. India also imported 1.4-2.2 MMT each year for 1996/97-1999/00 and 2.5 MMT in 1992/93. India also had a short crop in 2003/04, but imported little wheat.

Total world wheat stocks are large enough to handle a smaller crop in India. Stocks at the end of the 2007/08 marketing year were a relatively small 121.2 MMT, and recovered to 167.4 MMT by the end of the 2008/09 marketing year. Current USDA estimates show end of year world stocks growing for this year (2009/10) to 181.3 MMT. That is the largest end of year stock since the excessively large carryover years of 1998/99-2001/02 when stocks exceeded 200 MMT. Even more important, stocks were large among the nine major wheat exporting countries (Australia, Argentina, Canada, the EU, Kazakhstan, Russia, Turkey, Ukraine and the U.S.) at the end of the 2008/09 marketing year at 63.6 MMT, up from 38.4 MMT the year before and only 5.2 million MMT less than the large supplies of 68.8 MMT at the end of 2005/06.

India is not likely to give up efforts to manage wheat stocks regardless of arguments for freer trade or pressures at the WTO Doha Round of trade policy talks. With 80 percent of its population living on less than $2 per day and a long history of interventions in food prices, political pressures will continue to be too strong. What WTO member countries should demand is that government decision making be transparent without the delays that occurred this year and the reversal in policy.

Other countries can also demand that the Indian government pursue internal market policies that allow market forces to set wheat prices. The government purchase price for wheat for the 2009 crop resulted in the large government wheat stocks of 35 MMT. In the proposed budget released in early July the government support price was increased again from its current level of $230 per MT. Unless wheat output declines because of late planting or a shortfall of moisture, government stocks will accumulate even more in 2010 and likely lead to efforts to dump wheat on the world market.

The ruling government led by the Congress Party that was reelected in May with less need for support from minor parties is making efforts to allow for more market decision making. The futures market in India for wheat returned to operation on May 21 after being banned in March 2007 as a condition for continued support from the Communist Party. The government’s rejection of export subsidies for wheat this year was also a positive step.

India is not alone in regulating domestic markets and shifting all of the supply and price adjustments onto other countries through international trade. China and other developing countries with large populations have pursued similar policies. Developed counties have used high tariffs and selective imports to manage local prices. Even the EU which has become more market oriented dropped import tariffs on wheat after short wheat crops in 2006 and 2007 only to re-impose them after a large crop in 2008. The broad movement toward freer trade has stalled, but there is much that can be done to reduce trade distortions from domestic policies.