Tuesday, April 19, 2011

What's with wheat?

Two days ago, the Election Commission cleared the announcement of a wheat procurement bonus of Rs. 50 per quintal (0.50 per kg.), a few days after the wheat procurement season began. The announcement was thus delayed by a few days, but the real question is, why announce a bonus at this time at all?

The normal logic of a bonus is that it gives an incentive to the farmer to produce more wheat, by planting more. For this to operate, the bonus should be announced before the farmer takes his planting decision. For Indian wheat, that would be in November.

This throws up 3 possibilities for any rationale for the bonus:

1. That the government is afraid that procurement may be low, despite an excellent harvest; this, in turn, would mean the farmer prefers to hold the wheat for sale in the market when prices rise later in the year. Nothing in the market suggest that the holding patterns of Indian farmers are changing.

2. That it is purely a political decision - if prices, including agricultural prices, are rising across the board, then farmers should share in higher realisations.

3. That the government wants to capitalise on high international wheat prices, and export some wheat later in the year. This could create some political discomfort if the farmers do not share in the higher realisation.

I suspect that 3. is the major calculus, as the US harvest appears to be threatened by late winter rains, and Kansas wheat futures, at over 9 dollars a bushel, are extremely high. This translates to over Rs. 15 per kg, compared to the ruling price of under Rs. 12 in India, and should create lots of selling opportunities in Europe and the Middle East.

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