Other BriefingsA Heatwave and Supply Chain Shocks: How India’s Wheat Export Ban Impacts Global Food Security
India’s sudden ban on wheat exports comes as countries have already been forced to adjust their procurement and supply arrangements to make up for shortages following the Russia-Ukraine conflict. Russia and Ukraine had together accounted for about 30 percent of wheat exports. The war, which began late February this year, blocked Ukrainian supplies while Russia is dealing with the impact of sanctions. Adverse climate conditions, spikes in energy demand and rising power costs, geopolitical events, high commodity prices, and high shipping insurance premiums present a confluence of factors severely impacting global food supply.
In this article, we analyze India’s sudden decision to ban wheat exports, its impact on global markets, including renewed opportunities for Russian trade, and why it serves a blow to Indian traders. We also explain why India has not exported more of its surplus wheat stock before.
Why did India impose a ban on wheat exports?
India’s policy U-turn came on May 14, shocking everyone, and seeks to stabilize domestic prices after an extreme and ongoing heatwave has cut into its wheat harvest prospects. The worst affected Indian states due to the heatwave are major wheat-growing regions – Punjab and Uttar Pradesh. (For reference, parts of the capital New Delhi and Uttar Pradesh recorded temperatures crossing 49 degrees Celsius on May 15. A day earlier Jacobabad in neighboring Pakistan recorded 51 degrees Celsius.) It is reported that at least 10 to 15 percent of wheat crop in the north region have been destroyed as scorching high temperatures prevented the wheat plant from forming grains.
Meanwhile, just in late April, Indonesia announced a complete ban on palm oil exports due to high prices and domestic shortages of cooking oil; Indonesia accounts for around 60 percent of the global supply share. India’s wheat ban is thus not unprecedented but follows an alarming pattern that could set off major food crises at a time when global supply shocks appear to be continuous.
At a meeting in Germany, agriculture ministers from the Group of Seven industrialized nations said that such moves would worsen rising commodity prices.
Prior to the ban, India had committed to a target of 10 million tons of wheat exports. At the start of the year, the Indian government had forecast domestic wheat production to reach about 122 million tons in 2022. Now a spike in temperatures could result in production of 100 million tons or lesser.
The heatwave has also jumped energy demand resulting in more coal imports whose high prices are raising power costs for Indian discoms. Unsurprisingly, retail inflation struck an eight-year high of 7.79 percent in April.
In speaking to the media on May 15, Commerce Secretary BVR Subrahmanyam said wheat and flour prices in India had jumped 20 to 40 percent in recent weeks and farmers had been selling to traders than the government. Once the heatwave affected harvest targets, the government chose to secure its buffer stock.
We don’t want wheat to go in an unregulated manner where (wheat) may either get hoarded and is not used for the purpose which we are hoping it will be used for — which is serving the food requirements of vulnerable nations and vulnerable people. – Commerce Secretary BVR Subrahmanyam
The Indian government is also working to lessen the burden of Indian wheat growers. On May 15, the central government allowed the Food Corporation of India (FCI) to procure wheat in Punjab and Haryana for central stocks by relaxing the FAQ (fair average quality) of shriveled and broken grains by up to 18 percent – the limit is usually six percent – without any value cut. The decision will help farmers avoid distress sale of wheat.
Why has the ban come as a shock to global buyers?
As recently as last week, India was planning on sending trade delegations to nine countries – Morocco, Tunisia, Indonesia, Philippines, Thailand, Vietnam, Turkey, Algeria, and Lebanon – to seek opportunities to sell more Indian wheat to these markets.
Whom will India still sell wheat to?
India will allow exports backed by letters of credit that are already issued as well as government-to-government procurement deals. India has also reassured export of wheat to countries upon request “to meet their food security needs”. This was confirmed by Egypt’s supply minister, Ali Moselhy; Egypt is the world’s largest wheat importer and is caught between sky-high commodity prices and the blockage of relatively cheap Black Sea supplies. Interestingly, this was the first time that Egypt had agreed to purchase wheat from India.
Given India’s record wheat harvests in recent years (more information below), it is likely that its wheat stocks will be able to supply dependent markets.
Update: On May 18, Moselhy clarified that while the deal with India to procure 500,000 tons of wheat was agreed to, the contract had not yet been signed.
How did India’s wheat producers benefit from the war on Ukraine?
India benefitted early on from the disruption in global grain markets, exporting 1.4 million tons of wheat in April, as per reporting by Reuters. For perspective – just a year ago, in April 2021, India exported only 242,857 tons of wheat.
Since the invasion of Ukraine, India has sold wheat to markets in South Asia, Southeast Asia, the Middle East, Europe, and North Africa. New markets that opened to India’s wheat supplies include Egypt, Turkey, Israel, Indonesia, Tanzania, and Mozambique as well as Somalia, Kenya, and Djibouti through procurement by the UN World Food Program.
Grain buyers predicted Indian wheat shipments could climb to 1.5 million tons in May following the new season crop gathering in April and improvements in logistics (lower freight costs and increase in port cargo handling capacity). That assessment is now certainly put on hold.
How did India achieve such record wheat supplies?
The massive jump in wheat exports from India was only possible due to five consecutive record harvest seasons facilitated by suitable climate conditions, use of high yield seeds, and minimum support prices for farmers encouraging production.
The most pertinent factor, of these, was the unprecedented rise in global wheat prices – above the Indian variety – in 2020, which made sourcing from India more economical. Traders speaking to The Economic Times said that the Indian grain was priced at US$360 per ton compared US$400 for Russian wheat and US$458 for Australian wheat.
Indian wheat yield has also become more attractive in international markets as the country’s agriculture scientists have introduced new high-protein varieties, which among other things are favorable for making pasta and pizza dough.
Consequently, in 2021-22, India exported a record seven million tons of wheat (worth approx. US$2.05 billion).
What is the state of India’s wheat stocks?
India is usually challenged by its domestic oversupply of wheat, with the government stockpiling abundant grains in temporary warehouses.
In March, wheat stocks in FCI-backed warehouses totaled 28.27 million tons, and this was set to jump way beyond capacity with huge harvests expected in the April, May, and June period. Thus, India’s record April wheat export numbers were thought to be sustainable by most.
On May 19, the government revised India’s wheat production to 106.41 million tons from 111.32 million tons in the February 2022 estimate.
What stopped India from exporting more of its wheat surplus in previous years?
Multiple factors ranging from the need to secure a supply cushion for drought years or crisis periods like the pandemic and higher market prices on account of India’s minimum support price regime has meant that Indian wheat growers are traditionally uncompetitive in global markets. This year – record high commodity prices, the faltering rupee value, and a rare global supply deficit due to the disruption in Russian and Ukrainian wheat exports – enabled the Indian variety to both sell more than ever before and enter new markets.
How does the ban impact Indian wheat traders?
About 1.8 million tons of grain are now reported stuck at Indian ports after the sudden wheat ban. Traders are confronting heavy losses, especially given weak domestic market prospects.
Industry experts also note that “Indian traders have an export window only till June, when Argentina will supply wheat, increasing the global availability.”
Potential for Russia trade
Competition is also expected from Russia, which is set to produce an output of 87 million tons of wheat in 2022.
Note: Wherever wheat consignments have been handed over to Customs for examination and have been registered into their systems on or prior to May 13, 2022, such consignments would be allowed to be exported. See the official government press release, dated May 17, here.
How did global markets react to India’s wheat ban?
Buyers around the world, especially Asian and African importers, are worried as they were counting on Indian supplies. Now Russian wheat may become an alternative despite payment problems due to international sanctions on Russian banks and high shipping insurance costs. Meanwhile, accelerating the crisis are output problems reported in leading export markets Australia, Europe, and Canada. Across the world, poor consumers and buyers of feed wheat will be affected by supply shortages and inflationary trends.
Soon after India’s announcement on banning wheat exports, US and European wheat futures rose by almost six percent; the Chicago market reached its daily trading limit and Paris prices reached record highs.
This article was originally published on May 17, 2022. It was last updated May 19, 2022.
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