The Inflation Dilemma: Rising Wheat and Edible Oil Prices Explained

Source: IE

Retail food inflation in India has seen a slight dip, but two key commodities — wheat and edible oils — remain at the center of concern. These staples directly impact household budgets and are critical to the food ecosystem, making their sustained inflation worrisome. Here’s a closer look at the underlying reasons driving the price surge and the potential solutions.

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Wheat: Tight Domestic Supplies and Rising Prices

Wheat Production Challenges

India has faced suboptimal wheat harvests for the last three years due to erratic weather and reduced acreage. This has resulted in wheat stocks in government warehouses plunging to their lowest levels since 2007-08.

Despite an export ban imposed in May 2022 to ensure domestic availability, wheat prices have remained stubbornly high. Wholesale rates in Delhi’s Najafgarh market are hovering around ₹2,900-2,950 per quintal, significantly higher than ₹2,450-2,500 a year ago. Retail prices are similarly inflated, with atta and maida seeing year-on-year increases of 7.88% and 7.72%, respectively.

Hope for the 2024-25 Harvest

There is cautious optimism for the upcoming wheat crop due to favorable factors:

1. Increased Sown Area: Farmers have planted more wheat this season.
2. Adequate Moisture Levels: Thanks to surplus monsoon rains, soil and reservoir conditions are conducive for growth.
3. Extended Winters: The anticipated La Niña effect could prolong winter, benefiting the crop.

However, wheat harvested in late October won’t reach markets until April, leaving a supply gap for the lean season.

Government Stocks and Intervention

As of December 1, government wheat stocks stood at 20.6 million tonnes. Deducting allocations for the Public Distribution System (PDS) and maintaining a minimum buffer of 7.46 million tonnes by April 1 leaves only about 7.1 million tonnes available for open market sales. This is a drop from the 10.09 million tonnes offloaded in 2023-24, which helped cool prices.

Moreover, with open market prices exceeding the Minimum Support Price (MSP) of ₹2,425 per quintal, farmers may prefer selling to private buyers instead of government agencies, reducing procurement.

The Import Option

International wheat prices are currently low, offering some relief:

• Russian wheat costs approximately $230 per tonne, while Australian wheat is priced at $270. Adding freight and insurance charges brings the landed cost to ₹2,290-2,545 per quintal, close to India’s MSP.
• For southern Indian flour mills, importing wheat may even be cheaper than sourcing it domestically, even after adding port and transport expenses.

However, imports are subject to a hefty 40% customs duty. Reducing this duty could pave the way for importing 3-4 million tonnes, easing supply pressures and mitigating price spikes. Politically, this could be a feasible move, given that major wheat-producing states are not heading for elections in the near term.

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Edible Oils: The Indonesian Palm Oil Effect

Why Palm Oil Matters

Palm oil is the world’s most widely produced and cheapest vegetable oil, with India importing 9-9.5 million tonnes annually. Its affordability and versatility make it a staple for quick-service restaurants, bakeries, and packaged food manufacturers.

Indonesia’s Biofuel Push

Palm oil prices have surged due to Indonesia — the world’s largest producer — ramping up its biodiesel blending mandate. The blending rate has increased from 35% in 2023 to 40% for 2024-25, diverting 14.7 million tonnes of crude palm oil (CPO) to domestic industrial use. This has reduced exportable supplies, driving up prices globally.

The landed price of imported CPO in India now stands at $1,280 per tonne, surpassing crude soyabean oil ($1,150) and sunflower oil ($1,235).

Challenges in Substitution

India’s edible oil consumption is around 25-26 million tonnes annually, with palm oil contributing the largest share. While imports of soyabean and sunflower oil have increased to compensate for reduced palm oil availability, these oils cannot entirely replace palm oil due to its unique properties:

• Deep-Frying Stability: Palm oil is semi-solid at room temperature and resistant to oxidation, making it ideal for deep-frying.
• Texture and Shelf Life: Its neutral flavor and semi-solid consistency enhance the shelf life of baked and fried foods.
• Cost-Effectiveness: Palm oil remains the preferred choice for commercial food production due to its affordability.

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Domestic and Global Market Dynamics

Palm Oil Prices

The combination of Indonesia’s policy shift and higher global CPO prices has disrupted the edible oil market. In India, retail prices of packed palm oil have jumped from ₹95/kg to ₹143/kg in a year. Mustard oil prices have risen similarly, from ₹135/kg to ₹176/kg, reflecting the spillover effect.

Soyabean and Sunflower Oils

Increased imports of soyabean and sunflower oils have provided some relief, with global soyabean production reaching record levels. However, their higher production costs and limited availability in India restrict their potential to fully offset palm oil shortages.

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Mitigation Strategies

Wheat

1. Open Market Sales: The government must strategically release its wheat stocks to stabilize prices during the lean season.
2. Reduced Import Duties: Temporarily waiving the 40% customs duty on wheat imports could bolster domestic supply.
3. Incentives for Farmers: Offering attractive bonuses over MSP could encourage farmers to sell to government agencies.

Edible Oils

1. Diversified Imports: Enhancing imports of soyabean and sunflower oils from countries like Argentina, Brazil, and Ukraine can reduce dependence on palm oil.
2. Domestic Oilseeds Production: Promoting mustard and soyabean cultivation under government schemes like the National Edible Oil Mission could enhance self-reliance.
3. Price Monitoring: Tight monitoring of hoarding and speculative trading in the edible oil market is essential to curb artificial price hikes.

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The Road Ahead

Addressing wheat and edible oil inflation requires a balanced mix of short-term fixes and long-term strategies. Reducing import duties, augmenting domestic production, and ensuring efficient market interventions are critical to stabilizing prices. The government’s ability to act swiftly and decisively will determine how effectively these inflation worries can be alleviated.

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Practice Question

Examine the factors driving inflation in essential commodities like wheat and edible oils in India. Discuss the economic and policy measures needed to mitigate their impact on consumers. (250 words)