Wheat: time to bet on decline?

Wholesale prices for March-20 indicate that the upward spike seen in wheat prices beginning Oct-19 is anticipated to stabilize. That is welcome news. But is the worst over for the staple market?

The over one-third increase in retail price recorded between January 2019 and 2020 sent jitters across corridors of power, but the hike was always going to be short-lived. Several interventions taken by the government - such as export ban and signalling through duty free import - have ensured that price begin their long-awaited reversion to mean. As a result, 12 percent decline has been recorded at retail level between Jan to Apr 2020 bringing 10kg bag rate to Rs 420 in Lahore, although price is still far off from under Rs 350 levels seen before Jan-19.

While regulatory signals may have helped, conclusive support was received from procurement rate was increased by Rs1,400 per 40kg at the beginning of cultivation season, in effect ensuring that acreage sown makes strong leaps. Historic procurement target announced – at 8.2 million tons – means that mills with quota entitlements are now assured supply at a lucrative bargain; much lower than the prevailing rate of over Rs 1,920 per 40kg in wholesale market. Even if the illegal quota trading by ghost mills receives encouragement, it will eventually stabilize the commodity price.

Indicators are also aplenty. By Jan-20, wheat price in Lahore wholesale and retail market had increased year-on-year by 52 and 37 percent, respectively. During the same time, price control measures taken by district administrations meant that price of consumer staple, flour, remained stable, increasing by only four percent. Beginning Dec-19, market saw a peculiar situation where price of 10kg raw material - wheat - exceeded price of output flour, indicating that the market was anticipating further increase.

That margin has since begun to decline, from peak of 14 percent to just 4 percent by mid-April. If long term trends are any guide, 10kg flour trades at least 10 percent over price of wheat in retail. That means wheat price may fall further before they find bottom. Whether that bottom be reached at pre-shortage levels, is anyone’s guess, but key drivers deserve highlight.

Even if flour prices were to see no further decline, 10kg wheat price will need to fall to at least to Rs 360 for the margin to be restored to long-term average – or Rs1,440 for 40kg. Given official procurement rate is already set at Rs 1,400 for 40kg, that means margin between procurement rate and retail will thin to near zero, with no money to be made at wholesale level.

This may only occur if wholesale price declines to below procurement rate. While this is not entirely unheard of, but such distortions only last for a very short while during periods of extreme surplus, which does not appear to be on horizon, given season’s output has missed production target by close to five percent.

Which leads to the other possibility; that is, wheat and flour prices will have to discover a new normal. Given demand compression anticipated due to ongoing lockdown, it appears likely that supply and demand will remain in tandem. Even if retail wheat price were to stabilize at close to Rs415 per 10kg bag, that would still leave enough margin with the wholesale and procurement rate for markets to remain stable.

That may not leave much room for retail prices to decline any further. But wheat traders, much like other sectors, are surviving in extremely uncertain times. Thus, the less said with confidence, the better.