Farmers Set To Reap Higher Income But Government Has To Watch Out For Inflationary Trends

Last week, the Ministry of Agriculture came out with its first advance estimates of foodgrain production for the current crop year ending June 2019. The estimates pegged the kharif foodgrain crop production at a record 141.59 million tonnes, notwithstanding the south-west monsoon being nine per cent deficient this year.

If there are clouds of worries for the Narendra Modi government on these counts, there are further concerns in the form of rising crude oil prices and weakening of the rupee. Farmers could gain from higher crude oil prices but there are problems too. We will come to that later. Higher crude oil prices have historically resulted in firm wheat prices. A weak rupee makes Indian farm exports more competitive since they would be quoted in dollar terms that could be competitive.

The Foreign Agricultural Services of the US Department of Agriculture has come out with some interesting facts on the emerging scenario in the global agricultural market, especially for grains. The US agency sees wheat production to be three per cent lower this season 2018-19 (September-August) at 733 million tonnes (mt) against 758.3 mt last year.

Wheat consumption will continue its growth, but end stocks at 258.95 mt will be at three-year low. The forecast has already resulted in wheat prices rising nearly 20 per cent in the last 12 months and 10 per cent in the last three months. Export opportunity for Indian wheat will, however, we lower since South-East Asian nations are likely to cut their imports on lower consumption.

On the rice front, production is likely to be lower at 487 mt against 491 mt last year, while consumption will rise five mt to 487 mt. Ending stocks will be at 143 mt against 145 mt last year. This again is leading to firm prices. According to UN’s Food and Agricultural Organisation, Indian rice prices averaged at $383 a tonne during January-August this year against $358 in the same period a year ago. Indian rice is currently quoted around $380.

Global corn (maize) production has been estimated higher this year by at least 30 mt at 692.4 mt. While consumption is seeing rising by a similar amount, end stocks are seen at least 37 mt lower than last year in view of lower production last year. Corn prices have increased between seven and 13 per cent this year from various destinations like the US, Black Sea and Ukraine. However, prices could come under pressure on higher US and Ukraine crops. For Indian farmers, the rising demand from the poultry sector, which is growing at a compounded annual rate of over 10 per cent annually, and starch industry could keep the prices firm.

Oilseed farmers could be in for a bonanza if China begins buying large quantities of Indian soymeal following Beijing’s trade dispute with the US. Similarly, cotton could also gain with likely purchase by China besides global end stocks set to witness a fall. An advantage for Indian cotton exporters is that freight charges to China are very competitive.

There are other reasons, too, for farmers to look forward to higher prices. Higher crude oil price is one. A high crude oil price pushes up rates of corn, oilseeds and rubber. Corn and oilseeds turn costly because they are seen as alternative energy sources whenever crude oil zooms. It happened earlier when crude prices topped $100 a barrel and rose to a record $147 in 2008. In addition, natural rubber prices will also tend to rise as prices of synthetic rubber, a derivative of crude oil, will spike.

Therefore, going into 2019 elections in May, the Narendra Modi government can expect farm prices to be higher. The government’s decision to ensure that growers get at least 50 per cent more than their production cost as remuneration and schemes to ensure such returns will likely see an upswing in rural India’s mood and economy.

In view of high crude oil prices, the rupee has dived to a record low of over 73 to the dollar. Though a lower rupee will make Indian exports competitive, New Delhi will have to shell out more for imports, mainly crude oil, cooking oil, gold, electronics and machinery. The danger is in inflation going out of control. Already, murmurs are being heard over petrol prices ruling over Rs 90 a litre.

Higher farm prices are welcome, no doubt. And the Centre on 3 October announced a higher minimum support prices for rabi crops. The support prices, in line with the government’s policy to ensure that growers get at least a remunerative price that will be 50 per cent more than their production costs, will ensure an additional income for farmers to the tune of Rs 62,635 crore.

However, at the end of the day, what does the farmer or the common man get to keep in his pocket? If higher farm prices don’t translate into a better standard of living for the grower, the ruling party is in trouble. Caution on inflation should be the watchword for the government. Therein lies it chance for the 2019 elections.