BRIEF HISTORY OF FUTURES IN WHEAT IN INDIA :

India has a very long tradition of commodity futures. It was having sporadic of futures markets almost all over the country in not only such diverse cash crops as Cotton, Oilseeds, and Raw jute and their products but also food grains. Futures trading started with the setting up of Bombay Cotton Trade Association in 1875. The organized futures trading started in 1922 by the East India Cotton Organization. More and more commodities were added between 20’s and 40’s, for futures trading like Groundnut, Groundnut oil, Raw jute, Jute goods, Castor seed, Wheat, Rice, Sugar, Gold and Silver. This was indicative of a very long tradition of commodity futures in our country.
This is on the basis of recorded regulation in various provinces in pre-independence time. But sporadic futures trading are heard even prior to that. Teji, mandi, gali, phataks are the derivatives of futures heard happening centuries ago.
Wheat markets were in existence in several centers of Punjab and UP. The prominent and active was the Chamber Of Commerce of Hapur, which was established in 1913. Other markets were located at Amritsar, Moga, Ludhiana, Jalandhar, Bhatinda, in Punjab and at Meerut, Hathras, Saharanpur and Barreily in UP.
Futures trading in wheat have been taking place since long back at various renowned commodity exchanges of world like Chicago Board of Trade (CBOT) in Chicago; USA, Winnipeg Commodity Exchange in Canada, Kansas City Board of Trade in Kansas, USA, Minneapolis Grains in Missouri, USA and many other exchanges located in Japan, Australia, and East European Countries.
This bears testimony to the fact that the food grains are suitable for futures trading. With evolution of scientific grades and standards, scientific warehousing systems and practices, advances in transportation and communication, trading, clearing and settlement systems provides the necessary environment of competitive futures market.   

WHEAT SCENARIO IN INDIA :
Wheat is one of the most important staple food grains of human race. India produces about 70 million tones of wheat per year or about 12 per cent of world production. It is now the second largest producer of wheat in the world. Being the second largest in population, it is also the second largest in wheat consumption after China, with a huge and growing wheat demand. 

GEOGRAPHICAL AREA UNDER WHEAT CULTIVATION :

It is cultivated from a sea level up to even 10,000 feets. More than 95 percent of the wheat area in India is situated north of a line drawn from Bombay to Calcutta and also in Mysore and Madras in small amounts.

The Major Wheat producing states in India is placed in the Northern hemisphere of the country with UP, Punjab and Haryana contributing to nearly 80% of the total wheat production (Chart 1).

TYPES OF WHEAT– SIMILARITY BETWEEN INDIA & INTERNATIONAL :

NOTE: Dara variety produced all over in India (Maximum production), Desi (Durum) produced all over in India, Lok-1 in Gujarat and part of MP& Rajsthan, Kalyan in U.P.,  147 Average produced in Sahajanpur (U.P.), Sharbati in M.P., Mexican produced in Kota (Rajasthan)

TRENDS IN AREA, PRODUCTION AND PRODUCTIVITY OF WHEAT IN INDIA :

Production of Wheat in India as can be seen from Chart 2 has shown a rising trend in the past 5 decades. However, there was a steep jump in production of wheat during 1960-70 to 1970-1980 by nearly 109%. The Green Revolution in the 1960’s contributed to this phenomenal rise in wheat production in the country over the decade. However, following 1980’s, there has been a consistent declining trend in production of Wheat in India. For instance, the production of Wheat rose by just 61% from 1970-1980 to 1980-1990. In recent years, there has been a worsening trend with wheat production actually growing by just 7% from 2000-01 to 2001-02. (Please refer to Table 1)

For nearly a decade, i.e. upto mid 70’s agricultural production had stagnated. The spectacular yield growth recorded in the post-Green Revolution years in Punjab and Haryana has receded into history. Food grain production in the frontline agricultural states of Punjab, Haryana and western Uttar Pradesh, comprising the country's food bowl, has decelerated. The miracle that began with wheat was replicated in rice.
The area under production of Wheat has increased from a mere 12.93 million hectares in 1960-61 to 27.49 million hectares in 1999-2000, an increase of more than 100% over the past 5 decades. The production of Wheat at the same time, increased from 11 million tones in 1960-61 to 76.37 million tones in 1999-2000. The yield (kg/hectare) on the other hand, increased from 851 in 1960-61 to 2778 in 1999-2000, an increase of around 3.56 times. This indicates that although wheat production over the past 5 decades increased by 6.87 times but the yield of wheat has actually increased by only half of this figure.

SUPPLY-DEMAND BALANCE OF WHEAT IN INDIA :

As can be seen from Chart 3, the demand of wheat has increased by 2% (approximately) over the past 7 years while the supply of wheat has increased by 3% over the same time period. This indicates that the supply of wheat is more than needed for domestic use leading to stock surpluses.                                         

Since 1998 India’s share in world wheat production is around 12% to 13%, at the same time. India’s share in world wheat consumption is around 10% to 11%. It proves that some sort of extra stock (around 1% to 2%) arises every year. The demand-supply gap which is open at a rate of about 1 to 2 per cent per year is equivalent to 0.7 to 1.4 million tones of wheat, growing larger over the years. Resultantly the ending stocks of wheat have been increasing and the same thing can be visualized from the following chart

Indian Wheat Consumption and Stock variables

ANALYSIS OF PRICE TREND OF WHEAT IN INDIA & DEMAND ELASTICITY OF WHEAT :

Since the Green Revolution, Indian production of cereals including Wheat has been on the rise with the production of wheat rising from a mere 8.6 million tones in 1960-61 to 73.53 million tones in 1999-2000[1]. A study of the supply and demand trends over the past decade also indicates that there is always a 1%-2% surplus in Wheat. The MSP for Wheat has also increased from Rs. 275 in 1992-93 to Rs. 620 in 2002-03 (Please refer Table 2).
However, although the MSP has risen over the past decade substantially above Cost of Production leading to price distortion. For instance, in 2000-01, the MSP was set at Rs 610 (Rs/qtnl.). As against this, the C2 (Cost of Production i.e., all costs including the imputed costs of family labour, owned capital and rental on owned land) in case of Punjab was Rs 422 leading to a margin of Rs 188(Rs/qtnl.) Similarly, [2]the C2 in UP was at around Rs 439 leading to a margin of Rs 171 (Rs/qtnl.) In addition, the fragmentation of the Wheat market has resulted in further widening of price differentials between the North and South regions of the country.

RATIO OF FCI’s ECONOMIC COST TO MSP

From the above table it is clear that during the 90’s MSP has shown a steadily rising trend and at the same time economic cost has increased physically, but the ratio of  FCI’s economic cost to what it pays for wheat has gradually decreased.

MSP, PROCUREMENT AND STOCKS – WHEAT 

The distortions in prices are evident from the above table also. If consider Wholesale Price Index 127.2 as base during 96-97 when MSP was Rs. 380/- per quintal for both wheat and rice then MSP in 2001 should have been Rs. 481.90 as against Rs.610/- per quintal.
The demand of Wheat in the country is pretty stable over the past few years with the average demand of Wheat staying at around 63 MMT over the past 4 years. (Please see table 4) On the other hand, the supply of Wheat has also remained steady at 77 MMT (approximately) over the same time period. This condition is highly conducive to commencement of futures trading in wheat with better chances of price discovery. The reason being that stable demand and supply would help in correct future forecasting and future spot price fixation. This in turn would lead to convergence between futures price and future spot price and hence correct risk management mechanism.

As can be seen from Chart 4A, the MSP is always higher than the Mandi Prices in entire year of 2002 indicating that the MSP prices are not reflecting actual demand-supply of Wheat in country.

 INDIA’S POSITION IN WORLD WHEAT MARKET

Source : USDA

Wheat production in India has increased by over ten times in the past five decades and India has become the second largest wheat producer in the world. Today wheat plays an   increasingly important role in the management of India’s food economy.
Since 1998-99 India’s share in world Wheat production hovers around 11% to13%.      

INDIA’S POSITION IN THE WORLD WHEAT MARKET

Source : USDA

Starting from 1998-99 till date India’s share in world wheat export shows a rising trend. Not only share, India’s physical export also sharply rising. India’s percentage share in both world total export during 2001-02-July was 2.79 (i.e. around 3%).

INDIA’S WHEAT EXPORT

Source : USDA

GOVERNMENT POLICY REGARDING WHEAT :

Since wheat prices at procurement level and at disposal level are placed under controlled mechanism with defined objectivity, scope of general price trend analysis also becomes govt. policies centric. The related price in the open market has got a substantial relationship with the prices of wheat traded in the open market. Therefore our presentation on this aspect has a notion that the price elasticity of demand has got direct relationship on prices of wheat of other varieties (whatsoever be the size of share in total production). However, availability of targeted variety (Mexican/Dara) wheat shall increase, if Govt. withdraws gradually from procurement at MSP; in the open market, which shall concede volatility. 

PURCHASES :

The policy of Minimum Support Price (MSP) supports economic growth. MSP is a critical policy component of the Indian Economy. It generates broadly different purchasing power, health and wealth. Governments works out the MSP giving due consideration to all the economic factors like cost of input, power, capital; and labour with reasonable going margins. With the certainty about the support price, farmers expend better effort and resources provide confidence and motivation to the growers. MSP and commodity options are consistent with the requirements of the produced economy.

PROCUREMENT OF WHEAT (CENTRAL POOL ACCOUNT)

(Figs. In Lac Tonnes)