Although this is likely to result in a somewhat larger procurement than earlier anticipated, the overall supply situation for wheat will continue to be insufficient necessitating additional wheat imports, according to Grain and Feed Update, a report released by the US department of agriculture attache in New Delhi on Tuesday.

Wheat supplies in Punjab and Haryana will be adequate and government procurement is likely to be fairly normal. However, low production in Uttar Pradesh and Bihar will put upward pressure on open market prices within a few months.

Major wheat surplus producing states had been seeking a much higher support price (Rs 6,000 or more), but it appears that concerns about the impact of higher support price on the rising food subsidy spendingrestrained the increase.

Nevertheless, the hike is probably large enough to prevent a procurement disaster. At this price, farmers in the major wheat surplus states of Punjab and Haryana could well be tempted to sell to the government. Unlike last year, the market prices of wheat in major producing areas have already dropped to the support level, which should help larger procurement of wheat by government agencies than earlier anticipated. Last year at this time the gap between the open market price and support price was a historical high of Rs 1,400/mt as can be seen from the following table. The entire wheat shipment is scheduled to arrive at the southern ports, which could effectively curtail the demand for domestic wheat from southern India during the post harvest season helping larger government procurement.

Although procurement from Punjab and Haryana, the states with large surpluses, may perhaps be near last year's level, there is likely to be a sharp decline in wheat production in Uttar Pradeshand Bihar.

In a normal year, wheat procurement from Uttar Pradesh averages around 1.0 mmt.

In short, the government may be able to procure 9 mmt of wheat as a result of the support price hike, but much more than that seems unlikely in view of the anticipated over 4 mmt decline in production. Bidding away wheat from the open market offering higher support price could reduce wheat availability in the open market later in the season, which could spark off significant open market price increases as happened in 1996.

By increasing the price support level, the government has in effect set a minimum limit on open market prices and further widened the spread between the sale price (issue price) of wheat from the government stocks to the Public Distribution System (Rs 4,500/mt for Above Poverty Line,(APL) segment and Rs 2,500 for the Below Poverty Line (BPL) category). Unless the issue price of wheat is increased to offset the increase in the support price, wheat offtake from government stocks will startincreasing sharply after the procurement season (April - June) is over. Furthermore, to contain the price rise, the government may be forced to sell large quantities of wheat in the open market in the lean period (from October to March) negating any increase in procurement.