The prices of cereals are unlikely to surge as in the recent past but may remain elevated well into next fiscal due to a troika of factors — vagaries of climate change, strong global demand, and rise in domestic demand.

To be sure, production of cereals, which form an essential part of the staple diet in different parts of India, has grown consistently in the past 50 years, logging a compound annual growth rate (CAGR) of 2-3%. In recent years, increase in awareness among farmers on good agriculture practices, support from government in the form of input subsidies and procurement at minimum support prices (22-23% CAGR FY17-22), positive export sentiments (22-23% CAGR FY17-22), and growth in domestic demand have all contributed to growth in production.

However, prices of cereals have risen faster. The weighted average crop price index for cereal crops logged 3-4% CAGR over fiscals 2017-2022. Even this fiscal, prices of cereals have risen significantly on-year in the first nine months — of wheat and paddy by 8-11%, and of maize, jowar and bajra by 27-31%.

Says Pushan Sharma, Director, Research CRISIL Market Intelligence & Analytics, “The reasons are for all to see. Recent years have seen a spurt in climate-change events, like heat waves and erratic monsoon which has resulted in lower production of wheat and paddy, respectively, this fiscal. Add to this demand from global and domestic markets and the stocks of wheat and rice are estimated to be lower by 12% and 35%, respectively, for fiscal 2023, leading to a surge in prices of these commodities.”

At the global level, the ongoing war between Russia and Ukraine, which together contribute to 20-25% of world wheat exports, created disruptions in the market in 2022. India bridged the gap by exporting 7 million tonnes of wheat in fiscal 2022. This, however, depleted the wheat stock in the country, following which the government banned wheat exports in May. Despite this, India has exported a further 4.6 million tonnes of wheat as of December this fiscal to fulfil previously committed consignments.

In case of rice, competitive pricing of India vis-à-vis other nations boosted demand for Indian rice in global market. Even in the current fiscal (Apr-Dec), overall rice exports have been reported to be 6-7% higher on-year despite a 6-7% decline in paddy production, an increase in export duty to 20% for a few varieties of rice, and the ban on exports of broken rice.

This increased momentum in exports has thus been one of the critical factors leading to a surge in wheat and paddy prices by 8-11% on-year between April 2022 and January 2023.

Says Priyanka Uday, Manager, Research CRISIL Market Intelligence & Analytics, “Demand has surged on the domestic front, too. Among other crops, maize and bajra, which majorly contribute to the animal feed industry, have witnessed an increase in demand this fiscal following fodder shortage and 5-6% growth in poultry demand. Growth in beer sales after pandemic-related restrictions of fiscals 2021 and 2022 has also led to higher demand for bajra. This rise in domestic demand has pushed up prices of these commodities.”

For jowar, decline in production by 5-6% and increase in prices of substitute commodities such as wheat, bajra and maize has led to price rise.

Given all these, the price sentiment for cereal crops is expected to be strong in absolute terms. Anticipation of higher production of wheat in current rabi is expected to improve the stock condition, which may put downward pressure on prices, though heatwaves remain a key monitorable.

For kharif crops such as paddy, maize, and millets, the production expectations would be positive if normal, well-spread monsoon prevails. However, prediction of higher chances of El Nino impact on south-west monsoon by the National Oceanic and Atmospheric Administration would be a major monitorable as El Nino had resulted in 14% lower rainfall and a 2-3% lower kharif cereal production during 2015.