Weather forecast: Stormy skies and lower food prices on the horizon

New Delhi: Of late, Anand Prakash has been trying his hand at terrace farming. Not the ancient method that originated in South America, which involves cutting steps into hillsides to grow crops—Prakash, who lives in Ghaziabad, Uttar Pradesh, is a driver by profession and not a farmer. For him, terrace farming simply means growing vegetables and leafy greens on his rooftop.

With prices of basic food items going through the roof—tur dal prices alone have shot up 60% in two years—Prakash said he has been forced to grow his own food. “We had to reduce the quantity of nutritious items like pulses and vegetables in our diet. We almost never buy and cannot afford any fruit other than the occasional banana,” he explained. “I am lucky someone gifted me a cow—at least there’s milk at home. After spending on food and paying for private education (for two children), I am left with nothing.”

While they may not be following in Prakash’s furrow, millions of Indians have found themselves facing the same predicament in recent years, and like him, they have been forced to economize in all kinds of ways to put food on the table.

In a paper released last month, the Reserve Bank of India (RBI) noted that food inflation averaged 6.3% during the 2020s (June 2020 to June 2024), compared to just 2.9% between 2016-2020. This sharp divergence is largely due to supply shocks following adverse climate events, it said. High food inflation, the central bank warned, has turned “endemic.”

While consumers have been left reeling by inflation, farmers have not seen their incomes multiply. That’s because high crop prices—be it of pulses, vegetables or cereals—have often resulted from climate-induced production losses. In fact, trade policies such as export restrictions on cereals and duty-free imports of oilseeds have negatively impacted farm incomes.

How rains impact prices

One factor, rainfall, plays an outsized role in determining how farmers (and consumers) fare each season. But nothing is set in stone—a bumper harvest can lead to a crash in farm-gate prices, whereas freak weather events can cause widespread damage to crops, leading to a price spike. Even so, not every farmer will gain—only the lucky few whose harvest is spared benefit.

In the past few years, the Kharif (summer crop) output has been most at risk due to uneven rains, and one can never be certain of how things will play out till the crops are harvested, said Anand Chandra, co-founder and executive director of Arya.ag, which offers warehousing and credit services to farmer collectives.

Excess rainfall ahead of the harvest is a possibility this year. The India Meteorological Department (IMD) has forecast a wet September, with rains expected to be more than 109% of the long period or 50-year average.

Intense rains are expected in the north-west and northern states, including Rajasthan, Punjab, Madhya Pradesh, Himachal Pradesh, and Uttarakhand. Heavy rains coupled with strong winds can lead to lodging—when grain-filled crops fall, unable to bear the weight of the grain.

La Nina conditions—cooler-than-usual equatorial Pacific Ocean temperatures, which are associated with higher rains in India—are likely to develop by end September, the IMD said on 31 August. The forecast for October, when Kharif harvesting begins, will be issued late in September.

At the moment, the prognosis is uncertain. After an 11% deficit in June, the monsoon brought a 9% surplus in July, and a staggering 16% excess rain in August. Intense rains in short spells drowned parts of several cities, led to massive landslides in multiple states, and caused severe floods in some.

But on the positive side, the rains seem to have revived the farm sector, with no report of widespread damage to Kharif crops so far. Data from the agriculture ministry show that as of 23 August, Kharif sowing had been completed on 106.5 million hectares, close to the seasonal (previous five years’ average) area of 109.5 million hectares.

During the June-October Kharif season, farmers grow crops such as cereals, pulses, oilseeds, as well as sugarcane and cotton. This year, planting of rice and pulses has exceeded the 2023 level, and is nearly at par for oilseeds and sugarcane.

All of this is expected to lower prices in the food basket. Except for wheat, where firming up of prices may prompt the government to allow imports and undertake open-market sales, prices are likely to soften in the coming months, said Arya.ag’s Chandra. Wheat prices are a concern as some traders estimate the actual March/April harvest output is lower than the government’s projection.

View from the farm

Amit Raghuwanshi, 32, a farmer from Vidisha, Madhya Pradesh, manages close to 100 acres of family land. He is happy that the rains have been bountiful this year. But the prospect of a fall in crop prices, which will eat into his profits, is an unwelcome wrinkle.

Until three years ago, Raghuwanshi, like most other farmers in the region, used to plant soybean, a commercial crop used to make edible oil and a protein-rich animal feed. But, as freak rains hit soy harvests regularly, farmers in the region switched to premium varieties of rice.

Growing rice seemed like a rational choice as assured government procurement establishes a floor price. Even in a bumper harvest year, prices usually do not dip below that floor. Rice can tolerate periodic heavy rains and yields more per unit of land. In comparison, soybean is a low-yielding crop and its farm-gate prices have stayed sluggish for a prolonged period, largely due to the influx of cheap imported oils. Currently, wholesale soybean prices are close to levels seen a decade back.

By switching to rice, Raghuwanshi and his family took a calculated risk. Vidisha’s soil is not suited to growing rice—after a few harvests, it turns hard-pan, forming a dense layer impermeable to water and hard to cultivate. This year, Raghuwanshi left about 20 acres fallow just to let it recover after three seasons of planting rice.

This year, the family decided to plant long-grain Basmati rice, which commands a premium, even though Madhya Pradesh is not a designated Basmati growing area under the Indian geographical indication registry.

“Two years back, we sold Basmati (unmilled paddy) at ₹3,800 to ₹4,200 per quintal. Five months back, (wholesale) prices were about ₹3,200 per quintal. There is more than a month and a half left to harvest, but prices have already dipped close to ₹2,500 per quintal,” said Raghuwanshi.

Awaiting a breather

Softening prices of rice, the main Kharif crop, will come as a relief for the government, which has been struggling to cool food prices. According to the department of consumer affairs, as on 31 August, average retail rice prices were about 1.8% lower month-on-month, and 2.7% higher compared to last year.

Over the past few months, the high prices of vegetables—due to an intense summer—and pulses have been a sore point for consumers, while cereal inflation was largely under control due to improving domestic supplies and ample government stocks.

India’s latest GDP print, released on 30 August, showed the farm sector grew just 2% in the April-June quarter, lower than the 3.7% growth in the year-ago period. A decent Kharif harvest this year is expected to revive farm growth rates.

Cereal prices will be benign going ahead and prices of most varieties of pulses are likely to moderate due to higher sowing, aided by sufficient rainfall, said Pushan Sharma, director at Crisil Limited, a ratings and research organization.

Sharma added that the most volatile component in the food basket—prices of items such as tomato and potato—will cool in the coming months due to higher production and cold stores liquidating stocks. The sole outlier is onion, where prices can flare up. Currently, demand for onions is being met by a reduced winter crop, harvested in April/May; the Kharif harvest will only arrive in the markets by October.

This means that overall, prices of food and beverages, which have a 46% weight in India’s retail inflation basket, could see significant moderation from the highs earlier this year. Retail food inflation, which was at 9.4% in June, moderated to 5.4% in July, primarily due to the base effect of high food prices in July 2023.

Brewing discontent

To be sure, surplus rainfall is not the only reason behind the benign food price outlook. Since 2022, India has imposed a clutch of trade measures, including restricting export of cereals, to ramp up local supplies and government stocks. After a heat wave crippled the wheat crop in 2022, it banned wheat exports.

In 2022 and 2023, multiple restrictions were imposed on rice following uneven rains and a lower harvest, and these continue till date. The government imposed a minimum export price of $950 per tonne on premium Basmati rice, banned exports of white and broken rice, and imposed a 20% export duty on parboiled rice. As a result, India’s non-premium rice exports fell from 17 million tonnes in 2021-22 to 11 million tonnes in 2023-24.

The void created by India withdrawing from global markets is filled by other rice-growing countries, damaging its reputation as a reliable supplier, said a Delhi-based exporter who did not want to be named. “It’s time the government eases these restrictions. This will benefit farmers. The market has ample stocks and prices will dip further if restrictions are not lifted,” he added.

According to traders, the government could lower the minimum export price on Basmati in view of the assembly election in Haryana, a major growing state, next month. It could also step up direct purchase of soybean and other oilseeds to protect farm incomes. The state election in Maharashtra, a major soy producer, is due later this year.

Balancing farmer and consumer interests is a tightrope walk for the government. Farmer groups often complain that their prospects are hit by the government’s efforts to rein in food inflation. Oilseeds are a case in point.

Over the past two years, low edible oil prices globally have cushioned the Indian consumer. For several months now, inflation in edible oils has been in negative territory (ranging between -16.8% in July 2023 to -1.2% in July 2024). This was largely achieved by allowing duty-free import, which hurt local prices for domestic growers. In July, record imports of edible oils led to congestion in ports, industry lobby Solvent Extractors’ Association said last month.

But for now, edible oils continue to be a sweet spot for government inflation managers. Data from the Food and Agriculture Organization of the United Nations show that international vegetable oil prices were 28% cheaper in July 2024 compared to their 2022 highs.

Other than oilseeds, India’s imports of pulses are on the rise. Due to low output in 2022 and 2023, India’s pulses import bill shot up to a seven-year high of $3.7 billion in 2023-24. So, this year’s Kharif output will be critical as inflation in pulses has consistently stayed in double digits for the past several months. In July, prices of pulses were about 15% steeper compared to last year.

“Prices are likely to soften because domestic production is expected to be better. The crop is excellent in countries like Canada, Australia, and Mozambique, which supplies pulses to India. This will lead to lower domestic prices for tur and chana (for both varieties, currently prices are 16-17% higher year-on-year),” said Vivek Agrawal, managing director of JLV Agro, a Pune-based commodity brokerage.

‘Endemic’ risk

The Economic Survey released in July made a case for excluding food items from India’s inflation-targeting framework. Monetary policy tools such as interest rate tweaks are meant to tame inflation arising from excess demand; those cannot be deployed to control food prices, which are mostly determined by supply side factors, it said. Targeting food prices often hurts farmers, and hardships to consumers are better dealt with via direct cash transfers or food coupons, it suggested.

The RBI paper cited earlier made a counter argument, warning that high food inflation had turned endemic. Co-authored by deputy governor Michael Debabrata Patra, it said a “cautious monetary policy approach is warranted to squelch the propagation of food inflation pressures into a more generalized inflation.” This means the Central Bank is unlikely to ease rates unless food prices soften considerably. For now, all hopes rest on a bountiful Kharif harvest.

For consumers, any tempering in food inflation now will largely be ‘optical’ because of the build-up in prices over the past few years, said Crisil’s Sharma. Meaning, while moderation can negatively impact farm incomes (and have a bearing on rural wages and demand), households may not perceive it as a great relief.

So, even if the price of tur dal does not increase from here on, having spiked 60% in two years, it will not make a material difference to Anand Prakash’s life. 

Tomatoes, currently at ₹50 a kg, also remain expensive, although they are 20% cheaper than the record highs of last August, sparked by a supply shortfall. In other words, Prakash will continue to potter about with his terrace farming.