1.

INTRODUCTION


The fluctuation of wheat, maize and various edible oil prices is normal in the market economy. The level of the
price and the fluctuation not only has a significant influence on farmers and consumers, but a reasonable and
stable price also has an irreplaceable effect on the safe running of the these market. These increases in
agricultural commodity prices have been a significant factor driving up the cost of food and have led to a fuller
awareness and a justifiably heightened concern about problems of food security and hunger.
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The causes of this price spike are complex and due to a combination of mutually reinforcing factors, including
droughts in key grain-producing regions, increased feedstock use in the production of biofuels, rapidly rising oil
prices and a continuing devaluation of the US dollar, the currency in which indicator prices for these
commodities are typically quoted. This turmoil in commodity markets has occurred against the backdrop of an
unsettled global economy, which in turn appears to have contributed to a substantial increase in speculative
interest in agricultural futures markets. Tight market conditions for essential agricultural commodities pose
policy challenges for national governments as well as for international organisations. In order to take the right
policy decisions, we need to understand what caused the current price spike, what the implications may be for
prices and price volatility in the future, and how various countries and members of society may be affected. This
note aims to improve this understanding and thereby to contribute to sound policy formulation.
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Historically, food markets have been subject to much instability, and the last few years have seen very large
swing in food prices. This price volatility has had large effects on farmers, market participants and consumers.
Higher commodity prices benefit sellers (including grain farmers), but they hurt buyers (including consumers,
and dairy/livestock farmers who face higher feed cost). Lower prices have the opposite effects. Market
instability makes anticipating future price patterns difficult and creates significant price risk/uncertainty for
market participants. It can also lead to hasty and injudicious policy responses that might be difficult to reverse.
These need an understanding of the factors that contribute to large price swings and help in designing policy
schemes that can help reduce this uncertainty or to ameliorate its effects. The recent increase in food price
volatility raises three important sets of questions.
-term
phenomenon or is it the beginning of a longer term trend?
ility for farmers, traders and consumers? How does
it affect the welfare of poor households?
?
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Fluctuation in market prices for our agriculture products could adversely affect our financial condition and
results of operations
Prices for cereals, oilseeds and by-products, like those of other commodities, can be expected to fluctuate
significantly. The prices that we are able to obtain for our agriculture products depend on many factors beyond
our control, including:

prevailing world prices, which historically have been subject to significant fluctuations over relatively
short periods of time, depending on worldwide demand and supply


changes in the agricultural subsidy levels in certain important countries (mainly the United States and
countries in the European Union) and the adoption of other government policies affecting industry
market conditions and prices.
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However, after two decades of relative decrease in food prices across the globe, since 2008, food items have
become more expensive than non food items. By mid-2008, international food price had skyrocketed to their
highest level in 30 years, leading to hunger riots around the world. At the beginning of 2011, FAO food price
index rose above its 2008 peak. India is also concerned by inflation, particularly food prices have increased
more rapidly than non food prices . Indeed, the ratio of food price on non-food price was around 1 until April
2008 to reach 1.25 in October 2009. Since the end of 2009, the ratio has been around 1.20 and has been rising
ever since.
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1.1 IMPORTANCE OF WHEAT AND MAIZE IN INDIA
Maize is an important cereal. In Indian Agriculture, Maize occupies a prominent position and each part of the
maize plant is put to one or the other use and nothing goes as waste. Among the cereal crops in India, maize
with annual production of around 10 million tones covering 6 million hectares ranks fifth in area being next to
rice, wheat, jower and bajra, fourth n production whereas in productivity it ranks at third position. Maize
production in country is fully utilized domestically for food and exports are negligible. Even with the
spectacular increase during the recent years in production of the finer cereals i.e., rice, wheat or also of jowar
coarse grain, there is no problem of surplus of maize. It is, therefore, inferred that, with the increasing demand
for, food grains relative population growth maize will hold its share as an important cereal food grain. Taking
into consideration that maize contributes about 6% to the total cereal production and about 23% to the total
course grains, the requirement of maize for food will be about 8.25 million tonnes by 2000 A.D. Because of its
worldwide distribution and relatively lower price maize has wider range of uses. It is used directly for human
consumption, in industrially processing foods, as Live-stock feed and in industrially non food products such as
starches, acids and alcohols. Recently, there has been interest in using maize for production of ethanol a
substitute for petroleum based fuels.The next important field where maize finds extensive use is for livestock
feeds viz, cattle Poultry and piggery both in the form of seeds and fodder.
In most of the developing countries maize is consumed directly as food. In India, over 85 percent of the maize
production is used as food. Most commonly used forms are as (1) Chapattis (2) porridges of various forms (iii)
boiled or roasted green ears (iv) breakfast foods like corn flakes and (v) Pop corn. For the (iii) and (v) category
sweet and Pop corn varieties are especially grown in USA and Europe.
The industrial uses based on the physical properties of the cob when ground to powder are as fillers for
explosives in the manufacture of plastics, glues, adhesives, reyon, resin, vinegar and artificial leather and as
diluents and carrier in the formulation of insecticides and pesticides.
The economics of cultivation of maize, jowar and wheat are almost the same: but the cost benefit ratio in case
of maize is highest because of its high productivity. For processing of maize and its products mini factories
should b setup around maize growing-areas of our country. This will enhance the demand for maize and
its products and the growers can be directed their produce directly to the factories.
Like all other cereal crops, maize protein, even though possess at reasonably high level is deficient in essential
acids like lysine and tryptophan content.
Among cereal grains maize trade has expended most rapidly increasing from 20 million tonnes in 1961-65 to 60
million tonnes in 1977-79 representing an annual growth rate of 8%. The proportion of world production with
trade increased from 10% to 20%. Annual wheat traded was 80 million tones with growth rate being 3.5% and
proportion remaining at 16%. The rice trade also increased at about the same rate which was 11 million tones
and less than 5% of world production. India exported about 18,000 tonnes only.
Future Prospects:
The demand for cereals in India will inexprably increase during the next two decants. With the population
expected to increase to 985 million by the year 2015, the domestic requirements of food grains at approximately
the current levels of consumption have been estimated by the National Commission on Agriculture to be 225
million tonnes in 2015.Maize, due to its inherently higher yield potential, too National Commission on
Agriculture, after a careful consideration o the available date, has observed that maize will have to contribute
more to the meeting of Indias food needs during the next 25 years.
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Ranked next to maize in terms of consumption, wheat has been playing an important role in leveraging the
agrarian scenario of India. The annual production of wheat in India stands at 65-75 million tonnes, thereby
making India its second largest producer in the world after China. People in India consume 70-72 million tonnes
of wheat on an average. In India, it is commonly known as 'atta' and is eaten mostly in the form of rotis,
chapattis, etc. There are about 200 flour mills operating in India having a capacity to produce about 15 million
tons of wheat.
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In the realm of food crops in the world, wheat (Triticum spp.) occupies the number one position. India is one of
the principal wheat producing and consuming countries in the world. Its importance in Indian agriculture is
second to only rice. Wheat flour based products, such as the chapatti, are part of the staple diet in most parts of
India - particularly in northern India. Wheat straw is also used for feeding cattle. The Green Revolution, which
was initiated in the country in the late 1960s, has had a very significant effect in increasing the yield of wheat.
The output ratio of wheat to rice has steadily increased 1:3 to 4:5. Since 1991, the Ministry of Agriculture has
been giving massive thrust to boost its output in the country. At present Uttar Pradesh, Punjab and Haryana are
the three major wheat producing states. They account for nearly 70 per cent of the total wheat produced in the
country. Though Uttar Pradesh has the highest production In India, it lags behind Punjab and Haryana in terms
of productivity. Better irrigation facilities in these states are responsible for higher yield. In Haryana, 98 per cent
of the area under wheat is irrigated and in Punjab the ratio is 96 per cent. However, in Uttar Pradesh, only 88 per
cent of the area under wheat is irrigated. Wheat cultivation in non-traditional states including Sikkim is also
being popularized by improving irrigation facilities and developing seeds suitable for cultivation in these
regions.
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India is the second largest producer of wheat in the world, with production hovering around 6875 million tons
for past few years. The latest estimated demand for wheat production for the year 2020 is approximately
87.5 million tons, or about 13 million tons more than the record production of 75 million tons harvested in crop
season 19992000. Since 2000, India has struggled to match that record production figure and thus faces a
critical challenge in maintaining food security in the face of its growing population.
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1.2 How can the current price spike be explained?

Prices rise when markets get tight. At the same time, there is a strong demand growth. Demand for wheat and
coarse grains grew almost twice as much as did production. More than half of the increase in use of wheat and
maize was due to higher use in the bio fuels industry. Use of cereals for food also continued to grow, as did
cereal use for feed.
The production shortfall, relative to trend, would in itself have been enough to send prices higher, although
under normal condition stocks would have buffered the market and dampened the price rise. But stocks were
already low and they kept declining because of bad weather and low yields. Supply shortfalls, the absence of a
sufficient buffer, the continued increase in food and feed use, and the high growth in relatively price-insensitive
demand for biofuels all coincided to make the price increases exceptional. More recently, there has also been a
significant increase in investments in agricultural derivative markets from non-traditional sources, whether for
portfolio diversification or speculation. It is likely that this has contributed to the rise in short term futures prices
and is an additional factor in the current spike in spot market prices
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Important, persistent changes in global grain markets set the stage for the grain price spikes. These included
remarkably sustained and rapid increases in income in many countries, which increased worldwide grain
demand, especially for animal feeds. Public support for bio fuels production was another new, large and
persistent shifter of demand for maize, whereas funding of production-oriented crop research continued to be
neglected. The net effect of these factors was a gradual tightening of the aggregate supply demand balance for
major grains.
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1.3 What factors will shape future prices and price volatility?



The recent negative yield in key agricultural commodity producing regions that have contributed to
price increases should be viewed as temporary. Barring any underlying climate change or water
constraints that could lead to permanent reductions in yield, normal higher output can be expected in
the very short term.
Macroeconomic conditions that favour economic growth, increases in purchasing power, and stronger
demand for agricultural commodities are expected to continue. This is a permanent factor in future
price determination, but not a new one: strong GDP growth in developing countries has been a feature
of commodity markets for many years. Thus, this factor should slow the decline in real prices in the
future, but not lift average prices to permanently higher levels
The oil price and energy prices more generally, is a critically important contributing factor to the
increase in production costs for these agriculture products but ultimately in the market prices for these
goods.
Feedstock demand for bio fuel production is expected to increase further, although at a slower rate
than in the past three years, and under current policy settings appears to represent a permanent factor
in price formation.
Stocks of wheat and coarse grains have fallen to low levels relative to use, reducing the buffer against
shocks in supply and demand. Stocks are not expected to be fully replenished over the coming ten
years, implying that tight markets may be a permanent factor in the period to 2017. This should not
lead to permanently higher prices, but provides the background for more price volatility in the future.
The surge of investment in futures commodity markets from non-traditional sources may have short
term price effects. But relative to the ten year outlook period these may prove temporary, given
adjustment in markets and participants behaviour: funds can move rapidly in and out of commodity
markets as profit opportunities dictate. Given their size, this may well be a new and permanent
element in future price volatility.
A more general point concerning price volatility relates to the thinness of markets, or the share of
imports and exports relative to the size of global consumption or production. When markets are
thinner and prices in domestic markets do not follow those in international trade because of insulating
policies or market imperfections, world market prices must change more to accommodate an external
shock to traded quantities, all else equal. Such market characteristics are expected to remain a
permanent feature in the volatility of prices
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1.4 What are current expectations for future prices?


2013/14 (April/March) wheat exports are forecast to increase to 8.0 million tons, including 5
Million tons of government wheat. India is set for a near-record wheat harvest of
92.0 million tons in 2013/14 (April/March) on strong planting and favourable growing conditions.
Assuming a normal southwest monsoon this summer, 2013/14 (October/September) rice
Production is also forecast near-record at 102.0 million tons from 44.5 million hectares. Since 2010/11,
Back-to-back bumper wheat harvests and strong government procurement have resulted in a
Significant build-up in government stocks, which is likely to increase further in 2013/14. Consequently,
Required Report - public distribution the Government of India (GOI) is likely to continue to allow exports of
and wheat from government stocks in 2013/14. 2013/14 coarse grain production is forecast higher at
42.2 million tons on expected recovery in acreage and yields. Corn exports in MY 2013/14 are forecast
Lower at 2.5 million tons on expected strong domestic demand. Pulse imports in MY 2012/13 are
Estimated to increase to a record 4.0 million tons on continued strong domestic demand, and forecast to
Increase further in MY 2013/14 provided international prices and the value of Indian rupee remain
Stable.
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Corn exports likely to fall 31% in 2013-14. Outbound shipments of corn are expected to slide 31 per cent to 3.2
million tonnes in the 2013-14 marketing year hit by weak export demand, according to a report by the US
Department of Agriculture (USDA). India is estimated to have shipped a record 4.67 million tonnes of corn
( maize) in the 2012-13 marketing year (November-October)."Corn export is estimated lower at 3.2 million
tonnes on weak export demand," the USDA said in the report. Provisional monthly trade estimates indicate a
sharp decline in corn exports since August 2013 due to relatively weak global prices on improved supplies from
other competing locations compared to last year, it said. Besides, corn prices in India have been relatively steady
due to strong domestic demand from poultry and starch industry, and the government's intervention of procuring
corn at minimum support price of Rs 13,100/tonne in many states. Domestic spot prices of corn in the major
producing states currently range from Rs 11,640 to Rs 13,650 per tonne. Some corn is being exported to
Bangladesh and South Asian markets at prices ranging from $235-240 per tonne Freight on Board (FOB), which
is not competitive in the traditional destinations compared to the corn available from other competing origins,
the report observed. The USDA said, "Corn exports are expected to improve in coming months assuming the
current price parity of Indian corn vis-a-vis other origins remains unchanged." There are expectations that
domestic prices will ease further with the harvest of winter corn in Bihar and eastern India, where government
procurement is not very effective. Quoting market sources, the USDA report said the Indian government has
procured about 4,00,000-4,50,000 tonnes of corn under the minimum support price operation in the states
of Andhra Pradesh, Maharashtra and Karnataka.
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1.5 What are the impacts of high food prices?


The impact of high food prices depends on the interplay of various factors. In general, commercial
producers of these commodities will benefit directly from higher prices, as will in many cases the
people they employ (assuming, of course, that governments do not prevent higher prices on world
markets from being transmitted to domestic markets). Livestock producers, on the other hand, are
squeezed by both higher feed and energy costs and relatively flat prices. For farm households
producing mainly for their own consumption or for local markets insulated from price fluctuations on
national and international markets, the impacts will be mitigated. But for the urban poor, the impacts
will be strongly negative as an even higher share of their limited income will be required for food.
Each 10% increase in the prices of all cereals (including rice) adds nearly USD 4.5 billion to the
aggregate cereals import bill that are net importers of cereals.
The impact of high agricultural commodity prices is very significant. Of course these averages mask
much more significant impacts on lower income consumers who spend a larger share of their
expenditure on food. In addition, and to the extent that high prices persist and hence do not reduce the
future rate of inflation, indirect economic impacts might also be important.
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1.6 POLICIES UNDERTAKEN TO CONTROL PRICE VOLATILTY


Before considering interventions to reduce and manage domestic price volatility, it must be
recognized that some price volatility is an inherent characteristic of agricultural commodity markets.
In the short term, because there is a mismatch between timing of supply (which is seasonal) and
timing of demand (which is much less seasonal), agricultural commodities must be stored, and
storage will not be profitable unless prices vary during the course of the year. Over the longer term,
if the increase in food production is not keeping pace with demand growth, it is important that
prices increase. This will provide incentives for farmers to increase supply and for the private sector
to increase research and development, and will provide signals for the public sector to increase
spending on public goods that support agricultural production and markets. Broadly speaking,
interventions to reduce the costs associated with price volatility can be divided into two types. First,
there are interventions that reduce price volatility, such as improving market information. Second,
there are interventions that accept price volatility as given and attempt to cope with it. These coping
mechanisms can be either before or after the fact. Further, the interventions can occur at either the
international or the domestic level, and can be implemented by either the public or the private
sector. Some interventions fit into more than one of these categories. Use of domestic buffer stocks
and trade controls, for example, accept international price volatility as given and try to cope with it
after the fact. But, at the domestic level, these interventions also try to reduce domestic price
volatility.

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In the medium term, there is a real need to improve the purchasing power of poor food buyers so
they can acquire enough food even at the higher prices, relative to past averages, that are expected
to prevail in the future. Fundamentally that requires to foster growth and development. Investment
in agriculture, including in agricultural research, extension and education, may be the best way to
cut poverty and stimulate economic activity. In other situations, investment in agriculture may also
be helpful, but there may equally be a need to diversify the structure of the economy. In many cases,
investments in improving the overall environment in which agriculture operates may be most
appropriate improving basic governance systems, macroeconomic policy, infrastructure,
technology, education, health, etc. In other words, a tailored approach is needed, one that builds
upon the capacity and potential of individual countries, rather than a generalized rush to develop
agriculture.
Agricultural trade policies require further reform. Trade restricting policies whether they restrict
exports or imports have undesirable and often unintended impacts, especially in the medium and
long term. Subsidies that distort markets are equally unhelpful. Export taxes and embargos may in the
short term provide some relief to domestic consumers, though such measures do not distinguish
between low and high income consumers, and they also impose a burden on domestic producers and
limit their supply response. Export restrictions contribute to global commodity market uncertainty and
drive international market prices further up. On the import side, protecting domestic producers of
agricultural commodities by providing high price support and border protection restricts growth
opportunities for producers abroad and imposes a burden on domestic consumers.
It is also informative to look closely at the causes of recent price increases. On the supply side, the
link between production and yield shortfalls and climate change might be further explored.
Investments in R&D, technology transfer and extension services, could do much to increase
productivity and output. The use of genetic modification (GMOs) also offers potential that could be
further exploited, to improve productivity, to enhance the attributes of crops destined for either food
or non-food uses, and to enhance the resilience of crops against stress such as drought.
High agriculture commodity prices also have an impact on close substitutes, such as fish, and could
contribute to even further pressure on already depleted fish stocks, as well as to increased demand for
fish from aquaculture. Policies that ensure the sustainable and responsible use of ocean resources have
a key role to play, both within national boundaries and on the high seas; concerted action to control
illegal fishing is needed. Options to improve the business environment for private investment in
aquaculture might also be explored.
The current hike in food prices is an issue of a truly global nature. It has complex causes and impacts,
and requires a complex response at the international level. Current developments on global food
markets are having dramatic implications for food security among poor people. At the same time,
speculative factors and inward looking policy actions contribute to the nervousness and volatility of
markets. What is needed now is an objective, effective and coherent global response to avoid making
a difficult situation worse.
Now, more than ever, it is important to counter growing calls for trade protectionism. Closing markets
to either imports or exports will have exactly the wrong result. More secure global food supplies will
only come from competitive producers around the world being provided the freedom to respond to
current market opportunities. Continuation or introduction of policies that create distortions and that
undermine the appropriate market responses should be avoided.
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