Explained: Why India banned wheat exports and how it will affect FMCG firms

by 5paisa Research Team Last Updated: 2022-05-16T17:26:14+05:30

Last week, India imposed a ban on exports of wheat in order to try and bring the prices of the all-important foodgrain under control. 

The ban, except for government-to-government shipments that may be undertaken to help friendly countries tide over food security concerns, came as a U-turn of sorts. This is because just days before imposing the ban, the government had said it would look to grow wheat exports and was preparing to send delegations abroad for this purpose. 

So, what explains this U-turn?

A severe heatwave, especially in northwestern India, has impacted wheat production, spiking concerns that India may fall significantly short of its production target this year. 

The ban on exports was necessitated by the drop in the rabi production of the cereal, relatively low level of stocks with the Food Corporation of India (FCI) and high market prices. 

How much have the country’s wheat exports risen by over the last several years? 

India’s exports in 2021-22 had risen to more than 7 million tonnes from just 0.18 million tonnes in 2018-19. Even in the current financial year, 4.9 million tonnes of wheat had already been contracted for exports with letters of credit. These letters of credit, issued before the ban, will be honoured, the government notification said. 

So, how is the government placed as far as the stocks of wheat go?

The ‘opening stock’ with the government (FCI) stood at 19 MT on April 1, which was much higher than the buffer requirement of 7.5 MT. At 30 MT, the FCI stocks (post procurement) were, however, at a five-year low.

This prompted the centre to replace wheat with rice in a major way under government schemes that allow for free distribution to economically weaker sections of the society, according to a report by The Indian Express newspaper. 

How do the production trends in the all-important cereal crop look like?

Trade officials estimate production this year to be in the range of just 96-98 MT, as against initial estimate of 111 MT, the lowest in the last five years. With the annual domestic consumption estimated at 86-88 MT, the stock situation is getting tight, the report cited above said.

While 17 MT of wheat is still required under the government’s flagship schemes for the poor, there are questions about the quality of about 12.5 MT of FCI’s wheat.

How does this ban impact companies whose business it is to sell wheat or wheat products like flour or other packaged food items made from wheat?

Companies like ITC, which were hoping to grow their agriculture business revenue riding on the price rise in wheat, would be impacted negatively. ITC’s stock price had been going up before the export ban, but was down more than 1.6% at close of trade on Monday, the first day of trading since the ban was imposed. 

The company had exported significant quantities of wheat in fiscal 2022 to fulfil the needs of a global population dependent on supplies from Russia and Ukraine.

Another company that was hoping to cash in on the rise in wheat exports and prices at home was Adani Wilmar. Armed with the aspiration to become India’s largest food FMCG player, the company recorded 46% revenue growth from food and FMCG in fiscal 2022. Exports in the food and FMCG segment rose by 31% during the same period.

Wheat contributed 38% of this Rs 18.6 billion in sales. It continues to hold the second position in the Indian market.

The company had already ramped up its capacity utilisation to 80% in December 2020. In addition to its Nimrana plant, Adani Wilmar outsources wheat flour production to four other plants.

Another company that could get impacted is Hindustan Unilever, which saw its food and refreshment market share grow 3% on a year-on-year basis in the financial year 2021-22.

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