In November, the retail food inflation rate dipped to 9.04% from 10.87% in October.
Wheat and edible oil remain the two commodities that are most concerning.
The wholesale price of wheat at Delhi's Najafgarh Market is currently Rs 2,900-2950 per quintal. This compares to Rs 2,450-2,500 at the same time last year. In November, the annual consumer price inflation for wheat/whole flour and refined maida was 7.88%.
Vegetable oils saw an even higher inflation rate, 13.28%. According to the data from the department of consumer affairs, the modal retail price for packed palm oil in India is now Rs 143/kg. This is up from Rs 95 per kg a year earlier. Other oils have also increased in price: Soyabean oil (Rs. 154/kg versus Rs. 110/kg), Sunflower oil (Rs. 159/kg versus Rs. 115/kg) and Mustard (Rs. 176/kg versus Rs. 135).
What is the explanation for the inflation above?
Wheat: Limited domestic supply
In the last three crop years, India's wheat production has been below average. Stocks in godowns of the government have fallen to their lowest level since 2007-08, and domestic prices are still high despite an export prohibition since May 2022.
This time, Indian farmers have planted more wheat. This, combined with sufficient soil moisture and reservoir levels due to excess monsoon rainfall and also an expected La Nina (which would normally translate into a longer winter) has raised hope for a bumper crop in 2024-25.
The wheat planted in late October would not be ready to market until early April. The public distribution system requires about 1.5 million tonnes per month from the 20,6 million tonnes of wheat that were in public stocks at the beginning of December. In the period from January to March, the public can sell 7.1 mt in the open market. This is after subtracting the 7.46 mt normative minimum opening stock on April 1. These open market sales of government stocks in 2023-24 totaled 10.09 mt and helped to cool wheat prices.
The current prices may undermine government procurement. Open market prices are much higher than the official Minimum Support Price ( MSP). This may discourage farmers from selling to government agencies.
The Import Option
The international wheat price is currently low and imports are possible.
The price of Russian wheat in their origin ports is around $230, while the price for Australian wheat is $270. Addition of ocean freight and insurance costs of $40-45 for Russia and $30 for Australia brings their landed cost to India up to $270-300 a tonne, or Rs 2,290-2.545 a quintal. This is close to the MSP for a quintal of Rs 2,425
Even after incorporating port handling and bagging costs of Rs 170-180/quintal, and transport expenses of Rs 160-170/quintal, the cost for flour mills located in South India would be less than that of domestically-sourced grain.
There is a catch. Imports of wheat are subject to a 40% duty. Imports are only possible if the duty is zero. This might also be feasible politically, given that there will not be elections in the major wheat-producing States in 2025 – only Delhi and Bihar are scheduled to go to polls. Imports of 2-4 mt could help improve the domestic supply, and provide a buffer for any climate-induced damage to the crop from now until April.
Edible oils: Indonesian palm factor
Palm oil is the cheapest vegetable oil in nature. With 20-25 tonnes fresh fruit bunches, and a 20% extraction rate of crude palm oil from each hectare, 4-5 tons of CPO can be produced.
Soyabean, rapeseed/mustard and corn yields rarely exceed 3 to 3,5 tonnes and 2 to 2.5 tonnes per hectare. Even with a 20% recovery and 40% recovery their oil yields only 0.6-0.7 and 0.80-1 tonnes per ha respectively.
According to the US Department of Agriculture (USDA), palm oil will be the most widely produced vegetable oil in the world, with 76.26 million metric tons (mt) in 2023-24. This is ahead of soyabean oil (62.74mt), rapeseed oil (34.47mt), and sunflower oil (22.13mt).
CPO is usually cheaper than soyabean oil or sunflower oil because of higher yields. This was the case until August. In the last three to four months, we have seen a shift. The current landed price for imported CPO in India is $1,280 per ton, which is higher than the $1150 for crude soybean oil and $1,235 sunflower oil (table 2)
Indonesia's decision, to increase the blend of palm oil into diesel from 35% up to 40%, is believed to be the cause for the recent price spike. The top CPO producer in the world -- with 43 mt of CPO, followed by Malaysia (19.71mt) and Thailand (3.6 mt), plans to introduce so-called B40 Biodiesel this year.
According to USDA, Indonesia's biodiesel blend mandate - from 2.5% in 2008 up to 20% in 2018, 30% by 2020, 35% by 2023 and 40% by 2025 - will result in 14.7 million mt being diverted to domestic industrial use. This would reduce the country’s exportable surplus.
Can other oils replace the oil in?
The palm oil (mostly imported), accounts for 9-9.5 million metric tons of India's annual consumption of edible oils.
The lower availability of palm oil can be partially offset by increased imports from soyabean oil (mainly from Argentina, Brazil and Ukraine) and sunflower oil (mainly in Russia and Romania). Imports of palm oil fell from 0.87 million tonnes in November 2023, to 0.84 million tonnes in November 2024. However, imports of soyabean and sunflower oil rose, respectively, from 0.13 mt up to 0.34 mt. In 2024-25 the global production of soyabean is expected to reach record levels, with Brazil, and the US, harvesting record crops.
There are limitations to the amount of palm oil that can be substituted. It's not a product that is marketed to consumers like sunflower, soyabean or mustard. It is preferred in fast-serve restaurants and bakeries, as well as industries such as snack foods, biscuits, and noodles, said Siraj Chandhry.
Palm oil has a neutral taste, is resistant to oxidation, and can be used for deep-frying. It's ideal for halwais, samosas, and pakodas. It also adds a flaky texture and extends the shelf life of baked goods.
Imports of crude palm, soybean and sunflower oils are currently subject to a duty of 27,5%. It remains to be determined if the government will make an exception for CPO.
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