Cereal inflation: Is the worst behind us?

World cereals production is expected to fall 2.7% to 2.284 billion tonnes in the 2012/13 season, says FAO report, Photo: Pradeep Gaur/Mint (Pradeep Gaur/Mint)
World cereals production is expected to fall 2.7% to 2.284 billion tonnes in the 2012/13 season, says FAO report, Photo: Pradeep Gaur/Mint
(Pradeep Gaur/Mint)


From around 5% in April last year, cereal inflation reached a peak of 15% for urban India and 18% for rural India in February.

A year into an era of high cereal inflation, price pressures have shown signs of relief. But make no mistake, its impact on consumers’ pockets remains too severe to ignore, with more risks building up. Despite a dip, cereal inflation is still in double digits, contributing much beyond its weight in overall inflation.

Rewind to the same time a year ago, when cereal prices began heating up both due to the Ukraine war and faltering domestic supply. The government swung into action with export curbs on wheat and rice, but prices were far from tamed. From just over 5%, cereal inflation rose and rose—peaking only in February 2023, at 14.6% in urban India and 17.8% in rural India. The year 2022-23 ended with urban cereal inflation at 9.9% and rural 11.6%. The impact? Overall rural inflation went past urban inflation in 2022-23 for the first time in five years.

Cereal inflation has eased since, but its contribution to overall inflation rose in April. This could be because prices of other commodities cooled much more. Cereals have a 12.4% weightage in the rural inflation basket, but they made up 33% of the rural inflation in April, Mint calculations showed. In urban India, the contribution was 16%, again outsized against its weightage of 6.6%.

Economists believe cereal inflation could return to around 4% or below, a level not seen since the pandemic, in the medium term. But a likely El Nino effect on the monsoon could derail the downward trajectory.

Pricing Game

Since February, prices have begun declining for wheat and wheat flour, but the same cannot be said for rice. The last kharif season proved to be a bad one for rice, with production estimated at 96.5% of the target. But that loss was offset during the rabi season, and prices are now rising at a slower pace. However, global rice shortage in 2023 is expected to be the highest in 20 years, according to Fitch Solutions. This is again exerting pressure on prices. Moreover, the competitive price of Indian rice amidst this shortage is leading to increased demand overseas. Rice exports jumped 24% in April, the biggest year-on-year growth since August 2022.

Meanwhile, the decline in wheat prices since February has begun reversing, with the second half of May witnessing a mild rise. Anticipation of better prices in the coming months has reportedly kept farmers from releasing stocks into the market.

Grain Drain

With the El Nino threat looming, concerns over food prices have grown. El Nino had led to poor southwest monsoon seasons in FY10, FY15, FY16 and FY19. Below-normal monsoon can lead to a decline in cereal production, but the link has weakened in recent years.

If a shortage drives up prices, the government can offload foodgrain stocks in the market. In the two drought years of FY15 and FY16, the government’s deft management of wheat stock, along with timely wheat imports, had led to softening of cereal inflation, said Madhavi Arora, lead economist at Emkay Global. However, this year is different. Foodgrain stocks were down 30% in FY23 as the government had already intervened to control spiralling prices. While price rise can be kept in check in the short term, a Crisil analysis showed cereal prices are still expected to be 14-15% higher compared to the past five-year average.

Price vs Perception

After years of low inflation, cereal prices have risen at the fastest rate since FY14. A sharp correction isn’t expected, which most likely means that households’ perception of food prices will stay high. According to a Barclays analysis, households tend to give greater weightage to everyday use items while forming their inflation expectations. They also take time to register a decline in prices of such items—even though they may perceive increases quicker.

This means that the decline in prices of vegetables, oil, meat and sugar since September 2022 has failed to beat the perception of generally more costly food, thanks to continued price rise of staples such as cereals and milk, Barclays said.

The weather department reiterated its forecast of a normal monsoon on Friday. So it’s possible that the El Nino won’t hurt rainfall, as was the case in 1991, 1994 and 1997. But cereal prices have already risen so much that the pinch is here to stay on.

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