LOVELY SCHOOL OF BUSINESS (LSM)

Term PAPER
OF
Managerial Economics
TOPIC: - Wheat (Demand & Supply, price elasticity,
Market structure and factors affecting
factors)

SUBMITTED TO: SUBMITTED BY:

Mr. Sumit,Sir NAME: Sanjeev kumar
REG. NO: 10907431
ROLL NO: RS1905A34
Section: 1905
Wheat

It is believed that wheat developed from a type of wild grass native to the
arid lands of Asia Minor. Cultivation of wheat is thought to have originated in
the Euphrates Valley as early as 10,000 B.C., making it one of the world's
oldest cereal crops. In the Mediterranean region, centuries before recorded
history, wheat was an important food. Wheat played such a dominant role in
the Roman Empire that at the time it often was referred to as a "Wheat
Empire."

Wheat, which can be produced in a wide range of climates and soil

conditions, grows in areas as far north as the Arctic Circle and as far south as
the equator. The production of wheat is so widespread that it is being
harvested somewhere in the world in any given month. But wheat grows best
in regions having temperate climates with rainfall between 12 and 36 inches
per year. The United States ranks fourth in world wheat production, following:
1) China; 2) the Commonwealth of Independent States; and 3) the European
Community (whose major producers are France, the United Kingdom and
Germany).

Wheat -- Different Classes for Different Uses

Hard wheat contain more protein (11 to 18 percent) than soft wheat (8 to 11
percent). Hard wheat also contain more gluten. These different quality factors
make each class of wheat desirable for specific -- but different -- foods:

• Hard Red Winter Wheat and Hard Red Spring Wheat produce a high-
grade flour used to make bread, hamburger buns and biscuits.

• Soft wheat produces a flour that is desirable for baked goods that have
a tender, flaky or crisp texture, like cakes, doughnuts, cookies and crackers.

• White wheat is a soft wheat that produces flour used for cereals,
cookies and cakes
• Durum -- which contains more protein than any other class -- produces
a coarse, golden amber product called semolina that is mixed with water to
form a dough that then is forced through dies that shape it into pasta
products like spaghetti, noodles and macaroni.

The Varieties of Wheat

The number of wheat varieties exceeds any other seed-bearing plant. There
are two general types of wheat -- Winter and Spring -- reflecting the time of
year the seed is planted.

Wheat Scenario in India

Wheat is one of the most important staple food grains of human race. India
produces about 70 million tones of wheat per year or about 12 per cent of
world production. It is now the second largest producer of wheat in the world.
Being the second largest in population, it is also the second largest in wheat
consumption after China, with a huge and growing wheat demand.

Geographical Area under Wheat Cultivation

It is cultivated from a sea level up to even 10,000 feet. More than 95 percent
of the wheat area in India is situated north of a line drawn from Bombay to
Calcutta and also in Mysore and Madras in small amounts. The Major Wheat
producing states in India is placed in the Northern hemisphere

of the country with UP, Punjab and Haryana contributing to nearly 80% of the

Total wheat production

Trends in Area, Production and Productivity of Wheat in India

Production of Wheat in India as can be seen from Chart 2 has shown a rising
trend in the past 5 decades. However, there was a steep jump in production
of wheat during 1960-70 to 1970-1980 by nearly 109%. The Green Revolution
in the 1960’s contributed to this phenomenal rise in wheat production in the
country over the decade. However, following 1980’s, there has been a
consistent declining trend in production of Wheat in India. For instance, the
production of Wheat rose by just 61% from 1970-1980 to 1980-1990. In
recent years, there has been a worsening trend with wheat production
actually growing by just 7% from 2000-01 to 2001-02.

For nearly a decade, i.e. up to mid 70’s agricultural production had

stagnated.

The spectacular yield growth recorded in the post-Green Revolution years in

Punjab and Haryana has receded into history. Food grain production in the

frontline agricultural states of Punjab, Haryana and western Uttar Pradesh,

comprising the country's food bowl, has decelerated. The miracle that began
with wheat was replicated in rice. The area under production of Wheat has
increased from a mere 12.93 million

hectares in 1960-61 to 27.49 million hectares in 1999-2000, an increase of

more

than 100% over the past 5 decades. The production of Wheat at the same
time,

increased from 11 million tones in 1960-61 to 76.37 million tones in 1999-

2000.

The yield (kg/hectare) on the other hand, increased from 851 in 1960-61 to
2778 in

1999-2000, an increase of around 3.56 times. This indicates that although

wheat

production over the past 5 decades increased by 6.87 times but the yield of
wheat

has actually increased by only half of this figure.

Supply-Demand Balance of Wheat in India

The demand of wheat has increased by 2% (approximately) over the past 7

years while the supply of wheat has increased by 3% over the same time
period. This indicates that the supply of wheat is more

than needed for domestic use leading to stock surpluses

Since 1998 India’s share in world wheat production is around 12% to 13%, at
the

same time. India’s share in world wheat consumption is around 10% to 11%.
It

proves that some sort of extra stock (around 1% to 2%) arises every year.
The

demand-supply gap which is open at a rate of about 1 to 2 per cent per year
is

equivalent to 0.7 to 1.4 million tones of wheat, growing larger over the years.

Analysis of Price Trend of Wheat in India & Demand Elasticity of Wheat

Elasticity of demand measures the responsiveness of the quantity demanded

to a change in price. Economists usually express elasticity as a positive
number.
Since the Green Revolution, Indian production of cereals including Wheat has
been on the rise with the production of wheat rising from a mere 8.6 million
tones in 1960-61 to 73.53 million tones in 1999-20001. A study of the supply
and

demand trends over the past decade also indicates that there is always a 1%-
2%

surplus in Wheat. The MSP for Wheat has also increased from Rs. 275 in
1992-93

to Rs. 620 in 2002-03. The MSP has risen over the past decade substantially
above Cost of Production

leading to price distortion. For instance, in 2000-01, the MSP was set at Rs
610

(Rs/qtnl.). As against this, the C2 (Cost of Production i.e., all costs including
the

imputed costs of family labour, owned capital and rental on owned land) in
case

of Punjab was Rs 422 leading to a margin of Rs 188(Rs/qtnl.) Similarly, 2the

C2 in

UP was at around Rs 439 leading to a margin of Rs 171 (Rs/qtnl.) In addition,

the

fragmentation of the Wheat market has resulted in further widening of price

differentials between the North and South regions of the country.

Ratio of FCI’s Economic Cost to MSP:-

Years MSP Economic Ratio of Eco
(Rs./qntl.) Cost Cost to MSP
(Rs./qntl.)

1992-93 275 507 1.84

1993-94 330 532 1.61
1994-95 350 551 1.57
1995-96 360 584 1.62
1996-97 380 663 1.74
1997-98 475 798 1.68
1998-99 510 800 1.57
1999-00 550 888 1.61
2000-01 580 858 1.48
2001-02 610 871 1.43
2002-03 620 - -

From the above table it is clear that during the 90’s MSP has shown a steadily
rising trend and at the same time economic cost has increased physically,
but the ratio of FCI’s economic cost to what it pays for wheat has gradually
decreased.

(In MMT)

Year Total Demand

Supply
94/95 68.37 57.66
95/96 75.20 61.32
96/97 75.61 62.02
97/98 75.32 61.69
98/99 76.29 62.56
99/00 77.41 63.53
00/01 78.66 64.60
India’s Wheat Export

Year India's Export figure

 (In Thousand Metric
Tons)
1998/99 0
1999/00 200
2000/01 2357
2001/02(12- 3000
June)

2002/03(11- 4000
July)

Starting from 1998-99 till date India’s share in world wheat export shows a
rising trend. Not only share, India’s physical export is also sharply rising.
India’s percentage share in both world total exports during 2001-02-July was
2.79 (i.e. around 3%).

India’s Wheat Export

Year India's Export figure

(In Thousand Metric
Tons)

1998/99 0
1999/00 200
2000/01 2357
2001/02(12- 3000
June)
2002/03(11- 4000
July)

Government Policy Regarding Wheat

Since wheat prices at procurement level and at disposal level are placed
under controlled mechanism with defined objectivity, scope of general price
trend analysis also becomes govt. policies centric. The related price in the
open market has got a substantial relationship with the prices of wheat
traded in the open market. Therefore our presentation on this aspect has a
notion that the price elasticity of demand has got direct relationship on prices
of wheat of other varieties (whatsoever be the size of share in total
production). However, availability of targeted variety (Mexican/Dara) wheat
shall increase, if Govt. withdraws gradually from procurement at MSP; in the
open market, which shall concede volatility.

Purchases

The policy of Minimum Support Price (MSP) supports economic growth. MSP is
a critical policy component of the Indian Economy. It generates broadly
different purchasing power, health and wealth. Governments works out the
MSP giving due consideration to all the economic factors like cost of input,
power, capital; and labour with reasonable going margins. With the certainty
about the support price, farmers expend better effort and resources provide
confidence and motivation to the growers. MSP and commodity options are
consistent with the requirements of the produced economy.

Sales/Liquidation of Inventories

The prime objective of MSP of providing assured market to the growers

achieved and production kept on upward swing which culminated into
comfort level of food security and posed much more serious issues. One of
them was the slower pace of replenishing the inventories. Pricing policies of
disposal of stocks were thrust on the social commitment of the Government.
Government kept on pumping wheat stocks at the issue price, which need to
be lower than MSP through States machinery of Public Distribution channels
throughout the country that has helped to sustain the high growth rate and
maintain regular, supply of Wheat and Rice. Government of India introduced
a new scheme called Targeted Public Distribution Scheme (TPDS) in 1997
where in ultimate consumers were segmented in two categories i.e., Below
Poverty Line and Above Poverty Line as per the recommendation of Planning
Commission. The issue price of Wheat during 2001 and 2002 were as under:-
( Rs.quintal)

Commodities As on BPL APL

Wheat 1.04.2002 415 510
12.07.2001 415 610

Open Market Sales Scheme

When the impact of Government policies on pricing started showing little

effect on the wheat market; it was more or less stabilized, but at the same
time off take by states in PDS either steady or slightly showing downswing,
resulting into burgeoning and inventories with the Govt. agency (FCI).
Therefore Govt. for minimizing subsidies decided release first old grain or
below quality grain and then superior quality grain in Open market at the
best available market rate on commercial terms.

Exports

When saturation of domestic demand was observed and further compulsion

of sustaining the present market condition, the only avenue of liquidation of
inventories was Exports. But disparity of domestic and international prices
were dealt with subsidized issue price which served prime objective of quick
and faster replacement, reducing carrying cost which ultimately form the
major share of subsidy and ultimately earn the foreign exchange which shall
provide India a dependable supplier in the Wheat world market.

Administered Prices by Indian Government and Futures Trading

Futures as well as MSP and OMSS (Open Market Sales Scheme) are price risk
management mechanisms with the same objective to help remove
uncertainties arising due to price volatility in Wheat. However, in light of
administered price regime, futures trading in Wheat cannot kick off. Futures
trading in Wheat would help in proper price discovery only if the market is
allowed to determine the prices based on demand-supply factors affecting
Wheat. The reason is that in case of an administered price scenario, the
futures market would not trade freely. That is, if the MSP is say Rs 620/qntl.,
then the trading in market would not go below Rs 620 in any case distorting
the functioning of futures market. Even if the International markets were
trading lower, the Indian markets would still stay above the Rs 620 mark.

As can be seen from Chart 8, the Issue price of Wheat, which is administered
by FCI, was at around Rs. 525 per quintal for 2002. A comparison with FOB
prices of US Wheat prices in the same time period indicates that the US
Wheat Export Prices are more subsidized and competitive against Indian
Wheat.

In the light of the above discussion, MSP and Issue Price should not be
enhanced in the future but kept constant and removed in a phased manner
over a time frame. In its place, futures should be introduced as price
management mechanism correlating International and domestic wheat
markets to avoid price

distortions.

Market Structure of Wheat

The term market is used in a special sense in economics. In the ordinary

language the tem market means a particular place where buyers and sellers
meet each other and buy and sell the commodities. However, in Economics,
the term market does not mean any particular place but it means the entire
area where buyers and sellers of a commodity are in such close contact with
each other that price of the commodity tends to be one throughout that area.

The market of wheat follows the features of perfect competition market and
these features are being explained as following

1. Large number but small size of Buyers and Sellers:-

The number of buyers and sellers of wheat is very large but each buyer and
seller is so small in the competition with the entire market of the wheat, that
by changing the quantity of the product bought and sold by him, he cannot
influence its price. A seller sells so small a quantity of the total supply that if
he withdraw from the market, the total supply will not fall to such an extent
as to raise the price. So no firm ( farmer ,dealer) can influence the market
price by changing the quantity of its product.

2 .Homogeneous Products:-

All the sellers sell homogeneous units of the wheat. The wheat sold by
Mohan & sons firm will be similar to the wheat sold by the Sohan & sons
company. Buyers have no reason to prefer to wheat of one seller to that of
another seller. Because of large number of sellers and similar features of the
product , a firm operating under the condition of perfect competition is
merely a price taker and not pa price maker.

3 Perfect Knowledge:-

Buyer and seller are fully aware of the price of the wheat prevailing in the
market. Buyers have perfect knowledge about the price being charged by the
sellers for the wheat. Sellers also know well, where and from which buyer,
they can charge more price. Because of this knowledge and awareness, all
the sellers charge one price for wheat from all buyers without any
distinction, Therefore, there is no uncertainty in the market.

4 Free Entry and Exit of Firm:-

Any firm can enter in the wheat market and old firm can with draw from the
market. There is no legal or social restriction on the entry of new firm. This
assumption is subsidiary to the first assumption regarding large number of
sellers. It is because of free entry of firms that their number is very large.

5 Same Price:-
Each seller charges the same price for the same wheat. Price is determined
by the industry and the firm have to sell wheat at this price. Firms in wheat
market are price taker not price maker.

6 Free from Checks:-

Buyers and sellers are free from any checks or restrictions with regard to
their buying and selling of wheat. There is no agreement between buyers
and sellers in respect of the production , quantity or price of the wheat. Nor
have the buyers any attraction to buy the wheat from a particular seller.

7 Perfect Mobility:-

In wheat market there is perfect mobility of factors as well as goods and

services. Factors of production are free to seek employment .No factor of
production is monopolized by anyone. Each firm (farmer, dealer) can get as
many factors as it needs. Wheat can be sold at any place where they are
likely to fetch good price.

A market is an environment that allows buyers and sellers to trade or

exchange goods, services, and information. These interactions define
demand and supply characteristics and are therefore fundamental to
economies.

A market can be defined as a place where any type of trade takes place.
Markets are dependent on two major participants – buyers and sellers.
Buyers and sellers typically trade goods, services and/ or information.
Historically, markets were physical meeting places where buyers and sellers
gathered together to trade. Although physical markets are still vital, virtual
marketplaces supported by IT networks such as the internet have become
the largest and most liquid.

Some markets are very competitive, with a number of vendors selling the
same kinds of products or services. Conversely, some markets have low or no
competition, particularly if the industry is protected by government
legislation.

The number of buyers and sellers involved will have a direct bearing on the
price of the good or service to be sold, and has become known as the law of
supply and demand. Where there are more sellers than buyers, the
availability of supply will push down prices. If there are more buyers than
sellers, the increased demand will push up prices.

Markets can appear spontaneously when there are goods or services to be

exchanged, or they can be planned and regulated.

Types of Consumer Markets

Markets originally started as marketplaces usually in the center of villages

and towns, for the sale or barter of farm produce, clothing and tools. These
kinds of street markets developed into a whole variety of consumer-oriented
markets, such as specialist markets, shopping centers, supermarkets, or even
virtual markets such as eBay.

Commodity Markets

With the rising price of oil and food, commodity markets are once again
under the spotlight. Commodities underpin economic activity. Commodity
markets include: energy (oil, gas, coal and increasingly renewable energy
sources such as biodiesel), soft commodities and grains (wheat, oat, corn,
rice, soya beans, coffee, cocoa, sugar, cotton, frozen orange juice, etc), meat,
and financial commodities such as bonds.

Capital Goods & Industrial Markets

Capital goods markets help businesses to buy durable goods to be used in

industrial and manufacturing processes. A number of services can also be
associated with these goods. Transactions tend to be wholesale with large
quantities of goods being transacted at low prices.

After explanation of the different type of market we can say that WHEAT is a
part of commodity market so what is the market structure of commodity
market will be the market structure of wheat in India.

Commodity and Commodities market

INTRODUCTION

India, a commodity based economy where two-third of the one billion

population depends on agricultural commodities, surprisingly has an under
developed commodity market. Unlike the physical market, futures markets
trades in commodity are largely used as risk management (hedging)
mechanism on either physical commodity itself or open positions in
commodity stock.

COMMODITY

A commodity may be defined as an article, a product or material that is

bought and sold. It can be classified as every kind of movable property,
except Actionable Claims, Money & Securities.

Commodities actually offer immense potential to become a separate asset

class for market-savvy investors, arbitrageurs and speculators. Retail
investors, who claim to understand the equity markets, may find
commodities an unfathomable market. But commodities are easy to
understand as far as fundamentals of demand and supply are concerned.
Retail investors should understand the risks and advantages of trading in
commodities futures before taking a leap. Historically, pricing in commodities
futures has been less volatile compared with equity and bonds, thus
providing an efficient portfolio diversification option.

In fact, the size of the commodities markets in India is also quite significant.
Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion),
commodities related (and dependent) industries constitute about 58 per cent.

Currently, the various commodities across the country clock an annual

turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of
futures trading, the size of the commodities market grows many folds here
on.

COMMODITY MARKET

Commodity market is an important constituent of the financial markets of any

country. It is the market where a wide range of products, viz., precious
metals, base metals, crude oil, energy and soft commodities like palm oil,
coffee etc. are traded. It is important to develop a vibrant, active and liquid
commodity market. This would help investors hedge their commodity risk,
take speculative positions in commodities and exploit arbitrage opportunities
in the market.
Structure of Commodity Market

Wheat is a part of commodity market so the market structure of wheat will

be as the market of commodity market. This is the structure of commodity
market and this will be imply on wheat market.

Factors affecting the Demand and Supply of Wheat:-

Whether:-

Indian agriculture is based on Manson. Indian farmers don’t have so much

resources by which they can easily fertilize their crops. If there is not rain on
time it will be decrease in the productivity of the wheat. If it is rain at that
time when the crop of wheat is in final condition it also affect the productivity
of the wheat. So whether is the factor that affect the supply of the wheat.

Population:-

If the population of a the particular market or country grow the demand of

the wheat will be increase as the consumption of wheat will rise. So the
population of the market affect the demand of the wheat.

Price of the Wheat:-

If the price of the wheat increased customer can move to the other feeding
commodities as rice, milk , eggs etc. Demand will not be zero but the price
will affect the demand of wheat in the market.

Market of Wheat consumed Products:-

Wheat is used to manufacturing many other products such as bread, biscuits,

pasta, cracks, noodles, suji, rawa, papers vermicelli etc. if the marketing of
these products are increasing or decreasing the demand will respectively
increase or decrease. There are some industry that use the wheat so the
market of these industry affect the demand of wheat. These industry are as
Polymers & resins, cosmetic, pharmaceuticals.

Technology:-

Technology is a factor that will be affect the production of wheat and this
production will affect the supply of the wheat. We can the example of Punjab
where more technology is used in agriculture so the farmers of Punjab are
able to produce more wheat. So the technology will affect the supply of
wheat.

Government Policy:-

Government policies affect the supply of the wheat in India. If subsidy is

provided to the farmers they are more interested in producing more wheat
crop. The price of wheat , that is determined by the government will affect
the farmers interest about wheat. If they are not gaining much profit in wheat
production they will move to other crops and in this way the supply of wheat
will be affected. The policy of export by the government will affect the supply
of wheat in the Indian market.