India is reportedly in confidential talks with Russia for the biggest ever grain deal between the two countries, the supply of some 8-9mn tonnes of wheat worth $2bn, even though India is reportedly demanding a very deep discount, Reuters reported on August 17. The discussions are anticipated to continue for several more weeks.

"The government is exploring the possibility of imports through private trade and government-to-government deals. The decision will be made cautiously," an Indian government source told Reuters, when asked about wheat imports from Russia.

Indian wheat stocks at government warehouses were at 28.3mn tons on August 1, some 20% below the 10-year average, Reuters reports.

India has not imported wheat for years as it is usually self-sufficient, but extreme weather in the last two years has hurt domestic production. The talks come as India is trying to manage food inflation ahead of the upcoming 2024 national and regional elections under Prime Minister Narendra Modi's government. The ruling Bharatiya Janata Party faces a united opposition in the elections, with polls currently favouring the incumbent party.

India has been suffering from a bad agricultural season that has pushed prices for staples up that are hurting the poor the most in an election season.

As bne IntelliNews reported, wheat, rice and a negative impact on agriculture from El Niño this year have food security warning lights flashing red.

In July the Indian government banned the export of white rice in an effort to contain domestic food prices by administrative means. The effect of the Indian rice ban has rippled out around Asia, driving rice prices high across SE Asia and leading to governments across the region scrambling to shore up reserves of rice in anticipation of reduced yields this year in their own markets thanks to El Niño. That has pushed food inflation up globally. India also banned wheat exports last year and again this year after yields are expected to fall 10% this year, leading to domestic prices for wheat taking off at the end of May.

India's annual retail inflation has surged to its highest level in 15 months in July, propelled by soaring prices of vegetables and cereals. July witnessed a sharp uptick in India’s annual retail inflation, reaching 7.44%, a significant rise from the previous month's 4.87%, catching analysts by surprise.

Things have gotten so bad that both the Burger King and McDonald’s franchises in India have taken tomatoes off the menu following a poor harvest that made prices prohibitively expensive.

That has left Russia in pole position to help, as it is one of the world’s five agricultural superpowers and following an all-time high record harvest of 153mn-155mn tonnes of grain last year, its silos are full to bursting . Russia is expected to export a record 60mn tonnes of grain this – almost double its average exports from the last five years.

A deal for 9mn tonnes of wheat would be significant and a big increase on deliveries to India which is not one of Russia’s biggest customers as it is a major producer of wheat in its own right and has not imported large amounts of grain since 2017, when it bought 5.3mn tonnes on the open market. But wheat production has been in decline in the last few seasons due to a series of extreme heat waves in summers.

Wheat production declined to 107.74 million tonnes due to heat waves in key growing states during the 2021-22 agricultural year, down from the previous record of 109.59 million tonnes set a year earlier. The harvest is expected to fall again this season to 105mn tonnes of wheat putting domestic supplies under pressure and driving the government to look to imports to shore up its strategic reserve.

If the 9mn tonne deal with India goes ahead it would be 15-times more than India normally imports from Russia and represent about a fifth of Russia’s entire export capacity in the current agricultural year. It is also double Egypt's annual purchases from Russia, currently Russia’s biggest client and one of the biggest importers of grain in the world.

India’s trade reliance on Russia has grown rapidly in the last two years. Indian oil imports from Russia have grown from about 2% pre-war in Ukraine to top 46% in the first half of this year and mutual trade turnover has increased to just under $50bn a year.

The 9mn tonnes is also more than twice the size of the Indian government’s projection for this year’s grain deficit, estimating it needs 3-4mn tonnes to cover a potential shortfall. If the deal goes ahead, it would shore up the domestic reserve, ensuring price stability for wheat on the Indian market after prices rose by 10% in the last two months.

Russia is desperate to export more grain as an estimated $3.4bn worth of grain is in danger of rotting this year if more room cannot be freed up in its silos. India is reportedly asking for a deep discount of $25-40 per tonne of wheat to market prices, which Russia is reportedly willing to offer. The current FOB Novorossiysk price stands at approximately $250 per ton, Reuters reports.

Unlike oil exports, Russia's agricultural product exports are not subject to sanctions, therefore, payment for the wheat purchase will likely be made in dollars, similar to transactions involving Russian sunflower oil. The total cost of the discounted wheat deal should be slightly less than $2bn, The Bell reports.

The deal would have the added benefit of offering a degree of protection against potential disruptions at Russian Black Sea grain ports. Following Russia's withdrawal from the Black Sea Grain Initiative on July 17, guarantees for the safety of sea routes were revoked. This resulted in Russia imposing suspicions on ships bound for Ukraine of transporting weapons. Despite this, Ukraine has redirected its grain exports to Danube ports and has been actively seeking alternative routes. A really big deal with India would encourage Russia to re-establish the grain deal, something that Russian President Vladimir Putin’s allies in Africa, Turkey and China all want to see him do.

Ukraine has increased military tensions in the Black Sea after an unmanned naval drone attack on the Russian port of Novorossiysk this month and a recent declaration of the waters around the Russian ports of Anapa, Novorossiysk, Gelendzhik, Tuapse, Sochi, and Taman are a military threat zone further complicates the situation.

The Russian Ministry of Defence also reported that a Ukrainian naval drone had attempted to attack two Black Sea Fleet patrol ships on August 17, but they destroyed the drones with their onboard defence systems. Tensions in the Black Sea remain high.