The mismanagement of wheat economy is no surprise. Pakistan has been enjoying a surplus of wheat for the past couple of years, but there are insufficient and inadequate storage facilities for the surplus stock, which is now going bad. Moreover, thanks to high support prices, it can’t be exported either. Support prices and procurement, subsidised sale to millers, import tariffs and export subsidies – these are some of the tools at the government’s disposal to regulate the wheat industry. In today’s ‘Brief Recording’ BR Research looks into the country’s wheat industry, its regulation, and its outlook.
THE IMPORTANCE OF WHEAT: Wheat is Pakistan’s staple diet. As per the latest statistics from the USDA’s annual report on grain in Pakistan, 80 percent of farmers grow wheat on over 9 million hectares – or 40 percent of Pakistan’s agricultural land. It accounts for 10 percent of valued added in agriculture and contributes over two percent to GDP. The Rabi crop is sown in the winter months from October to December and harvested in March to May. Its marketing year (MY) is from May to April.
Wheat flour forms around 72 percent of the nation’s daily caloric intake. With an annual per-capita consumption estimate of around 124kg, Pakistan is one of the world’s foremost consumers of wheat. The world average is around 68kg as per the FAO. Hence, given the essential nature of this commodity, it’s no surprise that the government has had its claws in the wheat industry since the late 1950s.
GLOBAL WHEAT MARKET: Pakistan ranks in the top 7 wheat producing countries of the world, with an average 25 million tons per year. However, the country’s wheat productivity is not that impressive. According to the World Bank, Pakistan’s cereal yield during 2010 to 2014 was 2722kg per hectare, as against India’s 2962kg per hectare and Bangladesh’s 4357kg per hectare. However, the USDA expects this figure to improve to over 2800kg per hectare this year.
In terms of wheat’s import and export, there is no fixed trend visible in Pakistan; as it’s evident from the graph, Pakistan has been an importer of wheat for some years, while at times it has been an exporter. The country’s main official export market is Afghanistan. However, industry sources say that significant quantity of wheat is also smuggled to Afghanistan. Moreover, a global decline in wheat prices has made our exports uncompetitive and as a result, we are losing our Afghan market to the likes of India and Russia, according to sources.
WHEAT’S REGULATIONS: The procurement of wheat in Pakistan is carried out by PASSCO on the federal level and by the departments of food on the provincial level to be released to millers on a need basis. The procurement price and target is set by PASSCO each year.
Around 60-65 percent of the wheat produced in Pakistan is consumed on the farms themselves and does not reach to the market, while around 25-30 percent is procured by the government at the support price. The remainder is sold on the open market. So, there is little room for private players in Pakistan’s wheat market. However, there are differences of opinion among industry sources that claim that 20-30 percent is consumed on the farms, and around 50 percent reaches the open market.
In any case, private marketers of wheat are almost non-existent. The government has placed restrictions on inter-provincial transport of wheat every now and then, to help ensure that its procurement targets are met. Import tariffs and export subsidies also exist – currently, there is an export subsidy of around $45 per ton to help promote wheat exports. The import duty was also recently raised from 20 percent to 25 percent to discourage imports at the time of surplus.
The government’s aim is twofold; on the production side, it seeks to support farmers and provide them an incentive to grow wheat. On the consumption end, it wants to keep wheat affordable to the general public.
SUPPORT PRICE: The government procures wheat at the support price (which is higher than the market price) and sells it to millers on subsidised rates by undertaking certain costs such as transportation and storage. To finance this, it takes loans from private banks.
The support price is aimed to protect farmers from fluctuations in the domestic and international markets. As can be seen from the graph, wheat production has increased erratically over the years, while the support price has gone up steadily in comparison.
There are some objections regarding the effectiveness of this model and exactly how much it helps the farmers. Some are of the view that only the millers and the banks benefit from this while consumers receive no benefit. The correlation between the support price and wheat production is also questioned by some.
Wheat flour is what matters to the consumers at the end of the day, and this has gone up thanks to the increase in the support price. The price of wheat flour is unregulated and has been increasing vis-à-vis the support price. Finally, because of its essential nature, an increase in the price of wheat results in an increase in overall inflation. According to a research paper by PIDE, a 13.8 percent increase in the price of wheat flour results in a 3 percent increment in urban poor CPI.
IMPORT/EXPORT CONTROL: Pakistan’s wheat imports have continued even at this time of surplus – some sources blamed an inefficient government and its miscalculations for the unnecessary imports. They also said that the support price is so high (Rs 32.5/kg) that imported wheat (around Rs 22/kg) in spite of the duty is still cheaper.