Spotlight on Pakistan's
wheat economy
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.
Another industry source said that the wheat produced in
Pakistan is high in gluten and grown exclusively to make 'chapaati'.
He said local wheat is not ideal for making bread, biscuits,
or pasta, and for this reason, the wheat imports continue.
Meanwhile, exports are still uncompetitive owing to high
support prices. Sources said the export subsidy is doing
little good, and the overvalued rupee isn't helping either.
OUTLOOK: Pakistan's wheat industry is currently doing well,
given the high production numbers. The USDA expects MY16
production to stay strong at 25.5 million tons, and the
government has set a procurement target of 6.6 million tons.
This will bring the surplus stock in the hands of the
government to a hefty 10 million tons.
The government needs to establish proper storage facilities
for the surplus wheat stock. It needs to make wheat flour
more affordable to the common man. Moreover, procurement
targets should be lowered, so a space can be created for the
private sector in wheat industry.
April 2015
By BR
Report
Source: Business
Recorder