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Wheat policy: problems and issues
MOHAMMAD KHALIQUE ARSHAD
Over the last 50 years since the independence of Pakistan, the
policy-makers have not been able to develop a satisfactory
policy for the basic necessity of its people, food. This is
despite the fact that agriculture is the mainstay of our
economy and our land being one of the best for agriculture.
The policies made over the years for our staple grain,
wheat, have always been ad hoc.
 Every
new government experiments with this policy, at the expense
of the people, and there is no consistency at all. At times
we have surplus wheat which rots away in open storages.
At other times we are so short that we impose all kinds of
unenforceable restrictions which only result in black
marketing, exploitation of the farmers, and high prices for
the customers.
The government of Pakistan is giving billions of rupees in
wheat subsidy which is in fact the cause of many of the
problems in the industry. Two years ago it was decided that
the two main items of subsidy, namely transportation and
gunny bags, ought to be removed.
This was not implemented fully. The subsidised wheat is
naturally cheaper than wheat in the open market, resulting
in wrong signals to the markets and attracting profiteers to
put up new mills to get these subsidies when in reality
there is already 300% over-capacity.
In Pakistan, the price of Atta has always been a political
football. Flour being the staple food, is always on top of
the agenda for policy-makers. Often decisions are made that
are contrary to the market forces which result in price
distortions and disharmony in the system.
Excess milling capacity is the most powerful factor that
will ensure that the prices of flour will be driven down
only if the market forces are allowed to play their role.
Since independence, Pakistan has exported wheat for only two
years and imported wheat for many years. We have one of the
best qualities of wheat and also have modern milling
equipment.
There is no reason why we cannot produce the flour products
meeting international standards if we allow the free market
forces to make this happen. All multinational companies
operating in Pakistan happily get the required wheat
products locally.
One of the basic responsibilities of the government in this
regard is to make a reliable assessment of the production
every year. Unfortunately, we do not have any good
methodology for doing so.
In the same season, the estimates may suggest surplus at one
time and deficit at another. At the same time the demand
side estimates are equally undependable because of various
elements including official and unofficial export.
Wheat is also being procured, stored and transported in
gunny bags from farms to godowns to mills.
This system is now obsolete and actually costs more in the
end. We need to move with the times and start employing bulk
handling systems.
RECOMMENDATIONS Policies can produce lasting and
satisfactory results only if (a) the market forces are not
ignored, (b) they are easily implemented, and (c) the
legitimate interests of all stakeholders are recognised and
catered for.
As for wheat and its products, there are four stakeholders,
namely the farmers, the flour millers, the consumers, and
the government. Among this group, the farmers and consumers
at large are the most critical.
From a farmer's perspective, if the purchase rate is not
revised for many consecutive years and the government can
forcibly buy it in announced rate, he will plant more if he
estimates that the rate is profitable and less if not. We,
therefore, get into a cycle of high production when rates
are revised upwards, followed by years of declining
production as the purchase rate remains stagnant but the
cost keeps going up.
What is needed is an annual revision of government announced
purchase rate based on the cost of seed, fertiliser,
pesticides and water. This revision coupled with no forced
purchase will ensure that the supply will remain stable and
market forces will keep increasing the cultivated areas as
the demand grows.
From a customer's point of view, he wants as much product as
he demands, at the best possible price and good quality. The
only way to ensure that the customers achieve this goal is
to let the market forces of demand/supply reach the
equilibrium price levels.
The customer is the end loser in any artificial rate setting
methodology. This is so because the supply chain includes
distributor, wholesalers, and retailers in addition to the
millers and someone in the chain will always exploit the
situation, often in collusion with government officials,
resulting in high prices and poor quality for the customers.
The cost of milling is well known the world over and when
added to the price of wheat results in an easily calculated
cost. If the price of product is controlled artificially,
without giving fair profit to all involved in the chain, the
equation is not sustainable for long. Such a situation is a
breeding ground for corruption, black-marketing and
hoarding.
The installed flour milling capacity in the country is at
least 300% of the need, driven primarily by the quota system
for wheat supply. A number of flour mills were put up in the
last 2-3 years because of the tightness in the market
despite the fact that the capacity was already significantly
in excess.
If there is no limitation on the supply of wheat, the
"survival of the fittest" will ensure that only the most
efficient mills would operate. This would drive down the
prices to the lowest possible level.
The last stakeholder, the government, has a role of ensuring
that the policies and their implementation are such that
there is no shortage of this staple food. In order to do so,
sometimes it may need to buy/sell the product itself if the
markets are not mature enough to cater to that privately.
That is the case presently in Pakistan. In the light of
these constraints, it is imperative for the government to
maintain a large enough buffer stock, of say 2-3 million
tons as a very cheap insurance policy.
Having an excess in one year in not a loss; it is simply
carried forward into next year. Overtime this can change and
the government can actually get out of this business
altogether and perhaps maintain only a strategic reserve for
emergencies. On a longer term basis, the government cannot,
and must not, subsidise this supply to any meaningful
levels.
If the cycle of hoarding starts, the effects of the same can
easily persist for years. This is so because after a year in
which there is shortage, even if the crop is good in the
following year, the hoarders buy the wheat simply for
appreciation.
The problem we are facing today is precisely because of this
reason. Unless this vicious circle is broken decisively and
quickly, the impact can last a few years. The loser in the
end is the consumer.
In the light of the above perspectives of the stakeholders,
the following must be included as the key elements of a
successful and sustainable wheat policy:
a) The government must always maintain a buffer stock of say
10% of the expected demand, even if it has to import and
carry over into next year.
(b) While the announcement of a purchase rate ought to be
continued for some years to come, the farmers ought not to
be coerced into selling, and the millers ought not to be
prevented from buying.
(c) The supply by government ought to be without long-term
subsidies and without restriction on amounts, ie let the
market determine how much it needs and let the fittest
survive.
(d) The government ought to review its demand-supply
position around September-October and if needed it ought to
place order for import before the high season starts.
(e) If as a social decision, farmers need to be subsidised
(as is the case in many other developed countries), it ought
to be done in the form of items like crop insurance, tax
free pesticide supply, and provision of cheaper and better
seeds to increase yields etc.
(f) The flour mills should be facilitated to build storage
facilities and procure wheat on fiscally attractive terms,
since they are the actual processors of wheat and not the
hoarders.
In the short-term some additional measures are needed to
break the cycle of shortages.
The wheat issuance should be based on the actual
requirements. A classic case is the city of Karachi where
the supply is still less than half the need, resulting in
movement from Punjab.
In essence the issue should to made totally open, and if
that is resulting in a shortage in stocks, additional
imports should be made immediately. Only such a measure will
break this cycle now and ensure that this does not carry
over into the next seasons.
If the above recommendations are followed, the excess
milling capacity will result in driving down the processing
cost through competition.
This will manifest in better and more cost-effective storage
facilities, increased sizes of mills yielding better
economies of scale, price segmentation in the market based
on quality parameters and credit differentiation amongst
different quality players in the market. The winner is the
customer.
(The above article is based on a paper presented by Mohammed
Khalique Arshad, President of the Pakistan Flour Mills
Association (Punjab branch) at a seminar.)
Courtesy: Business Recorder
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