Official forecasts reveal that a fourth consecutive bumper wheat crop is expected in 2016-17 with an estimated production of 26.1m metric tonnes over an area of 9.1m hectares.
With an annual consumption of around 24.5MMT, a surplus of 1.6MMT will add to the existing stocks of nearly 5MMT held by the provincial food departments and Passco.
These cumulative stocks of 6.6MMT worth Rs250bn are a source of genuine worries, as the cost of merely keeping them in warehouse is backbreaking — more than Rs60bn annually.
Wheat is a unique crop in Pakistan’s economy in multiple ways. It is the dietary staple and accounts for 72pc of daily caloric intake. Around 80pc of farmers grow it on an area of around 9.1m hectares. It contributes 10.3pc to the value added in agriculture and 2.2pc to GDP and is one of the two crops (besides sugarcane) for which the government notifies a minimum procurement price and the only one which the government procures.
Market channels/procurement
The wheat crop moves into three separate marketing channels — an estimated 50pc of the harvest is consumed on farm or within the village where it is produced. Usually 25-30pc is procured at a set purchase price (currently Rs1300/40kg) by the government and then provided to the flourmills at the fixed issue price. The remaining 20-25pc is purchased by the private sector.
The government’s purchase of more than half of the traded produce is aimed at maintaining strategic stocks, incentivising production and protecting farmers from price depressions due to post-harvest gluts.
A revisit of wheat production and pricing strategy is essential to address the dual problem of competitive over-production induced by the self-sufficiency notion and offloading the surplus stocks
The World Bank forecasts that the current depressed prices would not regain the 2013-level till 2025. The offloading of Pakistan’s expensive 6.6MMT surplus stocks in a depressed global market will remain challenging.
A dispassionate look at Pakistan’s wheat economy reveals that the issue in the wheat sector is a systemic rather than short-term glut. Pakistan is ironically quoted by the FAO as an example of those countries which are self-sufficient, yet food insecure. The Pakistani consumer currently pays nearly double the international price of wheat.
The procurement of wheat by the public sector has systemic inefficiencies in terms of price and quality. The procurement price of Rs1300/40kg translates into $360PMT (FOB Karachi), which is twice the current global price of $181-193PMT.
The government’s purchase of more than half of the traded produce is aimed at maintaining strategic stocks, incentivising production and protecting farmers
A subsidy of $110PMT could not bridge the gap with the global price and government-to-government exports could not materialise despite best efforts of Ministry of Commerce and provincial food departments.
Around 1.9MMT subsidised wheat flour was exported during the last three years, out of which 99.6pc to Afghanistan. Such exports have a history of returning to Pakistani market after subsidy has been claimed.
Recommendation
A revisit of wheat production and pricing strategy is essential to address the dual problem of competitive over-production induced by self-sufficiency notion and offloading the surplus stocks.
In the short term, a difficult business decision has to be made to jettison the dead stock at its salvage value instead of waiting endlessly to recover the costs.
The writer is director general, Trade Dispute Resolution Organisation, Ministry of Commerce.
Published in Dawn, Economic & Business, April 17th, 2017
