Impacts of higher wheat support price

With the Rabi crop season about to commence from next month, the wheat support price has become a topic of debate, once again. Earlier this week, the Agricultural Policy Institute (API) - which informs and advises the government on issues relating to agricultural production and price mechanism of key agricultural commodities; proposed that the ECC should raise the wheat support price to Rs1,200 per maund. The support price for wheat has remained at Rs940 per maund for the last two years. API has recommended a higher support price for wheat owing to the rising cost of inputs; including seeds, fertilizers, pesticides and electricity. API also urged the government to withdraw taxes and duties on agricultural inputs; as in their view, such taxes could decrease production and put the countrys food security in jeopardy. To come up with an exact price, API must have done its calculations, taking into account the rise in input costs since the last revision in September 2008 and export parity price of the commodity. However, the magnitude of increase seems high as it was only last year when APIs recommendation for an increase in wheat support price, between Rs50 to Rs80, was rejected by the ECC. It must be recognized that prices of inputs have increased considerably since September 2008. To date, urea prices have more than doubled and DAP prices also rose by roughly 30 percent, over the same period. Pakistani farming system, which is skewed heavily towards small farm land holdings, has had to spend more on working capital requirements. Fixing support price makes economic sense in some cases. For one, production could be enhanced as a higher price can induce growers to increase their yield per acre and possibly motivate them to sow the crop on a larger acreage. Secondly, the small farmer could get a legitimate price for his output and not be financially harassed by the unscrupulous elements like middlemen. But procurement should only be done when wheat prices get depressed in the post-harvest period. However, this doesn seem to be the case in Pakistan as the wheat support price regime failed to increase the crops yield and wheat production is yet to breach the 25 million tons mark. Moreover, small farmers, who do not have adequate storage capacity, end up selling to the same middlemen who are in bed with procurement officials. Case in point: wheat is procured only from those growers who could somehow get hold of wheat sacks arranged by PASSCO. Moreover, to meet procurement targets, officials end up harassing the very small farmers whom the government intended to provide support in the first place. At Rs1200 per maund, exports would become even more unfeasible and Pakistani wheat dealers will resort to selling the commodity locally. With the current wheat support price of Rs 950 per maund and associated freight costs; local price comes to around $303-305 per ton, which is much higher than the current CBOT wheat futures trading in the vicinity of $250 per ton. As things stand, the government can hardly afford another procurement season. Currently, its quasi-fiscal borrowing from the central bank - which is required to be revolving credit, yet in reality has become continuing credit - is running into hundreds of billions of rupees. Provincial governments are sitting on unpaid liabilities. Infeasible wheat exports would lead to clogging of liquidity in the system, as witnessed earlier. Then there would be a gush of short-term inflation if this move is approved and implemented, because wheat holds 5.6 percent weight in the CPI basket. However, the actual impact will only be known after the harvest. Raising the support price will neither address the shortage or the pricing of essential farm inputs. Nor will it correct the inherent lacunae in the yearly procurement exercise. If the latter are not addressed, a higher support price would change little for small farmers; while large farmers and middlemen would reap windfall gains.