Costs of wheat support price

In FY17, for the fourth consecutive year, wheat harvest crossed the 25 million tonne mark. As harvest exceeded domestic consumption, the surplus added to Pakistan’s existing wheat stocks which rocketed to 5.7 million tons by June this year, as compared to 1.2 million tonnes in June 2014. SBP expects these stocks to increase to 7.05 million tons in FY18.

As impressive as the wheat harvest and the build up of stocks is, it comes at a cost. If Pakistan had been able to export the wheat surplus, excess crops would have been a reason to celebrate. To maintain wheat production, a high support price is needed. However, the current support price of Rs1300 (approximately $12) per 40 kg is much higher than the international price of approximately $9.7 per 40 kg hence making it difficult to export. So far this calendar year Pakistan has only exported 1,661 tons of wheat as per PBS.

As per the FAO, current year’s global wheat supply is expected to be at 984 million tons whereas utilisation is estimated to be 734 million tons. There is excess supply in the market, especially since EU’s production was higher than anticipated. Amidst ample global supply and strong export competition there is little demand for Pakistan’s relatively expensive wheat exports.

Storage of millions of tons of excess wheat leaves it vulnerable to insects, moulds, birds, and rats. Biotic factors such as temperature, humidity and type of storage can all cause deterioration of quality. At the current support price, Pakistan wheat stocks are valued at Rs168 billion. A conservative estimate by the Pakistan Agricultural Research Council of storage loss is 3.5 percent, putting potential losses at Rs5.88 billion.

Furthermore, losses of unsold wheat and its spoilage aside, surplus stocks are increasing the outstanding loans taken by the government for its procurement.

As the situation stands, Pakistan is neither consuming the wheat surplus nor is it exporting it. On the other hand it stands to lose billions in losses. In this lose-lose situation, the government’s support policy needs to be addressed since international prices show no inclination to rise. Or the wheat export subsidy mechanism should be established. It’s time to cut the losses and earn much needed foreign exchange. The bumper wheat crop is enhancing the gross domestic product but it is of no use without consumption or exports. It’s been 2-3 years since the wheat surplus exports, and subsidies associated are in the works. And in the mean time international prices dipped further and seeing global supply glut, there is less chance of upward price reversal. It’s time to cut the losses and move on!