It has finally taken one-fourth increase in national wheat prices (in 12 months) for Pakistan to welcome in cheaper private sector imports. National food security czars should be congratulated for attempting to send a price signal to the market. They should also be censured for letting a broken market to flourish.
The National Food Security Policy 2018 cites domestic self-sufficiency in food grains as the greatest success of the last decade. Yet, for a better part of that period, Pakistanis paid a lot more for wheat and flour compared to rest of the world. In a nation where 1 out of 5 individuals is malnourished – and bread the cheapest source of caloric energy - is the trade-off between self-sufficiency and affordability even worth it?
Consider that between FY15 to FY17 when MNFS&R estimated that wheat supply exceeded national requirement by 5-10 percent, average domestic wholesale price was at 1.6 times premium over landed cost of imports (excluding any duties). Now that the policymakers have acknowledged shortfall by allowing imports, it will ensure that domestic price does not run amok and stabilizes at the revised parity.
Yet proponents of self-sufficiency insist that in the long run, unabated cheap imports will send a negative price signal to producers who will switch to more profitable crops, increasing reliance on imports. Because of a large population, increasing reliance on imports will eventually drive international price higher – a hazard that is further exacerbated by currency risk.
Given the perennial BoP and forex reserves battle the country faces, import dependency is a prospect that domestic policymakers can ill-afford. Which raises the question of how much import is sufficient, before it sets off the purported domino effect, eventually dissuading farmers away from wheat cultivation.
Pakistan sets a national output target by calculating national requirement at 115 kg per capita, in addition to 10 percent strategic reserves. Because output in 2020 is short of the estimated requirement, it is only fair that domestic selling price adjusts in tandem with available supply.
But not all Pakistanis pay for wheat. According to USDA-FAS, 50-60 percent of wheat output stays on farm – for self-consumption; as barter in exchange of services such as farm labour; animal feed; and seed use by the 7 million private farms (and their families). Yet it remains unclear what percentage of the national population does the remainder commercially traded 40 percent caters to.
If bears mentioning that even the 115kg per capita requirement is based not on nutritional surveys or spending/consumption behaviour census but using price stability in yesteryears as proxy of supply adequacy, adjusted for population. Although it may offer as good a guess as any other, it is akin to circular logic, which completely disregards how markets function.
Prices of goods and services are not static, and neither are their demand drivers. For example, among several others causes, the wheat inquiry report of Feb-20 blames purchase of grain by poultry feed mills for causing price spiral last year. This begs the question why government production targets refuse to incorporate poultry feed mill demand as part of national requirement.
It is understandable that grain consumption by livestock and humans may not be price elastic. However, it is bewildering why 27th highest per capita wheat availability globally is insufficient to meet domestic food security requirements? It is equally inexplicable whether a decline in national per capita demand from 125kg to 115kg over the past two decades is a function of improving living standards - negative income elasticity as witnessed across developed world – or falling affordability for the poor.
It is also unfathomable why three-fifths of grain produced is retained on-farm when share of rural population is on a decline. That is, unless livestock is also a major consumer of wheat. Except, if Pakistan’s livestock is really wheat-fed, it is unclear how cattle population has managed to grow at 3.3 percent over the last decade, even as wheat output and yield has stagnated?
The bitter reality is that government’s estimates of national wheat requirement are based on static assumptions about population, consumption, prices, and yield. Yet, that may be the best-case scenario. The worst-case scenario is that apart from the officially procured volume, government has no clue about crop output assessment, which is based on crude surveys by provincial extension departments and guesstimates about crop losses. This was also highlighted in the wheat inquiry by FIA.
Policymakers have belatedly done the right thing by allowing imports and reigning in their egotistical obsession with self-sufficiency. Because of global economic slowdown, domestic consumers will hopefully benefit from lower international commodity prices. But once the dust settles, it also risks sending a negative signal to producers if a fair estimate of shortfall does not exist or is off by a wide margin.
Governments need not calculate national requirement of any commodity, let alone an abundant crop such as wheat. That is a function of markets, where both demand and supply drivers are dynamic and adjust based on price incentive. But if domestic policymakers insist on assuming the role of markets, they must at least do the job right. What is Pakistan’s national wheat requirement? And why?
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