Now that the federal government has increased wheat support price for upcoming marketing season (2021), a discussion of how price floors distort markets is moot. But will the pre-emptive action help reign in the price spiral? Let’s look.
Two major factors probably determined government’s tilt towards an enhancement in procurement rate this early in the sowing season (breaking away with the long-established tradition of increasing prices near harvest - circa March – if at all). The wholesale price in the outgoing season has been raging over Rs 2,000 per 40kgs, while farmers only received Rs 1,400. Faced with Section 144 and imposition of private storage caps, an increase in base rate thus was a foregone conclusion if the government were to keep farmers from switching to substitute crops in hordes.
The only other way for farmgate prices to increase would be if the sarkar had let the market forces rule the day. Although it appears that some ECC members were tempted, the latest MNFS&R czar is in no mood to act gutsy and do away with market intervention. Remember, international prices are witnessing a reversion to mean after bottoming out during peak Covid, which means the government must at least maintain import price parity (viz landed cost). When it comes to wheat, the policymakers have no desire to make Pakistan export-competitive, lest there be incentive for outward smuggling!
So, will farmers return to wheat? The evidence suggests, they always do. Wheat is an off-season crop for most farmers, meaning it does not compete with other major crops such as rice, sugarcane, or cotton (except for maize). Since FY09, Pakistan’s most popular grain has been cultivated over an average of 9 million hectares (ha), which is three times the area under the second largest crop, rice.
But when it comes to popularity of wheat, it’s the range and not the average which is of most significance. In the past decade, the lowest acreage has dropped was 8.65 million ha, while peaking at 9.2 million ha. For obvious reasons, wheat cultivation is a necessity not a choice for most growers. Even when it is not sold to provincial food departments or in open market, wheat is stored for self-consumption, as animal feed, and for in-kind payment to labour.
Thus, no more than 0.65 million ha are up for grabs by competing crops – a mere 7.5 percent of acreage under wheat. At national average yield of 3 tons per ha or 30 maunds per acre – historically highest – that may help rake in an additional 2 million tons, barely enough to keep domestic supply in equilibrium.
Increasing acreage, of course, is not the only way to improve output – especially when land is in limited (possibly, diminishing supply). Farmers could improve productivity, and higher procurement rate should indeed act as an added incentive. But does it really?
Doubtful. While historic trend suggests that increase in government support price – particularly dramatic increases such as in FY09 (see illustration) – help increase acreage, the jury is out on whether it helps improve yield. Of course, it is intuitive that higher price cannot guarantee higher yield, as neither the government nor the grower can help control for acts of God (read: vagaries of weather).
Anecdotal evidence based on non-scientific survey of growers brings to light interesting conclusions. It appears that the farming community perceives enhancement in base rate as recompense for erosion of purchasing power (due to increase in input prices). Thus, smaller the percentage increase in base rate, lower the propensity of growers to use yield enhancing inputs. A practice that is anyway limited mostly to commercially-minded growers.
But more interestingly, it isn’t certain whether the support price will even help bring more area under cultivation this season. Higher aftermarket price means seed is not available cheaply, whereas police raids on private storage means own-stock of growers is in short supply. If seed is selling at a higher price than final product, commercial growers may see little incentive in going long on wheat cultivation.
Demand dynamics of substitute crop is not helping either. Corn is cultivated in off season, especially in Punjab. Better corn prices due to recovery of demand from poultry segment since the lockdown ended means government may be able to do precious little to commandeer more acreage for wheat. Furthermore, a Rs 6 billion subsidy was announced earlier during the year to encourage cultivation of oilseed, especially canola. It appears that the MNFS&R is not mindful of its own competing objectives!
Meanwhile, both guaranteed demand and prices have turned wheat productivity the laggard of major crops in the country. The last time crop productivity increased by a substantial factor was circa 2004 – 2012, when average yield grew from 2.1 to 2.8 tons. Since then, national average yield has been stuck under 3 tons, even for most progressive growers.
Lack of investment in seed innovation – unlike maize, sugarcane, or rice – has made matters worse. Official sources suggest that the seed variety marketed by provincial departments is hardly different from two decades ago, which over the years has lost efficacy due to in-breeding. Seed could have been imported, except some brilliant minds also insist on keeping borders closed from with the only trading partner with similar agro-climatic conditions.
This is not a critique of enhancement in support price. As things stand, the federal government had very few choices, especially in the short term. But it may be a good time to face the creeping realization that there is precious little a government can do to increase wheat production if it insists on keeping private sector investment and innovation out of the sector. The rate has been increased; now face the bigger, more-long term challenges.
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