In the throes of global commodity crisis of 2008, Pakistan saw national average wheat prices rise by 70 percent over the previous year – setting off a chain reaction of food inflation in domestic economy. Later same year milk prices rose by more than 20 percent, establishing what many analysts perceived as a causal link between wheat and dairy item prices. The correlation made intuitive sense. Afterall, wheat straws are a crucial input in livestock feed.
It is of little surprise then that the price trajectory for wheat and dairy items during 2020 gives a sense of déjà vu. In the past 18 months, domestic wheat prices have increased by more than 54 percent – exacerbated by a governance failure, causes of which have been covered in this space ad nauseum. To a casual observer, it would appear that dairy prices have also increased in tandem during the corresponding period – upholding the correlation. But is the link also causal in nature?
Not exactly. Long before the country was hit by the most recent wheat crisis, dairy prices were increasing across the country at an average year on year rate of 4.5 percent. This was especially true during a 60-month long run beginning July-14, when annual change in national wheat prices remained either zero or in the negative territory.
So, what does that say about the correlation so often observed between the prices of these two commodities? Based on available monthly CPI data going back 15 years, the long-term correlation coefficient between the two food items is a very-high positive of +0.92 percent.
However, look closer, and the relationship is as good as non-existent. In fact, during recent years of wheat price stability – between Jul-14 to Jun-19 – the correlation went into the negative territory. During this period, while dairy prices rose from Rs 75 to Rs 91 per litre, national average wheat price remained steadfast at just Rs 35 per kg.
Then why are 2008 and 2020 so different from the norm? With good reason. The inflation spiral set off by a confluence of forces beginning from a sharp currency devaluation to convergence of domestic commodity prices with international rates, to policy failures w.r.t mistimed export and floor price decisions, and administrative heavy handedness, led to an across the board increase in price levels that eventually also spilled over into dairy prices.
Are dairy prices then determined by the direction wheat prices take? Not in the long term, and especially not in Pakistan where wheat prices are much more stringently controlled at both federal and provincial levels. Will 1.5 times increase in wheat prices in less than two years always lead to a sharp rise in milk prices as well? Possibly, but given wheat’s high weightage in national CPI, that correlation can be established with almost any other commodity as well – especially in a year of double-digit inflation.
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