For most of 2020, flour prices in major centres of Sindh have been at least one-third higher than in Punjab. That is no ordinary price premium; whose gravity is further exacerbated by the fact that neither inter-provincial trading, nor landing of imported wheat at Karachi port has helped bridge the difference. What is going on?
But first, some history. For much of the past decade, wheat and flour prices in Karachi have been higher than rest of the country (graph-based illustration only draws comparison against prices in Lahore for simplicity). Consider that between 2013 and 2018, flour traded in Karachi at an average premium of 15 percent over Lahore, with minimum and maximum differential ranging between 5 – 20 percent. During the same period, wheat prices in the port city averaged +5 percent over that in Lahore, ranging between -10 percent and +15 percent.
The differential has often been explained away with (intuitive) theories, rarely raising alarm since the premium has largely been consistent and rangebound. For one, cost of living in the southern city is thought to be higher than rest of the country, reflecting in higher-than-national-average prices of other essential commodities (as tracked by SPI/CPI); and two, the greater farm-to-fork distance of Karachi compared to Lahore, which has historically been surrounded by rural belts.
But since the wheat price spiral (or shortfall/crisis – as it may be remembered by posterity) hit the country beginning September 2019, the historical ratios have been thrown into a disarray. Since then, monthly flour prices in Karachi have been at least 40 percent higher than in Lahore (except for June and July 2020). What was initially blamed on the incompetence/corruption of provincial authorities who were found neck-deep in smuggling of wheat stocks in 2019, refuses to relent. But there is more.
After suddenly spiralling out of control in June 2020 - when 20kg flour price in Lahore short up to Rs 1,000 – Punjab’s provincial authorities have the spiral largely under control. If PBS is to be believed, flour in 7 markets of Lahore - (and markets of other major centres of the province such as 5 in Rawalpindi, 1 in Gujranwala, 2 in Faisalabad, 1 in Sialkot, 1 in Sargodha, 3 in Multan, and 1 Bahawalpur) as tracked by the apex statistics body of the country – is trading at a constant price of Rs 860 per 20kg, with zero variation between August and December. Is that a miracle pulled by the price administrative regime or a result of a technical glitch caused by data collection methodology?
It is definitely not the latter. The publicly available methodology of CPI (base year 2015-2016) on PBS website states that the authority “collects actual prices at which items are being sold to consumers”, “rather than list of tag prices fixed by the manufacturers or various price-monitoring agencies”. Moreover, PBS claims that the data is collected by field officers who “personally visit shops, stores and establishments …collect the prices from three shops of the selected items from each market in urban centres and two shops from each market in rural centers”.
Consider this: 2-3 shops each in 29 markets across 16 urban and rural centres of the province, all selling flour at a constant price for almost half a year and counting. If the Punjab government achieves nothing else in its five-year tenure, just the fact that an essential commodity such as flour is being sold at a constant rate for such a long time is a remarkable feat in itself; unless of course, it is not.
And here is more twist. For most of the last decade, flour has traded at a premium over the price of its raw material wheat – across all regions of the country. Between 2014 and 2018, flour price averaged over wheat price in Lahore by 12 percent, 20 percent in Karachi, and 13 percent on nation-wide basis. For most of this period, flour to wheat price ratio remained rangebound between 5 – 22 percent.
But this intuitive relationship between input (wheat) and output (flour) commodities have fallen into a flux in 2020. Because flour prices in Lahore (and rest of the Punjab) are miraculously low, flour is retailing at a lower price than wheat in the province. Naturally, the fifty percent share of Punjab’s markets in SPI/CPI has also brought down the national average ‘flour to wheat price ratio’ to the negative territory in recent months (see illustration).
While Karachi – or for that matter, Sindh, Balochistan or KP’s markets have observed no such anomaly - the port city has witnessed an anomaly of a different kind. Since July, the raw material wheat has become cheaper in Karachi compared to Lahore, without commensurate respite for flour (output) prices. Consider that since imported wheat began to land on Karachi’s shores, wheat and flour (actual) prices have declined, yet wheat to flour price ratio in the city has stayed at 40 percent, still beyond the historic range of 5 – 20 percent.
The situation demands answers, many from PBS and then some. The traditional explanation of “wheat is being smuggled out of Sindh with complicity of corrupt administration” does not make sense (at least, not on its own), because who would smuggle the raw material, only for the milled flour to be sold at lower prices in Punjab.
Is the administration in Punjab trying to send a price signal to traders (sitting on wheat stock) by forcibly-fixing a low retail price of milled flour? After all, if flour consistently retails at lower price, millers and wholesalers would no longer be interested in buying more expensive wheat, thereby bringing down its wholesale prices closer to desired levels?
Clever, except flour is much more expensive nearly every where else across the country. Consider that flour retailing at Rs 860 per 20 kg in Rawalpindi can be sold at an average 25 percent premium in Peshawar by just transporting to 2 hours distance (using PBS provided prices for both cities) – given that currently there is no ban on inter-provincial trading. Consider also that if this inter-provincial trading were to be indeed taking place – it has failed to bring down prices elsewhere. Consider also that by government’s own admission, the short respite witnessed in wheat/flour prices across the country since November has been attributed to landing of imports. Then add the fact that landing of imports hasn’t caused change in flour prices reported for Punjab by PBS between Aug – December, but only for the other three provinces.
The regional price disparity demands answers: from PBS, from Punjab’s price control and reporting authorities – but also from Sindh’s, for failing to bridge the gap (premium/ratio) between wheat and flour price which remains out of whack even in January. However, the anomalies offers another insight, important for the trackers of commodity prices and inflation in the country.
Considering the high weightage of wheat and wheat related products in national – both for urban and rural CPI of nearly 3 – 4 percent), the anomalous flour to wheat price ratio in Punjab - ranging in the negative territory for all of 2020 – coupled with Punjab’s over 50 percent share in markets tracked by CPI/SPI indicates that the national average flour price is in for a major adjustment very soon.
Two factors corroborate this theory. One, as per provisional surveys by USDA-FAS, the acreage under wheat has failed to grow by a major percentage in 2020-21 rabi season, indicating that the wheat output will not grow significantly. Thus, wheat prices may remain in the current range, if not altogether increase. This means that Punjab’s price control administration’s bet to rein in raw material wheat price by reining in output flour rates is unlikely to pay off (if that is indeed what is going on).
Two, international commodity prices are witnessing a major rebound since July, with US Wheat SRW prices rising by a quarter in the past six months alone. As Pakistan continues to import more wheat at higher unit prices – along with higher support prices for wheat announced by GoP domestically for the upcoming season – it is only a matter of time before flour in Punjab starts selling for at least higher-than-wheat-price, even on official rates.
Despite so much air-time devoted to commodity shortage over the past 12 months, it will be a pity if the incumbents fail to bring inflation under control - not even in their third year in power. And with SBP announcing forward guidance on monetary policy for the near term, it will be a shame that food inflationary pressures force the central bank to reconsider its stance.
Rather than bringing down the axe of administrative authority and repeating mistakes of past year, it is high time that governments in power – both federal and provincial – come clean about the wheat/flour prices mystery.
Comments
Comments are closed.