More flour mills are registered in Punjab’s two border districts of Rawalpindi and Attock alone, than in the top 5 wheat producing districts combined; districts that together are responsible for 25 percent of provincial crop output. Meanwhile, the barani region of north and north-western Punjab produces no more than 10 percent of wheat output yet is home to nearly 160+ out of 894 flour mills registered in the province.
Let that sink in for the moment. When it comes to Punjab’s wheat supply chain, it appears that the traditional wisdom of creating industrial clusters near farmgate simply falls flat. Instead, the largest concentration of milling units is located in the Rawalpindi and Gujranwala divisions, bordering KP and Azad Kashmir regions.
So, what’s exactly at play here? To understand, let’s first take a step back and recall how the flour milling industry in the province operates.
Every year from April – June, the Food department procures wheat across the province at the minimum support price fixed by the government. Once the Food department has met its procurement target, private sector players – middlemen and mills – are encouraged to enter buying to mop up the remainder produce and supply the market for the following three to four months.
In seasons of shortfall, the hope is that domestic demand be satiated through private sector supplies for the maximum length of time, so that food department may only dip into its reserves during the dry period (usually October – March). In contrast, when the department has high opening inventory, it seeks to release the stocks as early as possible so it may minimize carrying costs and free up liquidity for procurement in the following season.
But that rarely works in practice. When government procurement target is on the higher side, it signals a shortage to market players, encouraging stocking tendencies even at the farm level. Because this has the adverse outcome of crowding out private sector, the latter is unable to adequately supply the market during post-harvest months of July to September. This puts pressure on public sector to release its stocks early into the market to stabilize prices, often at subsidized rate. But how does that work?
Turns out, the food department only issues wheat to mills registered with the provincial flour mills association. While the department takes pride in its extensive background checking – from number of roller bodies, to installed capacity, and regular scrutiny of electricity bills - many of these milling units only come online when the government begins to issue its wheat quota, while remaining defunct for rest of the year.
Why? Because quite simply, the Punjab government releases the grain at a steeply subsidized price compared to its cost price or even market rates. In July 2020, the provincial government reportedly fixed wheat issue price to flour mills at Rs 1,600 per 40kg, after wholesale prices had already shot above Rs 2,000!
That’s an implicit subsidy of Rs 10,000 on every metric ton purchased by flour mills, or Rs 40 billion forgone against four million tons of wheat released to flour mills during the ongoing year (note: these are estimates). Consider also that in FY21, provincial government had to pay Rs 47 billion in interest payments only against outstanding commodity operations debt at the beginning of the year!
Never mind the opportunity loss; after all, governments are not in the business to earn profits off of the consumers. Never mind also that by procuring from growers at Rs 1,400 per 40 kg - when market prices eventually shot up by an additional 50 percent in few weeks – the government fleeced farmers of an opportunity to earn big profits, without taking handouts from the sarkar. Isn’t controlling grain price a worthy cause in a country where thousands sleep hungry?
Except, all that the provincial government did was create perverse incentives. By releasing wheat at a price substantially lower than market rates, it encourages “ghost flour mills” to appear out of nowhere, obtain grain quota, and then sell it off in the secondary market to competitors, non-registered units, or even across the provincial border to KP and Azad Kashmir – regions that suffer routinely from grain deficit. Can’t believe it? Look again at the accompanying map and pre-ponderance of flour mills units in the Attock-Rawalpindi-Jhelum belt that has little indigenous grain production of its own.
Punjab’s ghost mill problem is not unique to this government, as instances have been documented in press under past governments as well. Just last year, the provincial food minister declared that he would ensure the end of this scrouge. Instead, the milling industry exacted vengeance for selective disqualification by going on a weeklong strike, only for government to cave in. Did the ‘mafia’ win?
Readers are of course free to reach their own conclusions, but it may help to consider the following. That grain from surplus carrying Punjab makes it way to KP, AJK, or even all the way to Afghanistan is of little surprise considering the deficit in these regions. That KP’s buyers would find willing sellers in border districts is also intuitive. If flour, and not wheat, makes it way from Punjab to other provinces, all the better for provincial economic value-add.
With or without government interventions in the market, grain trading will take place. Instead, all the government achieved through its procurement operation is allow abnormal profits to one segment of the industry – flour mills, by capping their production cost through release of subsidized wheat, who may have sold it to willing buyers elsewhere, instead of producing inexpensive flour for provincial domestic consumption.
So, has the government realized the errors of its ways? Turns out, in order to recompense farmers for the lost opportunity to earn profits last year, it has now increased the buying rate by 35 percent to Rs 1,800 per 40kg. Maybe, it will also not subsidize the release price to penalize mills for their errant behaviour!
But what is certain is that nearly every private sector player involved in assisting government’s procurement machine profits from it. From commercial banks who earns billions in interest earnings, to flour millers that benefit from subsidized release, and farmers who receive a guaranteed purchase price, everybody benefits, except for the consumers.
The state believes that profit seeking private players will run wild and wreak havoc with national food security if it were to exit the wheat market. If past two years’ price spiral is any guide, consumers cannot be too crazy about the fruits of endless market interventions, either.
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