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According to weekly SPI, basmati (broken, average quality) national average price has closed in on Rs 100 per kg in the week ended 09th December. Although price of basmati varieties can reach up to Rs 250-300 per kg – depending upon quality – this is the first time SPI price has scored a century. Is a basmati price spiral next?

Not really. It is correct that basmati prices (as tracked by SPI) have increased by nearly 60 percent in the past 5 years that says little in an economy where currency itself has depreciated by over half during the same period. But FY21 marked the highest rate at which basmati prices have raised in nearly a decade, while FY22 may prove worse still.

According to PBS data, basmati prices rose by 10 percent during FY21 over the preceding year (12-month average). Since July alone, prices have risen by 6 percent, and even if they stabilize at current level for H2-FY22 – the 12-month average run rate will translate into 11.5 percent by end FY22.

But that’s not crazy enough in the world of domestic food prices, where prices of other staples such as wheat flour, ghee, cooking oil and sugar have risen by over one-third in less than a year (and in some cases, witnessed double-digit increase for two years in row). What’s crazy however is basmati price increase also flirting with double-digit territory, since in more recent past these had stood out for their relative calm and semblance of stability.

What has happened? First theory is a grain miller’s favourite, and takes a leaf from Econ 101. Essentially, it posits that wheat and other cereals are substitute goods – not only in human consumption but also as livestock feed inputs. Thus, increase in price of one commodity leads to rise in price of others, especially when quantum of price increase is inordinate, as has been the case with wheat flour prices domestically.

Of course, outside of classroom, the real world does not operate under ceteris paribus conditions. Over the past decade, while Pakistan’s wheat and flour output has stagnated, production of basmati and related varieties (such as Kainat) has doubled. Meanwhile, uncompetitive pricing meant Pakistan’s basmati could find few takers in the international market, meaning there simply was a lot more rice to fill the stomachs back home.

Greater output together with reduced export of marketable surplus meant that local prices remained stable, even when prices of other food commodities started to give in under the weight of rising cost of inputs. But it seems that the precarious equilibrium is now giving away too, a confluence of variety of forces.

First, cost of production of basmati and other rice varieties has risen in tandem with other grains. According to Punjab government, cost of per acre production for basmati paddy rose by over one-third in the past two seasons alone, without commensurate increase in market prices. Two, output growth rate is now peaking, as growers have failed to note quantum jump in per acre productivity.

Moreover, rice crop may very well have witnessed maximum area under its cultivation during the just concluded kharif season, as some growers may shift back to cotton in the upcoming season, due in part to demand revival from textile exporting industry. Lastly, demand for basmati exports is staging a comeback too, flirting with peak pre-Covid volume (witnessed in FY19).

It appears likely that local basmati prices may witness upward momentum in coming months, especially if local wheat output falls short of target/expectations. Is there any saving grace then? Maybe, but only to the extent that consumers may feel assured that basmati prices shall not witness a topsy-turvy rollercoaster ride – unlike sugar and flour prices – and may instead only inch forward – albeit slowly.

But that’s primarily an outcome of the very large number of small and mid-sized rice millers and shellers in the market, ensuring that none of the market participants command a dominant position in local trade. But that’s no thanks to administrative interference. Rice – and especially basmati market – has remained free of administrative intervention in the past, and must remain so regardless of which ever way prices might settle.

In the medium term, however, policymakers must confront the existential dilemma of building forex reserves on raw material exports. Commodity exports may very well offer the fastest route to growing foreign trade, but sooner than later economies run out of marketable surplus if they fail to improve productivity. While rice crop may have done tremendously well compared to wheat or cotton in recent years, it is not free of the low (and stagnating) yields scrouge that inflicts agriculture sector in general.

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