As spiralling wheat imports have once again become talk of town, one question reigns supreme over all other: where has the highest-ever output of 27 million tons disappeared? GoP remains off the view that in order to avoid future shortfalls, it must top up locally procured reserves with imports. But public sector buying spree has come at a cost, not least of which is the financing of federal and provincial government’s commodity operation debt – now closing in on Rs915 billion.
But another casualty of government’s oversized role in wheat procurement has been the private sector, which seems to have been driven out of local wheat market. Although historical data before May 2019 is unavailable, more recent statistics out of SBP reveal startling figures.
Between June ‘19 and June ’20, commercial bank lending to private sector wheat flour millers fell from Rs 50 billion to a little under Rs 20 billion. Of the total loans outstanding as at June 2019, Rs 40 billion were extended as seasonal financing for wheat procurement: self-liquidating working capital facility to finance grain purchase (and settled against sale proceeds of finished goods).
By June 2020, seasonal financing to private sector wheat processors stood at a little under Rs 14 billion. Because these facilities are self-liquidating in nature, it stands to reason that in most cases commercial banks didn’t renew seasonal finance for private sector wheat millers during the 2020 harvest season, starving them off liquidity to finance wheat purchase operations.
The situation seems to have improved during 2021. Albeit only slightly. Working capital season finance outstanding returned to Rs 35 billion; 2.5 times over the preceding season but still well under last peak witnessed two years ago. So, has the supply line of credit to private sector wheat processors resumed?
That may be overoptimistic. Consider that back in June 2019, local wheat prices averaged around Rs 1,300 per 40kg. These have shot up to beyond Rs 2000 per 40kg in the aftermath of wheat shortage that has unfolded over past two years. At current prices, private sector wheat processors can procure little over half of the quantum of wheat that was procured two years ago through bank financing.
Mind you, commercial banks offer very little working capital finance to grain millers other than seasonal finance, and tightening the screws on credit means private sector buyers must survive on own cash to finance inventory procurement.
And the retrenchment of bank credit is only one of many tools available to authorities to push private sectors buyers out of the market. Last year, Punjab government had also imposed a cap on private sector stocks of over 25 maunds. Raids of private wholesaler go downs and warehouses deter transactions on market credit, as supplier becomes inhibited in selling on credit terms in case stocks are raided and sealed, disabling buyer from repaying indefinitely.
Is it then surprising that the public sector was successful in meeting its wheat procurement target in latest season, often touted as evidence that the country produced record levels of grain? If the public sector simply eliminates all competition to its procurement of the single largest food commodity, is it truly proof of highest ever wheat output? Think again.
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