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If you think only a well-timed investment in US dollars earlier this year could have yielded stupendous returns, think again. The return could have easily been matched – nay beaten – by a portfolio investment in food grains. And unlike the currency - which is now showing signs of easing -cereal prices are marching forward like there is no tomorrow!

Since the change of government in Islamabad, wheat and maize prices as tracked by Wholesale Price Index (WPI) in local mandis have increased by 27.5 percent. Compare this to 22 percent depreciation of Pak Rupee between March and July (monthly average), which has now reversed course. If your commodity portfolio included the relatively lower yielding rice as well, the average return would have still beaten the return on currency.

And while the rest of the world is only coming to terms with what a food commodity price spiral looks like in the aftermath of Russianinvasion of Ukraine, the local story has been very different. For at least past three years, annual return on cereals has outpaced the return on currency. Rise in local wholesale prices of wheat and rice shot past currency deprecation even during the pandemic year (2020), when commodity prices collapsed globally.

The phenomenon may partly be attributed to adoption of a market-based exchange rate, which has effectively pegged commodity prices in local galla mandis with prices in international market. This means that in year(s) when price movement in global markets is slow or stunted, natural rate of currency depreciation helps record some positive price change in LCY terms. And in year(s) when global prices are out of whack – just as since late 2021 – the returns on commodity deliver the double whammy of price change from supply shock, as well as slippage in exchange rate.

It may be too early to conclusively comment on the possible effects this dollar pegging might have on local food prices and inflation. On one hand, market-based movements in exchange rate have certainly helped grain exporters. Pakistan’s rice exports have boosted by over 1 million metric tons, up 30 percent (in volume) compared to 10-year average between FY09 – FY18. In addition, exporters have added maize to Pakistan’s export portfolio, exporting grain worth $232 million during FY22, compared to just $14 a year earlier! Seventeen times increase!

On the other hand, could it also mean that local food prices have become dollarized, at least so far as raw material grains are concerned? In an ideal world, that would be a great development for Pakistan’s chronic trade deficit. Once commodity prices begin regularly readjusting themselves in line with international parity, traders may find it increasingly more attractive to sell to foreign buyers, earning precious foreign exchange in the process.

However, Pakistan’s economic settings are hardly ideal. As raw material for most food products – whether in the form of bread and roti or as feed for poultry and dairy/cattle livestock – the regular revision due to exchange rate movements - would most certainly cascade into local food prices, making basic food essentials pricier.

Does that mean consumption basket of average Pakistani will shrink year after year – until such time that current account deficit disappears - and more so during a period of global inflation? And if yes, does the state have a plan to protect the most vulnerable from these grim prospects?

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