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Coronavirus
VERY HIGH
Pakistan Deaths
15,619
11824hr
Pakistan Cases
729,920
431824hr
Sindh
269,474
Punjab
252,974
Balochistan
20,397
Islamabad
66,983
KPK
100,275

Seven million growers, and over twelve hundred milling units; none with more than three percent market share. Pakistan’s wheat and flour industry should fit the classic definition of a free market with a large number of small players, none big enough to influence price-setting. Yet the industry is anything but free.

Why? Unlike sugar, cement, or even banking, Pakistan has no wheat or flour ‘barons’. According to the USDA-FAS, over 50-60 percent of domestic output is retained on farms for food, feed and re-sowing purposes. The market could have been highly competitive with very low frictions considering the crop is grown across the country with milling/grinding units in very close vicinity. Except, there is one buyer that - depending on ones’ ideological leanings – is responsible either for equitable distribution and population welfare; or, for the distortions that have led the sector to its current state.

Over the past five years, federal and provincial governments annually spent close to Rs 200 billion on procurement of close to 6 million wheat. That’s 25 percent of domestic consumption or over half of marketed wheat.

Official procurement - conducted through PASSCO and provincial food departments – is done to meet several national objectives, chief among them is to maintain strategic grain reserves for the country, supply wheat to armed forces, meet SAARC Food Bank requirements, stabilize domestic market prices, and to extend welfare to farmers by offering guaranteed purchase of farming output. Let’s ignore the national strategic reserve requirements and analyse how successful public sector procurement has been in fulfilling its other objectives.

No marks for guessing. Going by the ongoing wheat shortfall in the country, it is no news that official procurement mechanism has failed to maintain price stability. However, it does perform the noble function of purchasing wheat from growers at above-market support price rate, contributing to welfare of the downtrodden. Except only that’s whitewash.

Why? To answer this, some context of politics of bardana is necessary. In order to receive the above-market price from food departments, growers must have access to officially issued bardana or gunny bags. Except, it is an open secret that distribution of bardana has long been blighted by nepotism; in the past by village patwaris, and more recently, by tehsil and district level administrations.

Chronic protests by small growers of being left out of bardana allocation does not necessarily translate into outright violation of official rules. Afterall, official procurement is need-blind; that is, it is untargeted and does not restrict procurement by size of landholding or any other welfare-based criteria.

It is only logical then that large landowners exercising influence in respective regions are able to get their hands on the gunny bags and receive higher than market rate. Small growers have no choice but to sell their produce to arthis and whole sellers, who address their liquidity needs by offering immediate cash payment, but against a steep discount.

That open market transactions are conducted at a discount to support price level should be enough evidence that government intervention in the market fails to achieve its welfare objective. Afterall, minimum price guarantees are set to serve as price floors, not caps.

Then there is the fiscal cost of government intervention. According to SBP statistics, aggregate debt stock from federal and provincial commodity operations has averaged at Rs 750 billion for the past three years, in addition to the debt servicing cost due to borrowing from commercial banks.

This is in addition to the subsidies extended to PASSCO and provincial departments for maintenance of wheat stock. For FY19, cost to federal exchequer stood at Rs 15 billion, Rs 28 billion to Punjab government, and Rs 5 billion to the Sindh government.

But exorbitant fiscal bill of commodity operations should not translate into shortage; it has not for more than a decade, until now. This is where competing policy objectives, parity with international price, and prohibitive controls over trade regime come into play.

Minute meetings of Federal Committee on Agriculture for rabi seasons between FY16 and FY18 reveal that for several years, government has been advocating plantation of substitute oilseed crops, arguably to little avail until FY19. The policy was a result of years of surplus wheat production and high opening stocks - until the last season - when the crop fell off target by a wide margin.

Between 2015 to Nov 2019, wheat support price also remained unchanged. While this contributed to stability in domestic prices, inflationary pressures and increasing cost of production made wheat increasingly unattractive to growers; finally leading some to shift to competing crops during the last season.

Last calendar year also turned out to be especially difficult for rupee-dollar parity, as subsequent rounds of devaluation finally made domestic wheat competitive against global market price, making official wheat export – and trade from smuggling channels – viable.

It is hard to quantify the extent of smuggling to Afghanistan, except it coincided with untimely rains in southern Punjab at the time of wheat harvest in April 2019. While official estimates insist that the extent of crop damage was limited, it was enough to set the speculators loose.

The increase in support price level to Rs 1,365 per 40kg by Nov-19 end ensured that the plot was finally ready for the crisis that is now unfolding. While most countrymen would like to see farmer incomes rise, when input (wheat) prices go up, output (flour) head nowhere except north.

Ordinarily, entry of investors to any market should bring liquidity, and aid in the process of price discovery. For example, news of crop damage in April-May could have led some market players to bet on shortage, and place import orders. Except, the sentry sits on the gates of both import and export; meaning investors had only one course of action: hoard and wait for domestic market to go belly-up.

How that movie played out in the form of Murphy’s law was explained in this space yesterday. (For more, read ‘What’s wrong with importing wheat?”, by BR Research published Wednesday, January 22, 2020). Government’s documentation drive and close monitoring of milling output ensured that investors found it hard to offload their stock, leading to the eventual announcement of import to stabilize domestic prices.

But what about the strategic reserves? Now that inter-provincial coordination has taken the shape of messy politics of corruption blame-game, it is no longer possible to make an informed comment that might succeed to skirt accusations of political favouritism. But consider the following.

The subcontinent remains the only region in the world where governments insist on remaining a party in wheat procurement business. For developing nations with high levels of poverty, this is a noble proposition. Except provincial governments claim that they were unable to timely procure wheat last year due to unavailability of funds.

Looking at the high cost of subsidy extended to the sector, in addition to the ever-growing debt stock of commodity operations, this comes as no surprise. Government’s fiscal space to perpetually continue commodity operations has become extremely contentious. And now that the country has finally faced a shortfall, its utility has also come in doubt; never mind the untargeted nature of procurement operation in the first place – explained above as ‘politics of bardana’.

No doubt, countries need to maintain strategic reserves. But shortfalls can also be addressed through liberal trade regimes. And if the prospect of market failure is the primary concern here, there is an alternate course of action.

Instead of maintaining strategic reserves equivalent to three-months of national requirement, government could explore the option of imposing inventory maintenance restrictions on flour mills. To incentivize, it could pick up the cost of inventory financing, which at prevailing market rates will only be 15 percent of what it is currently paying on its outstanding debt stock for past commodity operations.

Government’s control over the wheat market shows faith in twentieth century economic models that are no longer relevant in modern times. Its desire to manage every facet of the market reeks of managerial hubris. If the current crisis has proved anything, efforts to control market mechanism does little good, and often great harm.