Wheat crisis – the pricing angle

The so-called wheat crisis has been adequately covered in this space earlier this week. For detail, read ‘Wheat crisis: what about poor governance?’ published on January 23, 2020; and ‘What is wrong with importing wheat?’, published on January 22, 2020. Here the phenomenon is covered from the pricing perspective. The international and domestic prices of wheat are plotted for the past 15 years. Unsurprisingly, whenever the international prices were higher than domestic in dollar terms, wheat was exported. It happened in between 2007-2008, and between 2010-2011. History is now repeating itself in 2019-20.

While there were some exports as a result of a subsidy provision in 2017-18, but that was to stabilize glut in the domestic market at the time. And that surplus was a result of prolonged artificially high prices at home.

Poor governance and greed are constants. But exports or smuggling only takes place when there is a price arbitrage. The policy lever should not be to ensure food security through wheat, rather it should be on having international price parity so that arbitrage opportunity is quickly eliminated.

The food security element is relevant but misunderstood. While wheat constitutes over fifty percent of average Pakistani direct and indirect food intake (inclusive of feed for livestock). This makes Pakistan amongst top ten per capita consumers of wheat in the world. Yet, the country is nutritiously insufficient. There are many indicators to support this argument. The question is whether Pakistan’s obsession with wheat is misplaced, as the state spends excessive resources on an inefficient crop; by subsidizing production, putting in place support prices and eventually subsiding exports at the time of surplus.

Back in 2007-08, when wheat stock was in surplus, then government (under Shaukat Aziz) exported around 4.3 million tons of wheat. The international prices were moving up and the government thought it was an opportunity to earn foreign exchange. The prices kept moving up, and there was some miscalculation of numbers (or some wheat was smuggled through porous borders). As a result, wheat had to be imported at a much higher price from the rate at which it was exported.

In FY09, the incoming PPP government increased the wheat support price by around 50 percent in one go. International price soon came down and remained below domestic procurement prices till 2019 (barring a short window in 2010-11, when cumulative 4.9 million tons of wheat was exported).

Inflated wheat support price leads to food inflation across the basket. Wheat is also used as a feed stock. Thus, milk and meat prices increase in the second round. The impact creates distortion across the agricultural value chain.

During FY13 to FY19, monthly wheat prices at home were at 45 percent premium to international price (in dollar equivalent). The distortion was further magnified. Politics played itself out in procurement process as influential large landholders were able to get hold of gunny bags mostly. The small farmer rarely receives the right price while the poor consumer pays a higher price of final product as a result. There is no welfare in the process.

Now government has allowed import of three hundred thousand tons of crop. Looking at wheat futures, it looks like a risky proposition as prices are heading north. Import price in 2020 would be higher than earlier export. It’s a déjà vu of 2007-08, but fortunately at a smaller scale. The learning is to do away with the national fixation with price-fixing. Peg the price to international prices with government ensuring procurement through involvement of private sector. Else, history will keep repeating itself.