Wheat harvest operations are in full swing across the country. Back in Oct-19, the Federal Committee on Agriculture set highest ever wheat production target of 27 million tons on an area of 9.2 million hectares for the then upcoming rabi crop season.
According to SBP’s State of the Economy report for 2QFY20 released earlier this week, early estimates suggest that acreage has fallen short by 2.4 percent. Moreover, news reports suggest that output is expected to be revised downwards by at least 5 percent. This suggests that the average yield expected will take a hit of nearly 3 percent. Nevertheless, at 25.6 million tons, output will still be highest for at least past 3 years.
Does missed target mean another year of wheat shortfall?
That appears unlikely; for long as the government holds true on its procurement target. In an ECC meeting held in first week of March-20, the federal government had already announced an ambitious target for wheat procurement of 8.25 million tons. While procurement targets have always been fanciful and rarely achieved fully; the inclusion of Rs 280billion earmarked for wheat procurement in Prime Minister’s Relief Package for Covid-19 (announced on 24-March) sent a strong signal that the government is steadfast in its commitment to replenish official wheat stocks.
The 5 percent shortfall in output is not expected to affected procurement as the government will only be procuring one-third of total domestic production. However, it is of note as percentage of total output, the procurement target is second highest in history, only trailing the 9.2million tons procured in FY09 – the last time country recovered from a wheat crisis set in motion due to mistimed exports and sudden currency devaluation.
Significantly, the SBP’s report has also raised doubts on government’s ability to achieve procurement target, correctly adding that official procurement has averaged at 6 million tons during last 6 years. Provinces have routinely failed to achieve targets citing non-availability of funds, a challenge witnessed by both Sindh and KP last year, and the year before, respectively.
Covid-19 led dynamics may favour government buying:
Barring short periods of spasmodic panic buying, wheat prices are expected to remain stable in open market as demand becomes subdued to the economic slowdown. Between the first two weeks of April-20, domestic commodity prices have already fallen by 6 percent, as tracked by weekly SPI of PBS. That is indicative of a slowdown in commercial sector demand, which is expected to ripple through the economy as lockdown continues.
Furthermore, the ban imposed on procurement of wheat procurement by feed mills suggests that the administration is finally cognizant of demand for the sector across various segments other than human consumption. While corn substitution by wheat in poultry meal became a major competing demand driver last year, market intelligence suggests this may no longer in the coming months.
First, demand for poultry has nosedived, as evidenced by a 25 percent decline in poultry meat prices between first weeks of March and April. As a result, price of maize – a key raw material for poultry meal - have seen a freefall over the last month, which show no sign of abatement. As a result, end of June-20 maize price is forecasted at Rs 900 per 40kg, against the high of Rs 1,200 per 40kg that was witnessed last year. That means a combination of DC level control measures and demand slowdown will shift poultry buyers back to maize, freeing up more wheat for urban consumption.
Threat of smuggling, however, persists. Domestic wheat remains is witnessing a historic moment where it is uncharacteristically attractive in international market due to depreciation in currency witnessed over last year. As a result, margin between government notified rate and wholesale prices has also widened since May-2019. While it is hoped that the screws may be tightened on informal trade via Afghanistan due to public pressure faced during the past quarter, the challenge remains.
Wheat harvest will be nearing completion in Sindh in the next fortnight, while it has just commenced in Punjab last week, expected to close by first half of May. While noise was raised around teething issues due to lockdown and movement of rental harvest machinery, food security objectives suggest that the administration will maintain a blind eye to manual harvest so as to ensure that landless labour is paid in-kind (in wheat) for their labour. While BR Research has already highlighted this dilemma, the problem was also referred to by Spokesperson of the Prime Minister in a social media message earlier this week.
For as long as inclement weather is not faced in the next 10-15 days of harvest in central Punjab, it is expected that wheat harvest operations will be timely completed, especially with the onset of Ramzan season. Considering opening stocks of 1.5 – 2 million tons (estimated), even 80 percent achievement of total procurement target to maintain supply stability for the next year.