Poor rainfall during December has resulted in a 30 to 40 percent shortage in canal water and has brought a drought in certain areas including Barani lands in Punjab. Consequently, the FY10 wheat target has been cut by 2 million tons to 23 million tons - posing risks to farm income and fertilizer off-take going forward.
Recall that wheat is the driving variable behind the growth in farming income and accounts for 40 percent of total cultivated area in Pakistan. Contributing roughly 39 percent to major crops, a shortfall in wheat to 23 million tons could have a direct impact on GDP growth by up to 0.2 percent.
The follow through impact of this shortfall could be more critical, keeping in mind the six percent hike in domestic price over last year. If the situation continues, domestic wheat prices could boost further in the near future.
Moreover, slowdown in farm income could lower the appetite for fertilizer. If wheat output really falls short of the estimates, agricultural income would decline by nearly 3 to 4 percent year-on-year. This would result in a decline in DAP consumption as compared to urea - farmers appetite for DAP has typically been more susceptible to changes in farm income, given its relatively higher cost than urea.
From the consumption point of view, however, the situation isn as alarming as of this point in time. The government has a carryover stock of 3 million tons, which on top of 23 million tons expected this year means total inventory would be about 26 million tons. This, minus the roughly 10 percent used for cultivation and fodder, and the country will likely have enough to meet its consumption demand of 24 million tons.
Meanwhile, the government has already given directions to develop a plan for saving wheat crop from water shortage and current drought conditions through strategic management. Plans like wheat yield competition and rewards to farmers can enhance growers interest in the crop, which is reportedly shifting towards cotton and sugar.
Another explorable option is to increase subsidy on DAP, in case the DAP prices remain higher, to foster its consumption and help increase wheat yields. But crucially, and anticipating the much repeated episodes of commodity hoarding, the government should also ensure better in-land administration while plugging the avenues of smuggling. Else, be warned of the repeat telecast of 2007 wheat crisis.