Where many crops of the country such as sugar and cotton bore the brunt of the floods due to crop destruction, wheat by virtue of timing seems to have stayed immune to the destructive force of the massive calamity. The governments plan to remove the ban on wheat exports substantiates this to quite an extent.
And the reasons cited for the said allowance are quite justified. Government agencies have clogged the banking liquidity as far as commodity financing is concerned.
Out of the total quasi fiscal borrowing of around Rs390 billion for commodity operations, majority was used for wheat procurement. The wheat stock stored with government agencies is also adding to the interest costs of the government at a time when it is fiscally constrained.
With international wheat prices having established a higher level of over $270/ton, planning to export at the relatively higher level appears to be a feasible idea.
International analysts believe the prices will not fall further because bullish fundamentals abound in the form of Russias export ban, greater demand from China, and drier conditions in some wheat producing regions. However, the prices are not expected to rally as they did, during July-September because of large carry-over stocks in 2010/11 and greater expected production in the EU and Argentina.
Besides that, the government does not even have enough storage space to stock the 9.07 million tons of wheat it procured during the last two years. Even though nearly 725,000 tons of wheat was damaged after the floods, enough is available to be exported. "We have sufficient stocks for our population, I don see why wheat should not be exported," said Qadir Bux Baloch, Former Commissioner, Agricultural Development Commission.
About fears regarding the impact of the floods on wheat output this year, and whether allowing the export of wheat might create a shortage locally, it can be argued that local prices after a support price of Rs950 per 40 kg come to around $290 per ton, which is higher than the current international prices.
Consequently, wheat dealers will have an incentive to sell the commodity locally first and then export the surplus. This will put a limit on the quantity exported by default, thus rendering the Commerce Ministrys proposal to monitor the outflows of wheat stock more suitable than imposing a defined ceiling of 1 million tons.
Industry experts also believe that allowing a free-flow export of the commodity will help establish equilibrium between local and international wheat prices and is likely to reduce the possibility of wheat smuggling.
"Even if wheat prices increase internationally, none will need to be smuggled if local prices reach a level in line with international prices. Perhaps, this will eventually do away with the need to have support prices if farmers will get a price at par with international prices," said Bux.
As far as crop destruction due to floods is concerned, production expectations for FY11 remain robust. Some areas may have gotten damaged, but many still promise a sizeable output, said players in the industry. Estimated production of wheat for FY11 stands at around 25 million tons, but a better gauge can be suggested in January or February after the sowing period.
The step seems wise given the problems of crowding out as it will unclog some liquidity trapped in commodity financing. It is hoped such a measure will help align the central banks aim with those of the Ministry of Food and Agriculture, even if to a little extent.