Local wheat production has surpassed all estimates. According to the United States Department of Agriculture (USDA), Pakistan reaped a record 24 million tons in the wheat harvesting season in 2011.
Continuing with the saga of procurement, provincial food departments and Pakistan Agricultural Storage and Services Corporation (PASSCO) procured about 6.34 million tons of wheat, against a target of 6.57 million tons for FY12.
Tanvir Hussain, general manager for wheat procurement at PASSCO highlighted that PASSCO has to maintain strategic reserves of 0.5million tons of wheat at any given time along with 40,000 tons for the SAARC food bank. PASSCO also purchases and procures wheat for wheat-deficient areas like Gilgit-Baltistan and Azad Jammu and Kashmir, and also for institutions like the armed forces and the World Food Programme.
Cumulative reserves with PASSCO are roughly 2.3 million tons, which include procurements from the years 2009 and 2010. These reserves are well in excess of above-mentioned needs and strategic reserve requirements.
Adding to the ado, storage space continues to be a problem as PASSCOs storage capacity of 0.43 million tons is insufficient for all the stock, some of which has to be left in open fields.
While talking to BR Research, Muhammad Yousaf, ex-Chairman All Pakistan Flour Mills Association said, "There is limited wheat storage capacity of 4 million tons across Pakistan. There is also a fear of rain as it damaged wheat produce last year."
With Russia lifting its wheat-export ban this month and USDA giving an adequate grain supply outlook recently, local grain analysts are certain that international wheat prices are not going to rise in the short-term.
Given a support price of Rs 950 per 40 kg and associated freight costs, local wheat price comes to around $300 per ton, which is way higher than the Central Asian wheat exports currently trading in the vicinity of $250 per ton. With little incentive to export, Pakistani wheat dealers will resort to selling the commodity locally.
Ironically, theres enough to be exported as Yousaf said, "Its a bumper crop this year and wheat should be exported as there are no signs of a shortfall next year."
Although the government has allowed PASSCO to export 0.2 million tons from its excess stock at Rs1000 per 40 kg through private exporters, the latter are currently sourcing their wheat orders from local growers at a lower price and they might not utilise excess PASSCO reserves until wheat stocks in open market run out.
This shows the high procurement price and low storage space combo is not doing well for the wheat industry. A high procurement price makes exports unattractive, while a lack of storage space means the excess commodity has not much use but to potentially rot in the open, if its not sitting in godowns.
Simultaneously, commodity financing charges are playing their part in this cycle of futile wheat procurement. According to analysts, the Punjab government is paying Rs2.5 billion per month on account of financial charges for procuring wheat, putting a hefty burden on an already fiscally-constrained government.
With not much going in favour of procurement, its about time the government to pay heed to calls for eliminating the costly practice of procurement and work towards aligning the local industry with the global wheat market.