A subject of this column quite often is the wheat economy of Pakistan and the mess that has become of it due to the state's intervention. Once again, the support price is being raised to match the ever-declining international prices, but to what end?
As the graph illustrates, Pakistan's wheat exports have dwindled to near-zero just in the span of six years. In FY12 alone, when the support price was raised by Rs100, the country's wheat exports declined by some 75 percent. Major markets the world over have been lost, such as Bangladesh, Kenya, and Gulf states, with Afghanistan being one of our only remaining (and single largest) buyer. As of the recently-concluded FY16, wheat exports were just over 1,145 MT - 86 percent less than last year, each year finding a new low.
But the need for the support price can be understood. Wheat is the staple food of the country and farmers need to be given incentive to grow it. More so, the farmers themselves need some guarantee of income. After all, the whole commodity crunch for the past two years is the very reason why the support price exists - to protect the farmer in times of volatility. At the same time, however, when the support price starts working, i.e. starts protecting the farmer against lower market prices, it results in lower exports. So, it seems to be a catch twenty-two situation.
Earlier this year, BR Research wrote about the export subsidy necessitated by the support price of wheat, and how it is insufficient in the prevailing circumstances (Read "Pakistan's wheat glut narrated," published March 17, 2016). In Pakistan, one tonne of wheat is priced at $325, whereas the same internationally is around $200. The export subsidy is thus being raised to $120 per tonne from the previous $90 per tonne, applicable on 0.9 million tonnes of wheat until the end of November 2016. To the national exchequer, this is a burden of $108 million.
Every year, there is a surplus of wheat; the country's consumption is around 24.5 million tonnes, whereas the production is around 25.5 million tonnes (as of 2015-2016). Currently, carryover stocks are over 4.1million tons and poised to increase substantially in the coming year. With limited storage space and logistics, this wheat is likely to become unfit for human consumption - as it often does in Pakistan - if immediate steps for its disposal (or proper storage) are not taken. Thus, another hike in the export subsidy is being offered.
As per the USDA's monthly report, global export prices have declined to a seven-year low, reflecting market saturation. World wheat stocks have surged to their highest in six years, putting further downward pressure on prices. All other major wheat-producing economies have supported their farmers as well, but by subsidizing inputs.
In India, the support price on 100kg of wheat is INR1525; over here, that's Rs960 per 40kg, as opposed to the Rs1300 we've kept.
The reason their support price is so much lower is because in India, the electricity, water, fertilizer, and other agricultural inputs are subsidized. Perhaps that is the course of action that Pakistan needs to take. Not only would this make life easier for the average consumer who finds it difficult to afford such an expensive staple food, it would enhance the exports and keep the farmer satisfied as well.