Yet going by scary predictions in the media, it appears that flour has disappeared from the market like the Pied Piper. Explanations are aplenty. And depending upon ones’ political leanings, range from ‘mismanagement that has become characteristic of the party in power’, to ‘outright corruption’ at play.
Consider that of total domestic wheat output of 25.4 million (last four-year average), close to 15 million is processed for flour production by mills in peri-urban and urban regions. Over forty percent never makes it into the value-adding processing chain, as it is held back for on-farm consumption, feed uses and losses.
But that’s what ‘corrupt’ government do! First allow export to benefit vested interests, creating a shortage that is later to be fulfilled through imports. Anything is possible, after all. But recall that in FY18, the country exported 1.2 million tons, that led to no shortage. Of course, for ‘controlled’ commodities such as wheat, trade is only allowed to stabilize domestic prices, but more on that later.
Unfortunately, that is where the narratives begin to get tainted by angles of vested interests. Export to Afghanistan is blamed, except only 40 thousand tons was exported to the not-so-friendly-neighbour. The anger, instead, stems from the fact that instead of exporting value-added processed flour, government allowed export of primary commodity.
It is called diplomacy, and one that certainly didn’t come at the cost of national food security. The criticism conveniently forgets to highlight that domestic flour mills exported 33 thousand tons of processed flour to Afghanistan during the same period.
Still, why did it take the government until mid-2019 to ban exports? Two reasons. First, the extent of crop damage did not become clear until harvest began in April-May. And two, PASSCO and provincial food departments carried substantial opening stocks, which meant that crop availability appeared sufficient despite lower output compared to previous year, as confirmed by SBP as late as July 2019.
What went wrong then? This is where we must enter the realm of conjecture. In private conversations, flour mill owners from Punjab reveal that two disconnected events played a role in creating the recent panic. Back in April 2019 at the time of harvest - when news of crop damage begin to trickle in from southern Punjab - wheat became object of speculators’ interest, which reflected itself in higher flour prices by Ramzan and Eid season (May).
Rupee depreciation and government’s efforts at import compression also brought in a strange flock of seasonal speculators: the stereotypical ‘seths’ who were previously found investing in second hand imported cars, real estate, and gold.
And then came annual budget, and with-it government’s renewed documentation drive which tightened screws around the under invoiced grey market transactions. Turns out that increased monitoring of milling output has now made it difficult for these investors to offload their inventory. Instead, they resort to small-ticket volume releases to stay under the radar, which has caused a slowdown in open market transactions, and increased pressure on government strategic stocks.
Because Pakistan’s wheat is uncompetitive in international market, the import order for 0.3 million tons in fact serves a crucial purpose of price-signalling to the market players: the option of allowing commercial wheat import is on the table.
If this theory is correct, then it won’t be long before cheaper imported wheat begins to make its way in the domestic market, stabilizing prices. The seasonal profiteers will be forced to cut their losses and release the stocks they are sitting on.
Has the government done no wrong then and deserves no flak? It does, because it insists on being the biggest dog in a market where it has no business sticking its nose in. But more on that tomorrow.