Pakistan is the world’s sixth largest producer of wheat, according to the Ministry of Food and Agriculture, with an annual production of over 21 million metric tonnes (MT). The US Department of Agriculture estimates Pakistan’s rice consumption to be over 2.5 million MT. With exports of about the same quantity, Pakistan is capable of feeding its own population. Faced with such positive facts, we all wonder about the exact reasons for the prevailing wheat crises, which has existed in varied degrees for over a year now.
The Pakistan Government Wheat Policy
Before delving into the crisis, it is important to present an overview of the prevailing Government wheat policy (also known as Food Security policy).
The Government is obliged under the constitution of the Islamic Republic of Pakistan for the provision of essential food at affordable prices to the population throughout the country (please hold back that snicker and eye-roll).
To fulfill this responsibility, provincial governments have setup food departments for the purchase and storing of wheat stocks at government silos, which are then released to flourmills so as to keep wheat and wheat flour available at an affordable price throughout the year.
Procurement and storage of wheat by the Government is necessitated due to the peculiar nature of agriculture produce: wheat is harvested once a year during April-May. Thus, there is a glut of wheat inherent within the system. In the commodity markets every cultivator is anxious to sell his produce and clear liabilities (such as fertilizers, seeds) and take any well-deserved profit back home.
However, arrival of the crop creates disequilibrium in the market benefiting the purchaser who tries to bring the prices down. The notorious middlemen enter here. Thus the government also enters the market with an announced minimum price and ready to buy all the wheat being offered. This sets a floor price for wheat in the time of plenty and curtails possible exploitation of the farmer, thus influencing cultivator’s decision to grow wheat again, since it is profitable. Wheat storage is a costly business in terms of the opportunity cost of investment, storage, fumigation and transportation charges.
Thus, as months pass, overheads on wheat stocks result in an increase in prices and the private sector brings its wheat in the market based on their comparative holding power. Moreover, the government also sets its own release price for wheat, which only partially offsets overhead costs on storage. This price serves as the ceiling price in the wheat market and private traders clear off their stocks before this limit is reached. This policy is in operation with relative success for the last 25 years except for the times when the wheat crop in Pakistan has failed.
Why the Crises?
Why has there been a crisis in the supply of wheat and a spike in prices since last July, when in fact Pakistan produced wheat comparable to its requirements and imported 1.8 millions MT of wheat during December 2007?
Different quarters have given different alibis including misrepresentation of crop size by Government to boost GDP growth figures and concurrent permission to export wheat (700,000 MT was exported in May-June 2007) which later adversely affected market sentiments causing panic buying by public and hoarding by traders.
Another version blames the Government for failure in assessing changes in the local and international situation; increased wheat requirements as poultry feed (due to corn crop failure) rising to 1500,000 MT as per estimates of experts.
Another postulates that people are switching to wheat as rice prices sky rocketed due to extensive export of the commodity.
A fourth proposed reason is the increase in international wheat prices peaking at an unprecedented $550/MT, according to the Chicago Board of Trade.
Unrealistic agriculture-related public policy also came under criticism. An increase in the cost of production, due to the doubling of fertilizer costs and increased petroleum prices, also played a role in disrupting the tested Government wheat policy as purchase prices set by the government did not cover the cost of production, thus incentivising the growers to: either retain their crops or try selling them at higher prices to private traders if possible.
World Wheat Whereabouts
While all the above arguments hold, we are still at a loss to explain fully the current happenings in the local wheat sector.
The world wheat situation has improved this year. World net wheat production is estimated to be 8 percent higher this year than last year. Estimated in 2008 by the U.S. Department of Agriculture, at a record 656 million MT for 2008-09 against total consumption of 642 million MT world wheat stocks grew from 110 million MT to 124 million. MT. There has been record production in Canada, EU, U.S. and Russia. Australian produce is estimated to double (from 12 to 24 million MT) after consecutive crop failures in the last two years. India, with 76 million MT of home-grown wheat, has made it clear that it will not import wheat this year.
Apart from Pakistan, which has announced its intention to import 2.5 million MT of wheat during 2008-2009, there is no non-traditional buyer in international markets for wheat to pump wheat prices up.
All factors point at easing of international wheat prices in the coming months. Thus, the present wheat situation in Pakistan is not due to the global wheat scene as is oft-attributed by seemingly guilty quarters.
Current Wheat Situation in Pakistan
The Pakistan Government increased the minimum price for procurement of wheat by almost 38 percent in 2008. The aim was to offset price escalations in agricultural inputs and increase returns for the growers.
This is the single largest increase the Government has initiated in the minimum procurement price of wheat in the past twenty five years.
Despite reservations shown by several growers’ organizations, experts are of the opinion that increase in the procurement has benefited the growers by increasing the returns on their produce.
However, in light of the prevailing situation, private traders are buying wheat at rates much higher than those set by the government. Flourmills are finding it difficult to buy wheat from open markets immediately after harvesting season. Field evidence suggests that bigger growers are also retaining (read: hoarding) their produce in the criminal hope of better prices in the future. The situation is an aberration to normal market dynamics and it is evidence that the government’s efforts and its policy on wheat are not effective. The world wheat situation has negligible bearing, if any.
This change, where open market wheat prices do not correspond to the arrival of new harvests, has been witnessed since 2007.
The government picks up 30 percent of the country’s total marketable wheat (that is, 50 percent of total crop as per APCOMS estimate). For 2008-2009 this comes to Rs. 102 billion at a fixed purchase price of Rs. 15,630 per MT. Until May 20, 2008, total credit received by private traders from the banking system for wheat purchases in only Rs. 210 million.
Food Departments of two provinces (Sindh and Punjab) complain of hoarding of wheat by big farmers and traders who, according to them, until a few years back, could not retain big quantities of wheat even for a couple of months. This shift in the market situation points to the fact that new or non-traditional players have entered wheat market with huge funds at their disposal which they can park for a much longer time, for larger gains. While it is quite difficult to estimate actual amounts belonging to local investors which have left Pakistan bourses since February 2008, it is a substantive amount (KSE 100 has lost more than 3000 points since mid- April). With no substantive increases in the call and time accounts of our banking sector, it is quite plausible that this money has found better avenues and high returns in commodities sector (of which wheat is the biggest). Wheat, with its highly inelastic demand makes it a very suitable target for highest gains in the shortest time period, especially when the structural constraint of the wheat crop size, which is just enough to fulfill the national demands, lacks any cushion to ward off speculative trading in wheat.
The bottomline: regulatory bodies must shape up and step up. Commodity trading has a very real, direct human element and questionable business practices must be curbed to avoid myopic monetary gains at the cost of mass-scale manipulation and suffering of who it all boils down to: real people.