The problematic wheat surplus

Post Source: Dawn Economic & Business Review – By Ahmad Fraz Khan
Monday, 07 Dec, 2009

The wheat woes refuse to go away. The country regularly finds itself either short of the staple food or awash with it, and frequently fails to plan for either situation. Currently, it is caught in the problems of plenty.
The Punjab government alone is holding around five million tons of stocks, and it does not know what to do with it. With the current pace of releases, it would be holding around three million tons, costing about Rs35 billion, of carry over stock when the fresh season starts next April.
The department has indoor capacity for only 2.2 million tons. Thus, it would still have over 800,000 tons of wheat lying in the open, when the new crop would start pouring in. The cost of holding these stocks is simply staggering. The Punjab government pays some Rs1.2 billion monthly to service bank loans, taken for Rs72 billion shopping last year.
The financial pain of interest could be gauged from the fact that the provincial government defaulted on interest payment for a week in November. According to the food department calculations, it incurs incidentals of Rs175 for each maund that it keeps for the season, and, at present, it is holding over five million tons, with three million tons surplus.
Pakistan, it seems, has achieved stability in wheat production, which needs to be further built upon, and there is a huge potential for that. But even with current level of production, the country needs to find ways to regularly dispose of a part of it. Thus, along with efforts to increase productivity (per acre yield), the government needs to move on two other very crucial areas: quality and marketing. The crop is suffering on both accounts, and the problem is expected to accentuate if the government agencies succeed in enhancing yield.
Immediately after taking over, Musharraf regime had to deal with a bumper crop in year 2000. It raised two very attractive slogans, claiming that the country had achieved self-sufficiency in staple food and it would now start exporting wheat. The claim, however, fell apart due to subsequent shortages, failure to properly plan and policy summersaults, which destabilised domestic market and export dreams remained unfulfilled.
It is perhaps time to dust off those plans, and execute them afresh, because the production has matured to some extent and is expected to remain – barring national follies and weather disasters – that way. The government needs to move on four fronts if it wants to create a niche in the global wheat market. It must remove price differential between domestic and international price, help mills to modernise, avoid policy U-turns and create mechanism for quality procurement, at least for export.
Unfortunately, the wheat procurement price has been politicised to the core. Successive regimes have used the price to create or maintain rural vote bank rather than meeting market logic. But the current government broke all previous record, and granted a price that was not even thought of by any farmers’ body. The price has now come back to haunt it. It’s holding huge stocks, which no one is ready to purchase in the world. Even imported wheat cannot be exported because of massive loss that it entails. Keeping stocks is a huge fiscal liability but the government is stuck between its own folly and market reality.
When it announced the current support price (Rs950 per 40kg), it did so because the world market was climbing up and it claimed to be responding to international phenomenon. Now, when the world prices are down, it can revise the price downwards due to political reasons. Time is proving the decision to be bad politics, and worst economics.
The technological backwardness of the millers is also a big deterrent in way of claiming a part of the world market.
Out of some 1,100 mills in the country, only 10 are stated to be most modern. The government can help these mills through some kind of policy incentives and temporary tax rebates. The milling industry has survived on quota regime, which hardly left space for developing internationally credible brands and market them. Those with big market share normally purchase others quota and handsomely pay for it, increasing their cost of production. It also keeps inefficient mills in the market, and sustains a rigged market. All these aberrations need to be removed for developing domestic flour industry responsive to international quality demands and competitive prices.
The biggest harm to export value added wheat products has come from fluctuating official policies. The government is still to hammer out role of private sector in wheat trade. It has not only varied season to season but also within a season. The last few years’ history of the private sector in wheat trade is a chronology of wild policy summersaults, which sometimes assumed amazing proportions.

The government would induct private sector with fan fare – create policy and fiscal policy space for it. But it would change mind mid-stream, start raiding their stocks, ask banks to recover commodity loans, ban even inter-district movement. All these policy problems kept the domestic market on the tenterhooks and preempted any long-term planning on the part of the millers. The government needs to bring some kind of sanity in its policies so that millers could look beyond domestic market, and also earn some foreign exchange.
Finally, the government should fix an export quota for private sector and also devise ways to ensure quality purchase for that. It can fix some premium for quality.
Otherwise, the government would run the risk of holding a billion dollars baby every year – wasting precious human and financial resources.


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