How to stabilise wheat price

Post Source: Dawn Business and Economic Review

 

By Khalid Mushtaq

WHEAT holds a central position in the country`s food economy, both in terms of production and consumption. Being staple food grain, wheat supplies 72 per cent of calories and protein in the average diet. Its share in the total cropped area is about 37 per cent and in value-added agriculture 12.7 per cent, with a share in the country`s GDP of 2.6 per cent. Punjab contributes 80 per cent of the total production of wheat and 75 per cent of the total area. Since independence successive governments have intervened heavily in wheat markets. On production side, support prices were aimed at increasing wheat output and to support farmers` income. On consumption side, subsidised sale of wheat/flour to flour mills/consumers was aimed at enhancing household food security and maintaining price stability.

On trade side, public sector procurement and distribution was the main policy thrust. However, these policy interventions have resulted in misallocation of productive resources, caused financial burden on public exchequer, distorted markets and discouraged private sector involvement in wheat trade.

The provincial and federal governments are concerned with minimising fiscal subsidies and overall food inflation and donors are also pressing government for reduction in food subsidies and an increased role of private sector in wheat marketing.

It is imperative to undertake a study to help the government in designing a strategy that could result in reducing intervention costs, stabilise wheat markets, ensure stable and just prices both for growers and consumers, provide risk-less profit opportunities to wheat traders and encourage private sector investment in wheat marketing.

A well integrated market system is the key to all these issues. If markets are well integrated, government can stabilise price of the commodity in one key market and rely on commercialisation to produce the similar outcome in other markets, thus reducing the cost of stabilisation considerably. Moreover with market integration, price signals and information`s are fully transmitted among markets and to the growers. Primary wholesale agricultural commodity markets (mandies) are well developed in Punjab.

An empirical analysis was conducted to check the level of price transmission among six major wheat markets i.e., Lahore, Faisalabad, Multan, Sargodha, Gujranwala and Rawalpindi using monthly nominal wholesale wheat price (Rs/100 kg) data from January 2000 to February 2005.

The results indicated that regional wheat markets in Punjab are well integrated and converge to long run equilibrium in the sense that most of wheat exchange locations are in the same economic market and Lahore was found to be the dominant market. It was also revealed that price formation in one market is being guided by the other markets. It means that if there is surplus in one market and deficit in the other, commodity moves from the surplus to the deficit market and the only difference is of the transaction cost.

Further, it was also revealed that if there is disequilibrium among markets, nearly 70-80 per cent of this is removed in the same period i.e., one month time span. It was also observed that price shocks are positively transmitted across the markets.

From a policy-making perspective, the high degree of market integration observed in this case leaves little justification for government intervention in wheat markets of Punjab. In fact, most of the parasitical organisations suffer from gross inefficiencies, with immense costs to producers, consumers, environment and the government exchequer.

In order to save these costs and to promote the cause of privatisation, the government would be well advised to desist from active and direct engagement in procurement, storage, distribution, and for external trade on a massive scale and leave these tasks to the private sector. The government in its new role must be watchful of private sector activities, ensure healthy competition in agricultural commodity markets, and buy and sell in the major commodity markets to safeguard against monopolistic tendencies, excessive profiteering and rising stable commodity prices.

The results of research show that certain markets are not well integrated with each other. In order to achieve the goal of integration government should promote information and develop communication within markets. To accomplish better integration and integration among the markets, infrastructural facilities should be provided by the government to the targeted markets.

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