Belated decision on wheat export

Post Source: Dawn Economic and Business Review

By Ahmad Fraz Khan

AFTER months of foot dragging on the issue, the federal government finally this week allowed export of one million tons of wheat and its products. But considering international market trends, the decision seems to have come at least three months late. No one is now sure whether the country can benefit from the decision. Even if it does, there is no scope for exports to touch the mythical figure of one million tons. Over the last few months, the Punjab government wrote to the federal government time and again for permission to export wheat. First, it wanted the private sector to export. But, later, as financial desperation mounted, Punjab wanted to export the commodity itself, and clear the massive stocks. The federation, however, kept denying permission.

Punjab wanted to grab an opportunity created in the world market during August this year, when the Russian crop had failed and the world prices peaked to $400 per ton. Traditionally, August and September are considered to be lean months in the world market for availability of wheat.

The federal government, for purely political and Punjab-specific reasons, withheld the permission. It knew that Punjab finances would collapse if it does not clear its stocks. The province has been paying Rs80 million a day – Rs2.5 billion a month, and Rs30 billion a year – to service wheat related Rs180 billion loans. The federal-provincial politics thus not only ruined Punjab finance to a greater extent but an opportunity was lost to earn foreign exchange and develop a niche in the international market.

The international window, which opened in August, remained ajar till the beginning of the current month, as rains delayed harvest of Australian wheat – second largest crop in the world. Once the Australian crop hits the world market, international price is bound to slide and make export of dearer Pakistani wheat more difficult.

It was not only Russian crop failure, but a slight speculative pressure on wheat also helped drive prices up. Concerns about the next US winter crop, tightening the EU export supplies and mixed harvest results in Australia kept the prices high for a little longer than expected. These factors were in addition to world wheat production forecast of 644 million tons – five per cent less than last year. All these factors put together created an opportunity for Pakistan and Punjab having biggest ever stocks.

This week, wheat prices have come down to $324 and would go further below during the next two weeks when the Australian Wheat Board starts displaying its crop size and spot rates. The current rate of $324 per ton, translates into Rs27,500 per ton in domestic market. The official release price of little more than Rs25,000 leaves margin of over Rs2,000 per ton. But, the exporters have to get the wheat graded for export, which takes away 10 to 12 per cent of wheat. If transportation charges from Punjab are added, it does not leave any profit margin for exporters.

Thus, at the present international price, which might not hold for more than two weeks, exports from Karachi might make little sense. Exports from Punjab certainly do not make financial sense, from where Rs300 per ton transportation charges are added.

Apart from federal-provincial politics, the federal government must realise that exceptionally high domestic price of wheat has created a situation, where it would continue having surplus to varying degrees as long as it does not either rationalise domestic price or subsidise export. With current high domestic price and other incidentals charges added to it, export, would not make sense.

Pakistan, particularly Punjab, needs to take a long-term view of the crop – its future, export potential and possible markets. All big wheat exporting countries have created permanent institutions, like the Australian Wheat Board, to look after wheat exports.

It is such institutions that continuously monitor wheat prospects throughout the world, deal in future buying of the crop and provide foreign buyers a platform to deal with producers and exporters.

The need to create such institutions is underscored by three factors i.e. high domestic prices, massive and ever-increasing stocks and domestic production, which, on an average, has gone up by around two million tons during the last four years. Thus, it is time for the federal and the Punjab governments to sit together and create a permanent arrangement for dealing with the crop on commercial lines.

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