THE farmers and the government seem to be heading for a tough wheat procurement season, with the former facing a real threat of price crash and the latter ending up being the sole buyer in a glutted market.

The fears have been generated by two recent factors: world wheat prices plunging below $180 per ton – almost 40 per cent less than domestic price – and prospects of a better, if not bumper, crop this season.

Calculated on the basis of $180 per ton, the international wheat price is around Rs570 per 40 kg whereas domestic price would be Rs950 per 40 kg. Will the private sector be buying domestic wheat despite huge price differential, which would surely eat into its profits? The second deterrent for private sector might come from exceptionally high interest rates that hover between 18 to 20 per cent. Would the private sector be allowed to increase flour rate correspondingly to recover the bank interest rate? If yes, at what political and social cost for the government.

The official agencies have always been the biggest buyer in the market, which normally procure a major chunk of tradable surplus. They stabilise the market on the higher side as they enter with ready cash of Rs50 to Rs60 billion. This year, the government, however, would face the daunting task of arranging money three times more than previous year’s given the price increase during the last two years.

Punjab alone has asked for Rs90 billion for procuring initially estimated 3.5 million tons. If Pakistan Agriculture Storage and Services Corporation (Passco) and Sindh also procure 3.5 million tons, the federal government would have to raise Rs180 billion for the shopping spree. Given the liquidity crunch in banks and circular debt of government agencies already hitting a staggering Rs450 billion, would the federation be able to arrange that kind of cash? One should lose the sight of speculative pressures that these kinds of questions exert on the trade of food items.

According to market analysts, the government has invited the danger of landing in a fiscal mess when it took a purely economic decision (announcing exorbitantly high wheat price) on political grounds. In a run up to finalising new wheat support price, the government had sought recommendations from farmers’ bodies. None of them, be it Farmers Associates Pakistan – run under the chairmanship of Foreign Minister Shah Mehmood Qureshi – or any other, had asked for more than Rs875 per 40kg. But the federal government, fresh from the electoral victory from the rural areas of Punjab, increased price by almost 50 per cent – from Rs625 to Rs950 per 40kg – to please its rural voters and feudal supporters. Now, the decision is coming back to haunt the government.

The government should have realised that announcing new price is not a one-time activity, but it has to be sustained for the next couple of years. The government is also guilty of ignoring all international forecasts that bumper crop next season would bring the prices down. This year, according to FAO, the international wheat production would increase by seven million tons, bringing the price down. Though consumption would also increase by four to five million tons, the world would still be left with two to three million tons surplus. These forecasts were ignored, and the risk is now fast approaching Pakistan.

Though there are still chances that crop may not turn out to be bumper due to fertiliser crisis and its ultimate effect on yield. Should that turn out to be the scenario, the price crash might not be as severe as being feared by many. But, if timely rains in December are something to go by, and country receives another timely spell in March, the chances of substantial crop would brighten, deepening the fears of price crash.

One can also hope that the world wheat prices would recover during the next four months. Chances of such a recovery, or at least to the extent of recovery required by Pakistan, seem remote given the international liquidity crunch. The speculative pressure on wheat trade seems to have receded with the world hit by credit crunch .Currently, the food futures are deflating at fast pace, bringing the price further down. No doubt, the current international glut, created by world crop cycle, would reduce in next few months, but by that time international purchases would also be completed.

The export chances of Pakistani wheat would remain bleak if the government does not offer huge subsidies to wipe out price differential. The question again arises, where would the money come from? The cash starved government, where most of its agencies have defaulted on payments to each other, can hardly be expected to foot the huge export bill. Given the low world prices, export to Afghanistan would surely decrease, increasing pressure on official agencies or private sector to procure additional quantities.

There is no doubt that private sector would be obliged to procure wheat even at higher price to maintain quality needed for domestic consumers. Currently, the millers grind import and domestic wheat at 30/70 ratio. If the private sector maintains the same ratio even after the fresh crop arrival, its purchases would drop at least by corresponding 30 per cent. The millers would surely do that to improve their profit margin. It is also because of the fact that all traditional channels of flour supply, which exerted pressure on millers to maintain quality, have been altered.

The shopkeeper used to be answerable to its buyers for quality. Currently, town administration sells flour on private or millers’ vehicles. These vehicles keep shifting their selling points and one cannot trace them to protest against the quality of the purchase. That is why all recent consumers’ protests against the flour quality were directed against the government rather than millers. With social and fiscal pressure to maintain quality gone, a few scrupulous millers might abide by quality standards.

With millers reducing their purchase, the government would again end up either buying the additional quantity or risking further price crash.

These factors put together paint a gloomy picture for farmers and government. The former might end up paying fiscal cost of inefficient government and the latter the political cost of taking an economic decision on the basis of politics. At the end of the day, it might be a case of bad economics and worst politics.