Flour prices moving north

Published Sep 16, 2013 01:04pm

AS expected, the country’s flour market has gone into a tailspin. Over the last three months, its prices have gone up by Rs2.5 to Rs3 per kg, and are likely to increase further in the coming days as open market gets dryer, putting pressure on ‘barely enough’ official stocks.

The spiral that started in Ramadan has been unstoppable so far, and may quicken if not checked with prompt decisions. In Punjab, a 20kg flour bag now costs Rs785 instead of Rs735 pre-Ramadan price. In Khyber-Pakhtunkhwa, it sells for over Rs815. In Sindh, a 10kg bag — more preferred packaging for economic reasons — now costs Rs450 and around the same price in Balochistan as well.The reasons behind this substantial increase are a mix of unbridled market forces which knew the precarious position of official stocks. All procuring agencies put together had around 7.3 million tonnes of wheat at the end of the last purchase season. The figure looked healthy enough, at least on paper, to see the country safely through till the next crop. However, it certainly was not enough to absorb market manipulations by forces at work there, especially if they start hoarding or restrict grinding to their immediate market purchase instead of their stocks. The millers shifted entire grinding pressure on the open market where prices started going up. The steep escalation in market wheat prices (Rs5 per 40Kg every day at one stage) provided further incentive to the millers to save their relatively cheap stocks and grind what they get from market and pass the increase on to the consumers.

The government functionaries watched the situation helplessly because the only handle they had to control prices was to start releasing official stocks. This, they could not do so for two reasons: smaller stocks deterred them from flooding the market and at the same time they wanted flour prices to go up to save money on subsidy and also escape blame for increasing prices which could later be deflected on market forces.

The Punjab government, which was planning to start releasing official wheat at Rs1,275 per 40kg, let the market price hit Rs1,430 per 40kg before releasing wheat at Rs1,330 per 40kg, saving Rs10 billion on subsidy amount that it could have paid at the original release price.

The stated double logic for this exceptionally high price were: market price was already high and the Sindh government had fixed release price at Rs1,330 per 40kg. Secondly, had Punjab fixed lower price (possibly Rs1,275 per 40kg), much of the grinding could have slipped to Sindh because of high profit margins. Thus, Punjab and other provincial government benefited from what the private sector had done to the common man and later joined hands with it instead of checking market manipulation and unreasonable profits. Now, the government officials are found claiming credit for stabilising wheat market around Rs1,400 per 40kg instead of Rs1,430.

The federal government, especially its ministry of food security, should have been awake to the situation, which was predictable, thus preventable. At the beginning of the current season, it knew the stock situation and its vulnerability to market forces. It was also warned repeatedly. However, it did not act: neither helped import wheat, nor tried to ban exports. Exports to Afghanistan were dried out by ever-increasing domestic prices which edged Pakistan flour out of Afghanistan, not the policy measures. Now, Tajik wheat has replaced Pakistan flour, even fine flour.

The federal food security ministry should have calculated domestic requirements in June and either arranged import itself or incentivised import for private sector. It did neither. The private sector had imported some 65,000 tonnes of wheat only because of commercial reasons, as it is currently costing $275 per ton. The international market is bound to go up; possibly close to $350 per ton by the end of the year, if world past pattern is something to go by.

So, private sector would decrease imports unless it gets some incentive on import duty or mark-up rates. If the government goes to international market when it has already started climbing, any order of 500,000 to one million tonnes is bound to take it further up.

The federal government then would not only need huge money to import wheat but also billions of additional rupees to subsidise inland transportation and sales.

Reduction in duty or any other incentive at this stage may look like pennies as compared to what government would be forced to spend then. Any delay in import would spell further problems for an already volatile domestic market, with considerable social and political cost.


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