Wheat price drops due to surplus stock

Updated May 22, 2017


THE Punjab agriculture department has decided to complete its wheat procurement drive before Ramazan on the premise that handling a twin-assignment — managing subsidies of the Ramazan package and procuring wheat — would be too administratively demanding for the department.

The department, therefore, might stop distributing gunny bags by the end of the third week of May and stop receiving wheat by May 26.

Out of the total 4 million tonne target it has already purchased 2.5m tonnes and provided gunny bags for around 3m tonnes. With lists for gunny bag distribution ready and the arrival rate now over 150,000 tonnes a day, officials think that achieving the rest of the target is a week’s matter, though the procurement drive may end even before the target is achieved.

With a carry-over of more than 2.5m tonnes, the department would end up with 6.5m tonnes — the second highest ever — of wheat stocks if the target for the current year is achieved.

“Market mechanics are expected to change once the government announces a policy in this regard” said Majid Abdullah of the Pakistan Flour Millers’ Association

Farmers fear a price crash once the government stops wheat procurement. Their fears are based on three factors: despite having a better crop — 19.65m tonnes according to the official estimates — the price has been at least Rs30/maund higher than last year.

This addition was the result of better procurement package by the Punjab government. One positive of the package was the mode of payment. This season, Punjab stopped direct cash payments and routed them through banks, directly into the account of concerned farmers.

This forced middlemen to keep farmers in their good graces till payments were received after completion of the process. However, aware of their dependence on farmers for payment, farmers also exploited the situation to their advantage.

Secondly, the department also made procurement conditional through the presence of concerned farmers at the time of purchase which further increased the farmers’ importance in the process and enabled them to extract the price they preferred from buyers.

Thirdly, the lists for gunny bag distribution were prepared on first-come-first-served basis and bags were released as per those lists — making the department’s discretion void.

Though there were sporadic complaints about rigging in the lists and farmers belonging to two districts; these complaints, for the first time, went to court. The situation did not escalate and the distribution of bags was delayed for only three days.

All these steps put farmers in a better position to keep the price around Rs1,200 per maund but with the official drive now ending, farmers see this advantage fizzling out and the price losing that additional topping.

Another source of fear is the Ramazan package, which the Punjab government has announced to be highly-subsidised. The amount of wheat likely to be released in the provincial markets is being mulled.

Since Punjab has surplus stocks, it would keep the price low and is expected to release maximum wheat in the market. This policy is likely to hurt market sentiment which in turn will bring the price further down.

Farmers also know that large quantities of wheat would still be left in the market after the official procurement ends and the private sector would then take advantage of this.

Millers normally purchase around 800,000 tonnes, depending on the position of the official stocks and the expected release policy and price. This year, they think ample wheat would be available, both in official stocks and the market, for the rest of the season.

“The millers, as they see things, might not seek the official release of stocks till Nov-Dec,” says Majid Abdullah of the Pakistan Flour Millers’ Association.

The wheat price has not increased as much as millers feared as a result of the official procurement; after the 4m tonne procured by the government, a substantial quantity still remains in the market.

Without ruling out the decline in price, as feared by farmers, Abdullah thinks that the slide may not be steep, especially if the government comes up with an export incentive package.

However, market mechanics are expected to change once the government announces a policy in this regard, he said.

Published in Dawn, The Business and Finance Weekly, May 22nd, 2017