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Wheat farmers fear price crash in election year

Updated January 08, 2018


PESHAWAR: Farmers harvest wheat on a farm in this file photo.—Reuters
PESHAWAR: Farmers harvest wheat on a farm in this file photo.—Reuters

AS the current sugarcane crisis in Punjab and Sindh rages, farmers are now worried about wheat as well.

The emerging crop context is threatening for all — provincial and federal governments, traders, millers and, above all, farmers.

Stocks are running high, the domestic support price is unrealistically higher compared to the world and efforts to increase exports have failed in the last two years. Stocks are mounting every year and a support price policy is missing.

All these factors would haunt the wheat market once crop hits the market 70 days down the line, and farmers fear they would suffer the worst in shape of a price crash, as has happened in the case of sugarcane.

A look at the stocks’ position and the cost of maintenance explains farmers’ fears. Punjab alone now holds 5.8 million tonnes, which are sufficient to see it though for the next two years. Its releases are down to less than 10,000 tonnes a day, which are up to 70 per cent below the traditional releases at this point of time.

If governments go for high-speed liberal purchases, the financial cost would be unbearable. If they don’t, the political cost could be unaffordable

With around 70 days to go before Sindh’s wheat hits the market, the fear is that the Punjab Food Department may start the next season with a monstrous stock of around 5m tonnes and avoid or slow down the next procurement.

The cost of current stocks is over Rs164 billion and the Punjab has been servicing the loan with an unsustainable Rs2bn per month. These stocks are in addition to 2m tonnes with the Pakistan Agricultural Storage and Services Corporation (Passco) and another 1.7m tonnes with the Sindh Food Department. Both of them are bearing their costs, which should be as high as half of what Punjab is bearing.

After Sindh’s wheat would start trickling in the market, the Punjab crop would take another 30 days, only to overburden the domestic market with another 19m tonnes.

Fresh crop could only double these stocks within a matter of month, leaving these procuring agencies with an unbearable burden: administratively managing stocks of 10m to 12m tonnes and servicing these loans with Rs5bn to Rs6bn a month.

The elections year has added its own complications to the market. Its first result was keeping a high domestic support price despite opposition from Punjab.

The federal and provincial governments maintained a price of Rs1,300 per 40kg against the advice of saner elements because they wanted to pander to the rural voters.

The next compulsion would be procuring till the last grain because elections would be closely following the procurement drive. This would further escalate domestic stocks and their administrative and fiscal cost of maintenance.

Pakistan’s attempts to export even part of the stocks have failed miserably in the last two years owing to high domestic cost and failure to adjust to international wheat realities.

In June 2016, it offered 800,000 tonnes for export, with a subsidy of $120 a tonne. Of this, only 280,000 tonnes could be sent abroad. How much of it actually went abroad and how much was only on papers is now a matter of investigation with the National Accountability Bureau.

In the second attempt, the government is offering another 1.5m tonnes for export, with a subsidy of $159 a tonne by sea and $120 by road. The Economic Coordination Committee has already approved the summary and the provinces are in the process of notifying the same.

The exporters are, however, not so sanguine about prospects. Khurram Shahzad, an exporter from Lahore, said, “It would really be hard to export right now. Due to ad hocism in export policies in the past, Pakistan has lost almost all market.”

“Even in Afghanistan, which is always taken as natural extension of Pakistan’s market, the entire export is restricted up to Kabul,” he said. “North of Afghanistan is out of reach now. Dubai and some African markets may have some potential. But export markets need consistent policy, not ad hoc or desperate measure. The current attempt is a desperate measure, which has limited scope of success.”

With official stocks already overflowing, the new crop would throw another 8m to 9m tonnes of tradable surplus in the market. There are always two major players in the wheat market, ie official agencies and the private sector led by the millers. This year, the fear is that official agencies will already be overwhelmed and reluctant. Even if forced to purchase high quantity, they could always go slow.

Private purchases always depend on official stocks. If millers know that the government has sufficient stocks and they would have liberal releases, they hardly go for purchases, which cost them both in finances and infrastructure.

That is precisely where farmers fear lie. If one of the players goes slow and other is missing, even partially, the price crash would be the natural corollary, which could double their miseries after the cane crash.

This situation puts governments, both federal and provincial, between a rock and a hard place. If they go for high-speed liberal purchases, the financial cost would be unbearable. If they don’t, the political cost could unaffordable.

Published in Dawn, The Business and Finance Weekly, January 8th,2018