The wages of wheat

14 Apr 2018

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THE bulk of Pakistan’s wheat, covering nearly half our cultivable land, will be harvested in the coming weeks. In the spirit of the season, our neighbours across the border, in East Punjab, are celebrating the Vaisakhee festival today, to offer thanks for the harvest and usher in the Punjabi new year.

Despite the absence of noticeable revelry on this side of the Radcliffe Line, Pakistan’s, primarily Punjabi, wheat farmers have a great deal more to celebrate. At the cost of everyone else in the country.

The latest such toll is the $320 million that the state wants to pay as an export subsidy to anyone willing to take 2m tons of last year’s wheat from overflowing government stockpiles. This must be done to clear space and raise funds, so the incumbent government can keep farmers happy in an election year by buying around 6m tons of the current harvest. At a total cost of at least $700m more than global market prices. (This information has been calculated from data in the State Bank’s State of Economy report for the second quarter of this fiscal year and the US Department of Agriculture’s 2018 Pakistan: Grain and Feed Annual report.)

Trying to react to the market and to our needs is surely better than systematically doing the wrong thing.

Add to this the cost of storing the wheat, and interest on the money borrowed to buy and hold it (the State Bank pegs this around $200m in Punjab this year). Then add the multi-billion dollar welfare loss faced by consumers across the country in the last four years on the use of wheat that was overpriced because of import restrictions. Most of these costs were likely included by the food security ministry when its draft policy paper put the cost of the wheat policy near a stunning $2 billion annually. For context, that’s nearly twice the cost of the Benazir Income Support Programme.

Like most bizarre stories in our great land, the tale of how we got here starts and ends with the government.

Our wheat market is highly regulated, ostensibly to ensure food security. The state promises to buy a portion of the crop at a support price, restricts imports with high duties, and controls export. Around half of each year’s crop remains in villages, a quarter is sold informally, and the remaining quarter is bought by the provincial and federal governments and added to storage. From there, it is released over the year to flour mills at a subsidised price for onward retail sale. Between all these flows, the state attempts to maintain a minimum strategic stock level. Naturally, with a bureaucratic maze at this scale, nothing runs smoothly. One can hardly speak to a farmer without hearing of influential middlemen, conniving with officials to sell their wheat at the support price.

If operations are a problem, strategy is a much bigger one.

Since mid-2012, international wheat prices have roughly halved. Since then, our support price has actually risen from Rs1,150 per maund to Rs1,300. Even as research organisations within the government were sounding the alarm on surpluses, the government actually kept adopting higher production targets. As a result, despite export subsidies regularly on offer, our local holdings of wheat rocketed — from under 50 days of supplies in 2012 to nearly 70 days of supplies before the current crop was planted.

Last October, when the Federal Agriculture Committee met to set a production target and a support price, it was in the backdrop of government agencies having run out of storage, and renting fields to store excess wheat under plastic sheets. While rats were having a field day with this poorly stored prize, the committee, under the leadership of PML-N’s food security minister, Mr Sikander Hayat Bosan, set an unchanged support price and announced the highest wheat production target ever. And now, even though the target won’t be met, we are scrambling to free up space. You can’t make this stuff up.

In light of all this, the State Bank, restrained as ever, drily opined in its latest report that the “current mechanism of support prices and commodity operations requires a significant reorientation”.

How?

There is no shortage of informed voices arguing against having any support prices at all. A proactive ministry, monitoring sowing and crop conditions, and forecasting production, could estimate import and export needs based on market prices and act appropriately. This, combined with reasonable levels of strategic reserves, safely stored in silos (away from rats), could form the foundation of a food security policy.

Alternatively, if we are going to retain a support price for wheat it needs to be responsive to international market conditions. When domestic stockpiles are high, and global prices low, support prices must be reduced to nudge the marginal farmer towards alternative crops. At the same time, duties should be removed to ensure any shortfalls can be imported. To offset the likely political fallout, farmers could be offered broad input subsidies. For example, in the past couple of years, if we had set a far lower support price, instead of spending too much money to buy too much wheat, we could have afforded an increased fertiliser subsidy for all farmers, improving productivity for everyone. Critically, this would have created an incentive for some farmers to shift towards growing other crops that we import — like oilseeds.

Of course, both these options require accurate forecasting and rapid responses to price fluctuations to maintain food security. There are risks involved, and at times there will be costly errors – especially in times of rising international prices. But trying to react to the market and to our needs is surely better than systematically doing the wrong thing, year after year. The draft food security policy speaks of these matters vaguely, buried inside dozens of policy measures, without timelines and tangible targets. A more concrete, sustainable wheat policy well before next Vaisakhee would be cause for a real celebration.

The writer is a Lahore based columnist and consultant with a background in finance, strategy, and energy markets.

Published in Dawn, April 14th, 2018