THE government has finally increased the support price of wheat to Rs1,365 per 40 kilograms from Rs1,300. The rise is significant as it came after a gap of five years.

While farmers wanted a bigger increase, the federal government has rejected the possibility of a further jump in prices. And both sides have their reasons.

The government factored in the global wheat situation, import-export parity, cost of production and domestic producer prices while increasing the wheat price. Moreover, the food circular debt has already reached an unmanageable level of Rs775 billion, and millions of rupees are required daily to service the debt. A further increase in the support price could only exacerbate the situation.

But farmers say the increase is insufficient. They wanted the price at Rs1,600 per 40kg if their representative bodies are to be believed and Rs1,400 per 40kg if official circles are to be trusted. They justify their demand by citing ever-increasing prices of fertiliser and transportation, the five-year gap since the last increase and a general inflationary trend.

This year, the federation wants farmers to produce 27m tonnes after an increase of 5pc in the official rate

“Leave the first four years. Just consider what’s happening during this year alone. In the last few months, urea and DAP prices went up by Rs200 per bag,” says Ibrahim Mughal, a farmer and the head of an agriculture think tank. “Besides, seed prices have jumped by Rs300 per 40kg.”

So, according to his calculations, even if wheat is sown on 20 million acres (the federal government’s target is 22.73m acres this year), the rise in just these there heads is likely to increase the cost of production by around Rs15bn (Rs8bn in terms of urea, Rs4bn DAP and Rs3bn seed).

Add another Rs10bn on the diesel head and the demand for Rs,1,600 per 40kg starts to make perfect sense, Mr Mughal insists.

Official circles have their own explanation for a restricted raise. They say that the Agriculture Policy Institute (API) calculated the cost of production at Rs1,349 per 40kg for Punjab and Rs1,315 for Sindh. So, the current support price at Rs1,365 means a profit of only Rs16 per 40kg given API’s calculations.

The profit does sound meagre, “but one must not forget that API’s calculation already includes a premium of 25 per cent,” says Dr Anjum Buttar, the director general (extension) of Punjab.

As per official calculations, a farmer who produces 32.5 maunds (1 maund = around 37kg) per acre, which is the average yield for the last five years, would be investing a little over Rs35,512 and selling the produce for Rs44,362, thus making a profit of Rs8,850 per acre.

It may not be an ideal income bracket, but is certainly not as bad as being projected by community leaders, Mr Buttar explains.

Beyond this debate, the stated logic of the increase is to encourage farmers to produce more. Last year’s climatic debacle cost the country around 1.5m tonnes, as final production figures came in at 24m tonnes against the target of 25.5m tonnes.

This year, the federation wants farmers to produce 27m tonnes after the increase of 5pc in the support price.

But the fear is that this recipe may not work as much because of various reasons. First, it came too late. Punjab had already sowed over 80 per cent of its targeted 19.6m acres when the announcement came. Second, the increase in fertiliser prices is bound to dent its application and drag the final yield down. Third, the Indus River System Authority has warned of a 15 per cent water shortage during the Rabi season.

However, despite these negative factors, there is a hope. The last year’s dent in production not only wiped out longstanding stocks but also pushed the price higher. Currently, wheat is selling at well over Rs1,600 per 40kg in most of Punjab. It is expected to climb up in the next few weeks as markets dry up and official stocks drain more.

This price incentive is big enough to help increase production this year. However, it is a double-edged sword: if it leads to additional production, the country might not have any problems next year. But if the crop size remains small, stockists and hoarders — given this year’s massive margins — may jump in early, outmanoeuvre provincial food departments to purchase and hoard the commodity and dictate next year’s flour price as they did this year to create social chaos. So, this aspect should remain on the official radar.

Published in Dawn, The Business and Finance Weekly, December 9th, 2019