Wheat woes

16 Jul 2020


THE food bureaucracy has made a mess of the wheat market. It has sown the seeds for another serious crisis as it tried to avoid a repeat of last year’s flour shortages. Now it is looking for scapegoats. The policy of procuring maximum wheat at a support price of Rs1,400 per 40kg by keeping flour mills out of the competition has led cereal prices to spike in the open market. The government allowed millers to enter the market only after it had dried up. The marketable crop surplus, which wasn’t bought by the government, had already been stocked by speculators hoping to make a quick buck. Consequently, wheat prices in Punjab have soared up to Rs1,900-Rs1,950 per 40kg, and in Sindh to Rs1,750-Rs1,800 per 40kg. The increase has forced flour mills to stop private purchases because of the official cap on retail flour prices based on the subsidised public wheat quota issue rate of Rs1,475 per 40kg. The provinces have been compelled to start releasing wheat quotas to millers from public stocks much earlier than usual to keep the market supplied with affordable flour.

Now the prime minister wants a crackdown against ‘hoarders’, hoping that fear of action would lead those stocking up to liquidate their wheat stock to avoid its confiscation, thus helping to reduce prices for flour millers. But that is unlikely to happen, with prices set to climb to new highs in the coming months. The crackdown may delay the inevitable but won’t prevent it unless the wheat policy is corrected, as such action and price controls seldom work.

The country has harvested a much shorter crop this year than targeted. The carry forward stock isn’t enough to meet requirements. There are a few possible short-term solutions to avert a wheat flour shortage. Permitting millers to charge a higher price for flour and other products they produce from expensive wheat imported or bought from the local market could be one solution. The other could be the government subsidising expensive imported wheat to keep prices affordable for consumers. Or it may stop subsidising retail flour sales by increasing the official wheat issue price to bring it at par with the cost of imported wheat. This will enable importers to bring in grain without fear of losses owing to a large price differential between local and imported cereal. The long-term solution lies in deregulating wheat trade. Currently, the government purchases a large portion of the marketable surplus of crop at a price, which is usually much higher than the international price of the commodity, to support smallholders. It also gives it leverage to fix subsidised retail flour prices for urban consumers. Further, it restricts imports through tariff barriers and controls export. This policy has resulted in massive losses in subsidies, leakages and corruption. The long-term solution lies in the government’s limited presence to ensure a competitive market.

Published in Dawn, July 16th, 2020