Pakistan’s wheat market seems to be disintegrating, with unpredictable (some wheat watchers say threatening) consequences. A unified staple market, both in terms of supply and pricing, has kept social peace for the first 73 years of its existence. However, this stability is under pressure now like never before and threatens that social balance.
Currently, a number of factors are generating internal and external pressure on the wheat market and causing volatility. They include varying wheat prices, imports at different prices and the official ability to equalise prices through subsidies. Politics trump economic logic, and weak governance is unable to deal with hoarders and mafias that keep the market destabilised as federating units pander to the petty politics of a possible election year.
In addition to those factors, the crop itself is losing grounds viz-a-viz other competing crops, and many risks and doubts have been sown with the crop this season. In a nutshell, Pakistan’s food security seems to be on the line with many destabilising consequences.
As far as the pricing factor is concerned, five different prices (read markets) are operating in the country — and correspondingly varying flour prices as well. What makes it tragic is the fact that three out of five prices are officially approved by the three biggest wheat players, who never bothered to consult each other before announcing these prices, which serve their narrow interests.
The five different markets are causing instability at a time when the staple crop is already stressed because of DAP rates and the floods
The exercise started in September this year when the Sindh government raised its procurement from Rs2,200 per 40kg to Rs4,000 — a whopping jump of 45 per cent. Punjab (producer of 80pc wheat) was the next one: increasing it from Rs2,200 per 40kg to Rs3,000 — a 26.67pc rise. The federal government (monitor and regulator) thought Rs3,000 per 40kg should be fine, which it is now trying to revise to Rs3,200 per 40kg.
All three important players are reportedly negotiating to find a middle path, which is hard to come by because of considerations other than wheat, food security, or insecurity. This behaviour leaves a trail of questions. Why did the negotiation, which they are starting now, not take place before they all decided to go for individual prices?
None of them explained the economic logic behind their decision, measured the instability it may cause in the staple market or the reasons behind their effort to reach a consensus price now.
Things did not stop there. A fourth price entered into the fray when official wheat releases started by Punjab at a rate of Rs2,300 per 40kg to control rates of officially ground flour. Still, the fifth one, the private market, is operating independently of all of them (at Rs3,200-Rs3,400 per 40kg, and increasing by the week) and affecting the wheat and flour market. How can these policy goof-ups be justified, no one is ready to explain! The results of these steps are disastrously volatile.
Imports have not helped either. According to the Pakistan Bureau of Statistics (PBS), the country has imported around six million tonnes (3.1m tonnes in 2020, 2.2m tonnes in 2021 and around 0.856m tonnes in the first quarter of this fiscal year) in the last two years, at the cost of over $2 billion.
However, regular imports have not been able to stabilise the domestic market on the supply side. Conversely, it kept the market unstable by introducing new players (importers) and assigning them a big role in market stabilisation, which allowed them exorbitant profit while manipulating the already unstable market.
Money spent on the imported commodity to bring it at par with local wheat to pass it on to consumers only ensured further destabilisation. As per PBS, the average per tonne import price was $272 in FY21, $360 in FY22 and $477 in the first quarter of the current fiscal year. The prices show the destabilising impact they have had on the domestic market.
As if all these compulsions were not enough, politics has overwritten everything else. The PPP government, which is a vital component of government in the centre, did not bother to consult its PDM colleagues in Islamabad before announcing its decision to increase wheat prices by 45pc — the biggest jump in the history of Pakistan — and went ahead because it politically suited the PPP.
A nervous Islamabad was left groping for an appropriate response. It was still scratching its head when the PML-N government raised the wheat price by over 26pc. The next Punjab government (PTI-PML-Q coalition) took politics to a new height when it demanded 1m tonnes from the centre or permission for direct imports.
Its own calculation had put the demand at half of that quantity. Politics, however, multiplied the demand, sending wrong signals to the market at a critically important time. As a result of all these decisions, the wheat market is splitting, both horizontally and vertically. Politics, however, goes on.
All the factors that caused instability in the last two years are threatening to worsen during the rest of this year and the next.
Last year’s crisis began when production fell to 26.4m tonnes from the previous 28.42m tonnes — a gap of 2m tonnes. National calculations put consumption at 29m tonnes, and the federal government decided in June (only a month after the start of the wheat season) to import 3m tonnes to bridge the gap — exposing the domestic market to the vagaries of the world wheat market.
This year, production is feared to fall more for a number of reasons. Flood water is still standing on vast tracks of Sindh, and where sowing did take place, it has been delayed by at least a month — prolonging the current season correspondingly.
Hot weather delayed crop sowing by one month in the South of Punjab. This year’s most crucial factor may turn out to be a 30pc drop in di-ammonium phosphate application: its price of over Rs13,500 per bag made its consumption almost impossible for most farmers.
Though its price has fallen, mainly because of a drop in demand, it fell after the event and is bound to impact the final yield. Delayed sugarcane crushing season only ensured fields remained occupied and missed the most propitious time for wheat sowing. These are the uncertainties sown with the wheat crop this year and generate fear that wheat production may not reach where it ended last year.
Published in Dawn, The Business and Finance Weekly, December 5th, 2022