TALK to any rice dealer, from a small farmer to millers/wholesalers and brokers in Jodia Bazaar (Karachi) or Akbari Mandi (Lahore) — one thing will become clear to you: — the rice industry is in a panic. Although stakeholders in the industry have seen many ups and downs in prices, the current price fluctuations are beyond any of them.

An unprecedented 30-40 per cent rise in prices of different varieties of rice was witnessed during a short period of one month. An emergency meeting of the Rice Exporters Association Pakistan (REAP) was held in early February to ascertain the causes of these sudden jumps in prices. The only thing that they agreed upon was that it was the demand and supply factor.

Crop damage due to weather conditions during the harvest season this year and the blight problem in Punjab, affected Basmati rice supplies. Basmati crop also suffered heavy shortfalls. This caused a global demand for basmati to outpace the supply and prices soared in Pakistan too. Speculators and stockers were also active in the market.

The situation also exposed shortcomings in the official policies for facilitating rice exports. Many exporters are reneging on their long-term contracts with outside buyers while some have chosen to cash settle the differences in the contract and the current market prices. Some exporters accept D/A terms of payment as they are under pressure to fulfil orders at lower prices or face non-payment by the buyers under D/A terms.

The export target set for the rice export category this year (2006-07) is $1.275 billion but it would be a miracle if the total exports come anywhere close to that figure or even last year’s exports..

The rice export industry emerged in 1989-1990 when the government first allowed export in the private sector. Ever since, many have also made heavy capital investments that are essential for meeting food safety global standards. Many exporters have also developed their own brands and trade marks.

But the government felt little need to provide any incentive to this industry. The most glaring example policy outlook is SRO. 525(1)/2006 under which the government allows zero per cent rate on sales tax for supply/import of goods to five industries – leather, textiles, carpets, and sports/surgical goods. The exclusion of rice export industry is surprising given that rice exporters -in addition to local supplies--, import packaging material to meet the quality standards,

Uunfortunately for rice exporters, sales tax rebate on purchase of any printing and packaging material needs to be claimed through lengthy procedures rather than availed with ease like other export industries under zero per cent rate on sales tax. While other export oriented industries are being allowed to either avail zero per cent rate on sales tax of utilities or claim a sales tax rebate on utilities, rice exporters pay sales tax on utilities consumed by their processing plants.

The incentive to rice exporters should have been treated at par with other exporters under the Export Finance Scheme (EFS). Under its Part I, an exporter needs to demonstrate export realisation which equals the value of EFS financing availed from the SBP within 180 days. Under EFS Part II, an exporter needs to have export realisation which is twice the value of EFS financing availed within one year.

Both types amount to the exporter demonstrating export proceeds which are twice the value of EFS financing availed during one year or suffering SBP penalties in case exports are not double the value of financing. The SBP made one exception to this rule of doubling exports of carpets and rugs maintaining that since these export items are hand-made and require much more time in manufacturing, the time frame for EFS Part I should be extended from a period of 180 days for export realisation to 270 days.

Surprisingly once again, rice exporters were excluded from this exception to the rule. Basmati exports is a unique business model. Basmati procured at the start of the season needs to be matured over a period of at least 8--12 months. It needs to be properly stored in warehouses and fumigated to prevent infestation throughout this period and sufficient ventilation. Only after the completion of this process is Basmati ready for export.

Since the entire cash cycle is spread over a one year period, it would have been more appropriate to extend export realisation period to 360 days from 180 days. If the following five key measures are implemented immediately, they will go a long way in averting the crisis facing the industry:

•EFS on matching basis: The SBP should consider rice exports on matching basis of financing availed and not twice the value as it currently stands under the Export Finance Scheme due to the nature of the Basmati export business which involves a delayed cash cycle. This will provide an immediate relief to rice exporters.

• Zero rated sales tax on utilities and packaging material be allowed to bring the rice export industry at par with other core export industries.

• R&D/brand development support is provided to textile exports to the United States and Europe. These textile exporters get a six per cent monetary support on the FOB value. Similarly, the government should allow R&D based support on FOB value for rice exporters who export under brand names. As a result, average unit price of exports are likely to increase over time.

• Refinance/swap of LTF-EOP: The long-term financing for the export oriented projects scheme of the SBP allowed textile exporters a one-time opportunity to refinance/swap their long-term loans (KIBOR priced loans) with loans under the LTF-EOP for plant and machinery in 2006 while the industry was going through a period of crisis. Similarly, rice exporters should be given the opportunity to refinance their long-term loans and leases of plant and machinery. .

• Extension of LTF-EOP Scheme: The terms of the LTF-EOP Scheme should be extended to rice exporters to include financing for construction of warehousing / storage facilities. This will ensure that exporters will have sufficient capacity to maintain their stock levels and fulfil their contractual obligations with their clients.

• Currently, many small and medium size rice exporters are selling forward to their clients and buying rice in the open market to fulfil their orders. By the time they approach the market to cover paddy or rice stock for their orders, the prices will be changed so much that they may not be able to fulfil their orders. To prevent such a situation in the future, it is essential to allow rice exporters a chance to build storage capacity and inclusion of storage construction in the LTF-EOP scheme.

The writer is a director at Matco Rice