Wheat pricing and trade surplus risk (By Ahmad Fraz Khan)
 

Of the two options to keep wheat crop attractive for farmers, the government has not chosen the most appropriate one. It has increased the support price by over 10 per cent — from Rs950 to Rs1,050 per 40kg.

The other option it had was to reduce the cost of production by either withdrawing or at least reducing the general sales tax (GST) on agriculture inputs.

The increase may not be bad in itself. After all, the slapping of GST on agriculture inputs had increased the cost of production by around 25 per cent in the last one year and turned the wheat price economically unfeasible.

The manner in which the decision came is equally questionable; the provinces, which are now responsible for the sector, were never taken on board. Technically, the new price is applicable to purchases by Pakistan Agriculture Service and Storage Corporation (Passco) and the provinces are not bound to follow it. But, practically, the provinces have no choice but to follow suite. Otherwise, they will risk the wrath of farmers and rural voters.

As elections draw near, no provincial government, especially Punjab, can take such kind of political risk. So, everyone has to own the new price, but everyone was not on board in the decision-making.

As Punjab saw it, the PPP government knew well that once it increased the price, the PML-N have no choice but to follow suite and pay an un-affordable price. Since the federal government does not buy much (Passco procures around one million tons on its behalf), the increase would cost Punjab much more. With its finances in bad shape, it would virtually be impossible for it to absorb the cost.

The federation also knew well that the private sector would be reluctant to pay the additional price. Traders pay the market price, which is either linked to an effort to maximise profits or export parity, and has normally been less than official price tag.
Thus, the bulk of crop may land at the provincial doors and Punjab would have no choice but to procure till proverbial last grain, and pay the price.

Till last year, the economy of Punjab was literally collapsing under food debt. A breather came when international price shot up for a while, and it was able to export less than a million ton. Till then, it was paying around Rs70 million a day in interest payments to banks on over Rs75 billion loan that was stuck in wheat stocks. As things stand today, it is still holding 4.7 million tons of wheat. Under no circumstances, it can release more than 2.5 million tons of wheat, because the rest of the country is also holding well over five million tons of it. Punjab would be thus carry forward over two million tons of wheat (read Rs60 billion loan at a daily mark-up of Rs30 million) when the next procurement starts.

With the next procurement costing between Rs100-200 billion, depending on its decision how much Punjab purchases, its finances would be in shambles. Add another Rs30 billion wheat subsidy bill, which is already due, the figures and picture get even worse. This is how Punjab reads the federal decision, and fears for the worst.

Though Punjab would be main sufferer, there would be hardly any cause for the rest of the country to celebrate if the current trend in the international prices continues in the next harvesting season. Pakistan’s wheat, with its current price is costing around $325 per ton in the international market, whereas Russian wheat is available for $220 per ton. Even at the Chicago Board, it is being traded at $265. With Australian wheat just around the coroner, prospects for Pakistani wheat have almost diminished in the world market.

If the federal government has decided to compensate farmers only through price increase because it cannot withdraw or reduce general sales tax on inputs under duress from foreign lenders, the provinces need to look for other options. One such option could be reduction in wheat area, because it is next to impossible to carry two million tons extra wheat every year, with almost no visible export potential unless something dramatic happens on the globe.

The farmers can go for crop diversification. There is a huge range of crops –canola to pulses – options available during the Rabi season. Both these crops also cost billions of dollars in imports every year. But all such efforts have to be planned and executed meticulously.:thinking