The Senate Standing Committee on National Food Security & Research meeting held recently was briefed on the looming increase of wheat flour prices in upcoming months as the provincial governments have not achieved their wheat purchase targets which can spiral into a shortage and price hike in no time.
The committee was informed that both Punjab and Sindh governments are short of their procurement target by 0.6 million tons each which can result in a further increase in flour prices by Rs 30 to Rs 40 in the upcoming months.
The increase will be inevitable unless the ample availability of Wheat is ensured in the market.
Why does Pakistan, the world’s seventh-biggest wheat producer, face flour shortages? How did it transition from a wheat exporter to a net importer? Despite government scrutiny and numerous investigations, a lasting remedy to this pressing issue remains elusive.
Pakistan’s annual wheat production has increased by 7 percent over the last ten years from 25.9 million tons in 2013-14 to 28 million tons in 2022-23 which might seem a lot to some but unchecked growth of population, cross-border smuggling into Afghanistan, and mismanagement of the whole supply chain has turned the production levels meaningless in terms of ensuring national food security.
Pakistan is facing a shortfall of at least three million tons for which both the public and private sectors have been allowed to import wheat. The private sector will be importing 0.9 million tons of wheat in the upcoming months.
“Pakistan first time became a net wheat importer in 2019 when the Punjab Food Department allowed an estimated 1.6 million tons of wheat to be used in poultry feed. Secondly, farmers also diversified towards maize as it had nearly similar prices but higher yields per acre. These two factors contributed towards creating a local shortfall.”, stated Asim Raza, the Central Chairman of Pakistan Flour Mills Association (PFMA) while talking exclusively to ProPakistani.
He also questioned the wheat production data presented by the government and termed the wheat support price an ‘enforced price’ stating that farmers were forced to sell wheat to the government and that crackdown is still happening which highlights that government has low wheat stocks.
Is government intervention critical or harmful?
Actually, it’s both at the same time. There is a strong argument often made in support of privatizing wheat procurement operations. Foremost, inefficiencies in this whole operation have created a circular debt-like situation in Punjab and secondly, it’s argued that an evolution of a free market will automatically prevent any excessive price hike or shortage and so the agriculture department officials agree in private conversations.
The last reported estimate suggests that while the caretaker government paid Rs. 200 billion in the last fiscal year, the food department still owed more than Rs. 750 billion to banks while it had to receive Rs. 380 billion in subsidies from the government. It mainly arises due to the incidental charges in the form of interest, storage costs, freight, losses in storage and management and subsidy that are provided to the flour mills to ensure the lower release price of flour.
“An estimated 4-5 million tons of wheat comes to market during the open season while different federal and provincial departments buy 6-7 million tons and people keep the rest in their homes for their yearly consumption. If the government does not buy, it will enable an ample availability of wheat in the market, resulting in open competition and preventing any shortage.”, added Raza.
He added that the moment government gets out of the wheat market, it will automatically stabilize the prices as happened in the case of rice. On the other hand, the provincial governments are floating some new plans but they are not any better than the old ones so experts say that the only way to fix this market is to let it go.
Also to add, Pakistan has also one of the most expensive wheat in the world since the government hiked its support price by more than 77 percent to Rs. 3,900 per 40 kg last year which means smuggling is restricted in theory.
But in a country like Pakistan where regulations are rarely followed in letter or spirit, the idea of letting the private sector take the reins of national food security is hard to accept for obvious reasons. Apart from the issue of food security, wheat may be one of the few crops for which farmers get their fair price considering the current prices of maize.
“It aims to protect two crucial segments of the society, farmers and especially small landholders who get their fair price and secondly to ensure the food availability to a common man, regardless of its price”, stated Aamer Hayat Bhandara, progressive farmer and founder of Agriculture Republic Think Tank while talking to ProPakistani.
He recalled the recent sugar fiasco and said that when the government notified one price of sugar on 27th April, a week later there was a stay order barring the government from doing anything. He asked how the regulator will be ensuring the price on both ends of the supply chain when it has been falling at doing so with sugar and fertilizer if the market is privatized.
He added that if market prices of wheat are capped by the government on both buying and selling and flour prices still get out of control, then there is no other solution than imports but in that case, curtailing the middlemen will be a challenging task.
It should be noted that the current notified price of urea is Rs. 3,100 per 50 kg bag but it’s selling for Rs. 3,500 to Rs. 3,800 across Punjab. But maybe the most appropriate example might be cotton where the government announced a support price but hasn’t been able to ensure it and decided to buy itself through the Trading Corporation of Pakistan.
Raza was of the view that while sugar was allowed to be exported at more than double the local prices due to which domestic prices increased but flour mills are only being victimized to distract everyone from that. The government has been sitting silent since Lahore High Court gave a stay order but the same level of compliance is not shown by the government when the court gave some orders in favor of flour mills.
New plans in the works
Meanwhile, the food department is looking into the open auctions of wheat at lower than market prices instead of releasing quota to the flour mills and providing cash subsidies. The government is formulating the rules and regulations for the open auction where flour mills would also be allowed to participate and is hopeful that it will result in relief for the common man.
The government is also carrying out a crackdown against the hoarders but since that’s a double-edged sword and a strict restriction on the grain movement can also affect the supply of wheat to mills so instead of blocking the roads and checking everything, district administrations are only conducting information based targeted raids which hasn’t been very successful.
PFMA while welcoming the targeted cash subsidy program has opposed the idea of an auction arguing that it will benefit a few flour mills and can destroy the rest of the industry. The reason is that the auction works well when there is wheat available in the market and you have a strategic surplus available from the previous years that you need to auction to buy more.
PFMA argued that all mills have their own respective areas as their market where they provide flour and auction will only benefit 50-60 mills out of more than 1,000 mills across Punjab so it’s impractical and can open the floodgates of corruption.
Moreover, Flour Mills Association is also split in their take on the early release of quota to the flour mills for market stability. While the Punjab chapter of the association seems united on this demand, the members from Sindh have opposed the idea as they believe private import is enough to address the situation. It’s also suggested that mills in Sindh find the idea of an open market more lucrative since they will be getting the imported wheat at lower prices for being closer to Karachi.
Impact of imported wheat will be insignificant
The import duty for flour mills is 5.5 percent and for any entity other than flour mills, it is 6 percent. The cost of import at the port will reportedly be around Rs. 3,300 to 3,400 per 40 kg and after adding the port handling charges, it will cost around Rs. 3,700 to 3,800 in Sindh and Rs. 4,200 in Punjab.
On the other hand, flour mills in Punjab have reportedly 0.6 million tons of wheat in storage compared to 1.6 million tons during the same time last year or far less than 2.2 million tons a year before that. So even if all the 0.9 million tons of wheat that the private sector will be importing comes to Punjab (which is unlikely), the biggest province will still be short of 0.1 million tons so the impact on local prices of wheat or flour if any, will be insignificant.
Raza pointed out that imported wheat is of different quality and can’t be used alone. The government-imported wheat can only be mixed up to 15-20 percent while privately imported wheat can be used up to 50-70 percent in blend with local wheat.
He also admitted that in light of the above facts, flour prices are unlikely to be affected especially since local wheat prices are estimated to stay above Rs. 4,500 and appreciate further in upcoming months.
Band-aid on a bullet wound
The government has openly admitted that certain flour mills sell the subsidized wheat they get from the government in the open market and run the mills empty to show the electricity units to receive the rebates. In addition to causing the losses to exchequer, it also fuels the unending hoarding cycle and turns the whole exercise of procurement meaningless.
But the question remains, if it’s true, why there is no action? Are the allegations another part of the great game of blame or government is too helpless in front of flour mill owners?
“Government registered fake cases against flour mills which were later proven wrong”, responded Raza to the question about the allegations. He claimed that there are still FIRs registered against flour mill owners from the previous governments but nothing came out of it.
Reports suggest that a substantial amount of wheat, nearly equal to our annual imports, is being smuggled to Afghanistan. While the prospect of importing wheat persists, the bigger challenge lies in addressing alleged outflows from mills to the open market and Afghanistan, as well as the issue of hoarding.
Otherwise, we can import all we want but neither it will solve the circular debt equation nor it will ensure food security. There is a potential in allowing the private sector to buy wheat simultaneously but it’s also pointless to pursue if the government cannot ensure a certain cap on flour prices or protect the only thing remotely near to social security net farmers have in the form of wheat support price.
If we are really looking to close the book on this ‘annual’ wheat crisis, we need to invest in increasing productivity and reducing waste more than we are investing in imports. It demands a comprehensive approach, drawing solutions from all theories in moderation to effectively address the root cause of shortages instead of putting a band-aid on a bullet wound and claiming victory.
