Pakistan Should Restructure Its Support Prices Mechanism for Crops: SBP

Pakistan can restructure MSP mechanism mainly by prioritizing staple crops, especially wheat, and increasing the role of private sector in the procurement and supply management of other crops.

In the half-year report, ” The State of Pakistan’s Economy,” an exclusive report analyzed Pakistan’s structure of minimum support price and suggested key recommendations for its improvement. Pakistan can draw useful lessons from international best practices and implement strategies such as loan rates for key crops.

This can serve a dual purpose of providing farmers with financing, essentially reducing their reliance on expensive loans from informal lenders, and simultaneously establishing a floor price for these crops.

Such a system grants autonomy to farmers in terms of repaying their loan; either by selling their crops in the open market or by delivering pledged crops to the government procurement agency. In the long run, the government needs to slowly step back from direct procurement and play its role in monitoring demand and supply gaps and encouraging the private sector to play its role in procurement and storage. The government may maintain strategic stock primarily for exigencies and extreme shortages.

MSP in Different Countries International Experiences Countries such as India, Bangladesh, and China have MSP mechanisms for important crops similar to Pakistan.

India uses MSP for numerous Kharif and Rabi crops including paddy, maize, soybean, cotton, wheat, barley, and gram. Bangladesh announces MSP for paddy at harvest time and procures it through the Public Food Grain Distribution System (PFGDS). China, procures and announces support prices for wheat and rice based on production cost and market conditions before the crops are sown.

On the other hand, in addition to announcing support prices for selected agricultural commodities, the South African government provides support of 30 percent and 5 percent of gross receipts of sugar and wheat respectively. Whereas, the Kenyan government sets a floor price for wheat at which private traders and millers are required to buy domestic produce before they can import at a preferential tariff. In the USA, the government has several support programs in place for their farmers such as commodity loan programs, farm storage facilities, honey recourse loan programs, market loss assistance payments etc.

In commodity loan programs, a hybrid approach is used by issuing ‘loan rates’ for selected commodities such as wheat, corn, and oilseeds. Farmers can avail of financing on the basis of these ‘loan rates’ by pledging their crops as collateral.

At maturity, farmers can either sell their crops in the market (if the market price is higher than the ‘loan rate’) and repay the loan or deliver the commodity (pledged as the collateral) to as full settlement on maturity in case the market prices are lower than the ‘loan rate’.

MSP’s Objectives in Pakistan MSP is a form of market intervention in which governments set a minimum price for agricultural produce to incentivize farmers to grow more of a certain crop in order to achieve self-sufficiency and food security, ensure smooth supply, and keep prices stable in domestic market.

The minimum price is set considering the cost of production such as land rent and input costs – fertilizers, pesticides, seeds, water, labor, machinery rates, fuel charges, etc. as well as demand and supply dynamics. However, MSP becomes an added fiscal burden in resource-constrained developing countries.

Governments, in both developing and advanced economies, use various approaches to support farmers depending upon the needs and dynamics of their respective countries. In Pakistan, wheat is procured by the government at MSP while cotton and sugarcane are mostly supported through indicative MSP. The government also undertakes the purchase and sale of key commodities to ensure equilibrium between demand and supply and maintain buffer stocks.

The Punjab government maintained the minimum support price (MSP) for wheat at Rs. 3,900/40 kg for FY24. Sindh has set MSP for wheat at Rs. 4,000/40 kg. The minimum support price for sugarcane has been fixed at Rs. 40 per maund.

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