Over the last 50 years since the independence of Pakistan, the policy-makers have not been able to develop a satisfactory policy for the basic necessity of its people, food. This is despite the fact that agriculture is the mainstay of our economy and our land being one of the best for agriculture. The policies made over the years for our staple grain, wheat, have always been ad hoc.
Every new government experiments with this policy, at the expense of the people, and there is no consistency at all. At times we have surplus wheat which rots away in open storages.
At other times we are so short that we impose all kinds of unenforceable restrictions which only result in black marketing, exploitation of the farmers, and high prices for the customers.
The government of Pakistan is giving billions of rupees in wheat subsidy which is in fact the cause of many of the problems in the industry. Two years ago it was decided that the two main items of subsidy, namely transportation and gunny bags, ought to be removed.
This was not implemented fully. The subsidised wheat is naturally cheaper than wheat in the open market, resulting in wrong signals to the markets and attracting profiteers to put up new mills to get these subsidies when in reality there is already 300% over-capacity.
In Pakistan, the price of Atta has always been a political football. Flour being the staple food, is always on top of the agenda for policy-makers. Often decisions are made that are contrary to the market forces which result in price distortions and disharmony in the system.
Excess milling capacity is the most powerful factor that will ensure that the prices of flour will be driven down only if the market forces are allowed to play their role.
Since independence, Pakistan has exported wheat for only two years and imported wheat for many years. We have one of the best qualities of wheat and also have modern milling equipment.
There is no reason why we cannot produce the flour products meeting international standards if we allow the free market forces to make this happen. All multinational companies operating in Pakistan happily get the required wheat products locally.
One of the basic responsibilities of the government in this regard is to make a reliable assessment of the production every year. Unfortunately, we do not have any good methodology for doing so.
In the same season, the estimates may suggest surplus at one time and deficit at another. At the same time the demand side estimates are equally undependable because of various elements including official and unofficial export.
Wheat is also being procured, stored and transported in gunny bags from farms to godowns to mills.
This system is now obsolete and actually costs more in the end. We need to move with the times and start employing bulk handling systems.
RECOMMENDATIONS Policies can produce lasting and satisfactory results only if (a) the market forces are not ignored, (b) they are easily implemented, and (c) the legitimate interests of all stakeholders are recognised and catered for.
As for wheat and its products, there are four stakeholders, namely the farmers, the flour millers, the consumers, and the government. Among this group, the farmers and consumers at large are the most critical.
From a farmer’s perspective, if the purchase rate is not revised for many consecutive years and the government can forcibly buy it in announced rate, he will plant more if he estimates that the rate is profitable and less if not. We, therefore, get into a cycle of high production when rates are revised upwards, followed by years of declining production as the purchase rate remains stagnant but the cost keeps going up.
What is needed is an annual revision of government announced purchase rate based on the cost of seed, fertiliser, pesticides and water. This revision coupled with no forced purchase will ensure that the supply will remain stable and market forces will keep increasing the cultivated areas as the demand grows.
From a customer’s point of view, he wants as much product as he demands, at the best possible price and good quality. The only way to ensure that the customers achieve this goal is to let the market forces of demand/supply reach the equilibrium price levels.
The customer is the end loser in any artificial rate setting methodology. This is so because the supply chain includes distributor, wholesalers, and retailers in addition to the millers and someone in the chain will always exploit the situation, often in collusion with government officials, resulting in high prices and poor quality for the customers.
The cost of milling is well known the world over and when added to the price of wheat results in an easily calculated cost. If the price of product is controlled artificially, without giving fair profit to all involved in the chain, the equation is not sustainable for long. Such a situation is a breeding ground for corruption, black-marketing and hoarding.
The installed flour milling capacity in the country is at least 300% of the need, driven primarily by the quota system for wheat supply. A number of flour mills were put up in the last 2-3 years because of the tightness in the market despite the fact that the capacity was already significantly in excess.
If there is no limitation on the supply of wheat, the “survival of the fittest” will ensure that only the most efficient mills would operate. This would drive down the prices to the lowest possible level.
The last stakeholder, the government, has a role of ensuring that the policies and their implementation are such that there is no shortage of this staple food. In order to do so, sometimes it may need to buy/sell the product itself if the markets are not mature enough to cater to that privately.
That is the case presently in Pakistan. In the light of these constraints, it is imperative for the government to maintain a large enough buffer stock, of say 2-3 million tons as a very cheap insurance policy.
Having an excess in one year in not a loss; it is simply carried forward into next year. Overtime this can change and the government can actually get out of this business altogether and perhaps maintain only a strategic reserve for emergencies. On a longer term basis, the government cannot, and must not, subsidise this supply to any meaningful levels.
If the cycle of hoarding starts, the effects of the same can easily persist for years. This is so because after a year in which there is shortage, even if the crop is good in the following year, the hoarders buy the wheat simply for appreciation.
The problem we are facing today is precisely because of this reason. Unless this vicious circle is broken decisively and quickly, the impact can last a few years. The loser in the end is the consumer.
In the light of the above perspectives of the stakeholders, the following must be included as the key elements of a successful and sustainable wheat policy:
a) The government must always maintain a buffer stock of say 10% of the expected demand, even if it has to import and carry over into next year.
(b) While the announcement of a purchase rate ought to be continued for some years to come, the farmers ought not to be coerced into selling, and the millers ought not to be prevented from buying.
(c) The supply by government ought to be without long-term subsidies and without restriction on amounts, ie let the market determine how much it needs and let the fittest survive.
(d) The government ought to review its demand-supply position around September-October and if needed it ought to place order for import before the high season starts.
(e) If as a social decision, farmers need to be subsidised (as is the case in many other developed countries), it ought to be done in the form of items like crop insurance, tax free pesticide supply, and provision of cheaper and better seeds to increase yields etc.
(f) The flour mills should be facilitated to build storage facilities and procure wheat on fiscally attractive terms, since they are the actual processors of wheat and not the hoarders.
In the short-term some additional measures are needed to break the cycle of shortages.
The wheat issuance should be based on the actual requirements. A classic case is the city of Karachi where the supply is still less than half the need, resulting in movement from Punjab.
In essence the issue should to made totally open, and if that is resulting in a shortage in stocks, additional imports should be made immediately. Only such a measure will break this cycle now and ensure that this does not carry over into the next seasons.
If the above recommendations are followed, the excess milling capacity will result in driving down the processing cost through competition.
This will manifest in better and more cost-effective storage facilities, increased sizes of mills yielding better economies of scale, price segmentation in the market based on quality parameters and credit differentiation amongst different quality players in the market. The winner is the customer.
(The above article is based on a paper presented by Mohammed Khalique Arshad, President of the Pakistan Flour Mills Association (Punjab branch) at a seminar.)
Courtesy: Business Recorder