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Wheat support pricing or bad economics?




  • The stated logic behind increasing wheat support price is the escalating cost of production. This growing cost is a reality but it constitutes one of the many variables that should determine the wheat price. Import and export parity, domestic consumption and projected requirement should also get equal weight in calculating price. But it has not been the case, as electoral politics overrides everything else

    THE ECONOMIC Coordination Committee of the Cabinet has recently increased wheat support price yet again, third time over the last four years of the present government’s rule. The last week’s increase has taken the price from Rs1,050 per 40kg to Rs1,200 per 40kg — a jump of 14 per cent.

    Last year, the price was taken from Rs950 per 40kg to Rs1,050 per 40kg – an increase of almost 10 per cent. In 2008, when this government took over, it increased the price from Rs625 per 40kg to Rs950 per 40kg – a leap of 46 per cent.

    It is not only this government. The last one, when closing in on elections in 2007, had also increased price from Rs425 per 40kg to Rs625 per 40kg. This makes a little less than 300 per cent increase in the last five years. And this is being done to a crop that is a staple for the huge majority and dictates food security situation in the country.

    Once the new wheat price takes hold of the market, the 20kg of flour, which used to cost Rs225 in 2007, would cost well over Rs725 – taking it out of financial reach of a few million more. The social cost of political pandering of rural voters thus becomes unbearable for the people.

    By increasing price of wheat every year, the ruling elite tries to consolidate its rural vote bank, thinking that all rural people would benefit.

    This is, however, a wrong assumption if Pakistan Agriculture Census is to be believed. According to it, around 85 per cent farmers don’t produce marketable surplus. Thus, they are not the beneficiaries of a regular increase.

    To make the assumption even skewed, around 40 per cent of rural population is landless labour that buys wheat for survival. The increase thus benefits only a small part of the rural population that produces a marketable surplus and is part of the ruling elite and decision-makers who raise wheat prices for meeting its electoral expenditures.

    The stated logic behind increasing wheat support price is the escalating cost of production. This growing cost is a reality but it constitutes one of the many variables that should determine the wheat price. Import and export parity, domestic consumption and projected requirement should also get equal weight in calculating price. But it has not been the case, as electoral politics overrides everything else.

    Increasing cost of production is a reality, one created by government policies. In the last four years, fertilizer (urea) price has increased from Rs700 per bag to Rs1,700 per bag – a difference of a staggering 142 per cent. Electricity prices have gone up by 163 per cent – from Rs3.28 per unit to Rs8.63 per unit. In the same period, diesel cost grew from Rs73 to Rs111 per litre – a growth of 53 per cent. All these prices increased mainly due to government policies and it is the major beneficiary of the increase. In fertilizer price, a small role is played by weakening government writ and cartels operating in it. Here again, it is the government that should take the blame.

    Because of these factors, the cost of wheat production, according to official estimates, has increased from Rs400 per 40K in 2006-07 to Rs932 per 40kg (133 per cent). The farmers’ bodies, however, put it at much higher figure. The government has created a vicious circle for itself, where it increases prices of inputs to meet its own running expenditures. Then, it increases wheat prices to compensate farmers. On the third plank, it procures wheat to stabilise market. Finally, it ends up subsidising flour for the urban population. One wonders, where this process would stop.

    The cumulative cost of these four stages is hundreds of billions of rupees a year. By increasing wheat price, the government only correspondingly adds to these expenditures. This is apart from regular reports of massive corruption at these stages that have become fodder for the media.

    One indicator of this rising cost is administrative cost of wheat procurement. In the last four years, Punjab, which is one of three organisations (along with Sindh Food Department and Passco) involved in procurement, had paid Rs80 billion in interest payments to banks on its stocks. That makes it Rs1.66 billion a month or Rs550 million a day.

    In 2009-10, the Punjab procured 5.78 million tons at the cost Rs143 billion and paid Rs19 billion in mark-up to banks. Next year, it borrowed Rs88 billion and paid Rs26 billion to banks as carryover stock kept adding to the cost. In 2011-12, it borrowed Rs76 billion and interest payments were Rs23 billion. This year, it still owes Rs73 billion and has so far paid Rs11 billion.

    In these four years, the Punjab alone had to borrow Rs381 billion for wheat procurement and paid Rs79.53 billion to service loans. The other two – Sindh and Passco – also procure around the same quantity and cost can easily be doubled if they are added to the tally. This is the cost of increasing wheat prices regularly and dealing with the fall out.

    The federal government needs to consider two options: controlling input prices instead of increasing support and leaving price fixation to provinces. Instead of increasing support price and increasing administrative and corruption charges, the federal government should adopt fiscal and taxation policies that bring input prices down.

    This would benefit the small farmers in equal measure and add to their productivity. Secondly, the federation should now leave the prices of agriculture commodities, wheat included, to provinces, which now own the sector.

    It sounds strange that producers should be deprived of the right to fix price of their products. Punjab, to its credit, opposed increase in wheat prices but the federation unilaterally did the deed, creating a situation for provinces where they have no option but to follow the price or risk alienating voters. This is certainly bad economics.

    Courtesy: Dawn

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