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Reforming faulty wheat policy




  • Recently two articles came out in Dawn – one titled “Flawed wheat policy” that argued that the wheat policy was flawed because there was more reliance now on the private sector. The second article titled “Distortions in wheat marketing” said that the wheat policy remained flawed because of exactly the opposite reasons — lack of enough reliance on the private market.

    Wheat policy: problems and issues Recently there was an editorial also in the newspaper, which argued that liberalization of import of wheat has been inappropriate. Instead, more stringent steps should have been taken to rein the hoarders.

    This article demonstrates that a phased reform is underway to promote private sector’s constructive role in wheat marketing.

    The overriding objective of the reform programme is to promote efficient markets for wheat in order to ensure market-based incentives to farmers. Progress in reform has already produced positive results.

    The government intervenes in the wheat market, through procurement and sale. The provincial food departments (PFDs) sell majority of their wheat stocks to private flour mills at the official release (or issue) price. Until recently, the government sometime imposed controls on movement of wheat for fulfilling procurement target at an announced price, which was supposed to be guaranteed minimum (floor) price. Last year the practice of ban on wheat movement was discontinued. It now announces floor price at which farmers can sell voluntarily.

    Until recently, issue price included an element of subsidy. Trends in procurement, release and wholesale prices show that the issue price was only occasionally below the procurement price and never higher than the procurement price plus the margin necessary to fully cover marketing costs. This means subsidies were incurred, paid mainly by the provincial governments for domestic procurement, for keeping flour prices for consumers under control.

    Until recently, the subsidy by provincial governments has been substantial (see the Table ).

    Subsidies for imported wheat were made by the federal government. The PFDs buy imported wheat from the federal government at the same release price at which they sell domestically produced wheat to private millers.

    So, the difference between the import cost and the price paid by the PFD are met by federal subsidy. For the year imports are made, the subsidy payment per ton has been quite variable, ranging between Rs300 per ton and to Rs2,000 per ton.

    As the Table shows, total subsidy payments have fluctuated dramatically, as a result of both variations in per ton subsidy and the level of imports.

    During 2003-04, the total import was 1.5 million tons and the total subsidy was more than Rs12 billion. Thus the size of the total subsidy has been enormous – more funds were spent on wheat subsidies to consumers than public expenditure on crop, livestock, forestry and fisheries combined, for producers.

    The objective of the reform programme is to change intervening role of the government and use market based approach to attain two policy goals that the government pursues now — food security (ensuring availability of food at affordable price to consumers) and guaranteeing a minimum price to the producers.

    The proposed reform programme will eventually change radically the role and functions of public food agencies, which will only confine to policy-making, monitoring food situation, executing a regulatory framework and maintaining a strategic stock of wheat.

    The essential elements of the new policy are as follows: a) A clear distinction will be made during stock build-up between guaranteed minimum price (fixed and announced before sowing season) and procurement price (variable and dependent on market conditions). b) A strategic reserve (initially one million metric tons [mmt]) will be maintained for price stabilization and for emergency purposes, and this should be distinct from the operational stock to be used for regular releases to market during transition to new wheat policy, targeted allocations for specific groups (e.g. military) and targeted food for the poor. c) Government may, through a body of experts, determine a price band for wheat procurement and marketing, of which the lower end is dictated by the objective of providing incentives to growers and the upper ceiling is pre-determined to serve the interest of the consumers. Within this price band, the private sector will be allowed to function freely and unhindered. d) The existing food subsidy programmes for the underprivileged will be extended to carefully target the poorest of the poor. e) Import and export of wheat is open to the private sector. f) Producers of wheat are free to sell either to government procurement agency or to private sector. g) A strong forecasting and information system is being devised to provide timely information to policy makers and transmit signals to the private sector.

    Results of the new policy: The new market-friendly wheat policy has already produced some positive results. No restriction on movement of wheat was placed, growers voluntarily sold at the guaranteed minimum price and a distinction was made between operational reserve and strategic reserve.

    Private sector actively participated in the market and as a result growers got good price for their output. Private sector’s total purchase from the market has been nearly two million tons (compared to 1.3 million tons last year). Sindh bought the targeted amount. Punjab Food Department and PASSCO also bought as much operational reserve as these agencies aimed for.

    Only in one area, the implementation of the policy diverged from the plan and the result fell somewhat short of expectation.

    Punjab and PASSCO could not procure as much as these agencies had planned for in building up their strategic reserves. According to the original design of the policy, after reviewing the result of purchase at GMP, a high-level committee would review the total purchase and if purchase had fallen short of target, the committee would decide to buy the rest at the market price to fulfil the target. This did not happen.

    Although a committee was formally set up for Punjab for that purpose, no action was taken by the committee in time. This illustrates once again the inherent limitation of the government to react quickly to market and act flexibly.

    However, there is no reason for despair, because overall stock position (in both public and private hands) is much more than last year and the actual price trend in the wheat market indicates adequacy of supply in the market.

    The most effective way to influence the price of a commodity in the market is to increase its supply (assuming its demand in the short-run remains unchanged). The price in the short-run also can be influenced by expectation (which actually works through seller’s behaviour in withholding or releasing supply in expectation of price movement in the future).

    Keeping these facts in view, the government took the right step in influencing the market by liberalizing import of wheat through the private sector to increase overall supply position.

    So far, almost 900,000 tons have come to the market through private imports and along with releases from the private sector, wheat prices have stabilized. The new wheat policy has thus worked effectively – so much so that there is now weak or no demand from flour millers for wheat from the public sector and so far releases from the government stock both in Sindh and Punjab has been negligible.

    Both the provinces are expected to end up with sizable stock for the coming year. Import through private sector has not required that the federal government provides any subsidy.

    Considering all these facts, the government is now taking follow-up steps to consolidate and sustain the good results already obtained. The experience of past year’s programme and the lessons learned will be carefully reviewed and discussed and further stream-lining and strengthening of the wheat policy will be made on the basis of lessons learned.

    In the future, the provincial food departments and PASSCO will compete with the private sector on equal terms in the wheat market.

    In line with the change in policy, provinces are in the process of preparing restructuring plan for its food departments. Provincial food departments are in the process of recruiting consultants to help them to prepare action plans that will include reorganization of the department, elimination of general food aid and substituting it with directed food subsidy for the deserving poor.

    The government plans to move in a phased manner, keeping some controls in place in the interim to ensure food security and price stability. The government will keep a vigilant eye on the market and plans to gradually withdraw from an active role, letting the private sector take over the primary responsibilities for procurement, storage and marketing.

    Federal Ministry of Food, Agriculture and Livestock and the provinces will adhere to key principles and concepts that underlie the phased reduction in the size of public procurement: a) The government will be only one of the players in the wheat market. The purpose of public procurement will gradually shift from that of maintaining a large operational stock that dominates the market to a strategic reserve, which will be used for price stabilization and for intervening in the market in emergency circumstances.

    The strategic reserve will be managed efficiently and cost effectively on commercial lines. The operational stocks will be reduced in size as the private sector takes over, so the main stock that public agencies will hold in the future will be the strategic reserve b) The provinces will adopt no coercive measures to ban wheat movement from one place to another between districts and provinces, or to force sales of wheat to public agencies. c) The private sector will be free to import wheat, and export by the private sector will take place without hindrance, subject to the tariffs and anti-dumping rules under International Monetary Fund and World Trade Organization agreements.

    (The writer is joint secretary, federal ministry of food, agriculture and livestock).

    Courtesy : The DAWN

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