Wheat is a staple food of the people of Pakistan and a strategic commodity, therefore supplying flour, wheat or grain to a population of 220 million people should be an uphill task, especially when land use for food production is limited and under multiple restraints.
The purpose of this article is to analyse a few of the causes of rising wheat prices in the country during this crisis.
Total land area of Pakistan is 882,000-kilometre square, or about 80 million hectares, out of which only 22 million hectares (27.5%) are under cultivation. The rest of the land area is cultivable waste, densely populated forests, and rangelands (FAO in Pakistan, 2020).
Target: The federal Government Committee on Agriculture has set a target of production of 27.3 million tons of wheat from 9.2 million hectares in 2020 (Sadiqqui, 2020), which in view of Mr. Siddiqui, Pakistan’s agriculture will miss its target.
Share in GDP: The share of Agriculture in the GDP of Pakistan is only 18.9% in 2020 (Ministry of Finance, Government of Pakistan, 2020). It is interesting to note that the share of wheat, rice, sugarcane and maize is only 4.5% of the GDP of Pakistan. Other crops contribute 2.0% to GDP, which in turn means that the rest 12.4 % of agriculture contribution to Pakistan’s GDP does not come from farming but other cash generating activities like cattle farming, horticulture, off-farm economic activity etc and when we take out the share of rice, sugarcane and maze from the 4.5% of farm output, we are left with an insignificant contribution of wheat production to Pakistan’s GDP.
Productivity of land: The 9.2 million hectares producing wheat are 42.3% of the entire cultivable land area of Pakistan and 27.3 million tons of wheat would mean 0.33 tons production per hectare. Average production of wheat per hectare around the world between 2013 and 2016 was 4.5 tons per hectare (Rachel Purdy, 2018). In other words, Pakistan’s land productivity for wheat production is 4.17 tons less than the world average.
Per Capita production: When we divide these 27.3 million tons of wheat with 220 million population, we get. 0.12 tons per person per year. So much for food security. Further if we divide these 0.12 tons within twelve months, we get 0.01 tone per person each month. So much for the supply of wheat in Pakistani market from domestic sources.
We have already discussed the land productivity in the country, now let us discuss the cost of production and supply chain management for wheat in Pakistan.
Price Policy: The Government of Pakistan controls the support price of wheat and fixes this support price with the view of either supporting the farmer (producer of wheat) for economic reasons or the consumer for political reasons. In March 2020 Government of Pakistan (PTI) increased the minimum support price of wheat to PKR 1,400 per 40 KG. (Rana, 2020) or PKR 35.0 per KG. The Government has deferred its decision to enhance this minimum support price to PKR 1,600 per 40 KG, or PKR 40 per KG.
It should be noted, here, that the theory of free market economics underlines that if the support price is less than the market price, then, the market demand would be more than the market supply and there would be shortages in the economy. On the other hand, if the support price is less than the market price, the market demand would be less than the market supply and therefore there would be surpluses in the economy. In this case, there has to be shortages because the mill owners would not want to release their production in the market.
In addition, there is news about smuggling of flour (and wheat to Afghanistan or India. This would be true if the market price of these items in the foreign market is more than the price in the domestic market. If the accusations of smuggling are true then the government has to be accused on two points. First that its machinery has less control over its borders and therefore cannot control smuggling out of the country, and two, its prices are less than the international prices therefore do not suit the suppliers to sell in the national market at that price.
Cost of Production: It is pertinent to note here that over a number of years, the cultivable land around major cities of the Punjab has been taken over by housing societies pushing the cultivation of agricultural products including wheat to further (from the cities) and less productive land). This has in the first instance, increased the freight cost of transporting agricultural produce from the fields to the mills and subsequently the market.
When we take the different costs of producing wheat as approved by the government of the Punjab in 2019-2020, the average cost for every 40 KG of wheat at the mandi (wholesale market) gate is PKR 1081 (Government of Punjab, Pakistan, 2020) or a little more than PKR 27 per KG. This would mean that the farmer should be getting PKR 8 profits after sale to the mandi and if support price is increased, will get PKR 13 per kg.
Market Price: “A survey conducted by Profit found that flour mills had stopped the supply of flour when the price of wheat reached PKR 2,450 per 40 Kg in the open market. Due to which, a 20 kg bag of flour – previously PKR 880 – was being sold at PKR 1,500” (Omer, 2020) In other words flour was being sold at PKR 75 per KG in the market. The Pakistan Flour Mills Association (PFMA) in May 2020 increased the ex-mill price of flour to PKR 900 or PKR 22.5 per KG (Omer, PFMA increases flour price by Rs120 per 20kg bag, 2020). In other words, the mill owners and the middlemen were getting a revenue of PKR 4.5 on the average per each KG of flour sold.
Import of wheat: Because whether conditions in the country lowered the yield to 22.0 million tons from the estimated 27.3 million tons of wheat, therefore in June 2020, the Government of Pakistan has given permission to the private sector to import 2.5 million tons of wheat from abroad (Doniey, 2020). The import was at an international price of US $ 282-285 per ton (Omer, Pakistan fears growing wheat shortage, price hike as imports fall, 2020) of wheat which at current exchange rate of PKR 162 to 1.0 dollar would come to an average of PKR 46,000 per ton, or approximately PKR 51 per KG.
In conclusion, it is seen that the productivity of land producing wheat in Pakistan is extremely low (0.33 tons per hectare) when wheat production contributes only between 2.0% to 3.00% to the country’s GDP. The per capita production of wheat in the country is not enough to sustain food security in the country (0.01 tons per person per month). As per price-policy of PKR 35 per KG gives an incentive of PKR 8 per KG to the farmer, when the cost of wheat is PKR 22.5 per KG to reach at the mando gate. At the same time the mill owners sold (supply) to the market four at the rate of PRK 22.5 per KG (including cost as well as profits to the mills) while the consumers (demand) were forced to pay PKR 75 per Kg for flour in the open market. Increase in support price to PKR 40 plus cost of import of wheat at PKR 51 per KG would certainly push the market price of flour for the consumer upwards, or would increase the impact on taxpayers.
Who would gain? In the current situation it is clear that the consumer as direct demand or as tax payer that subsides this extra cost would be the losers. Nevertheless, those who are going to be the winners in this scenario would be the middlemen at the mandi, or the mill owner or may be the foreign exporter of wheat to Pakistan as well as the private sector that would import this much needed for the country product.