Pakistan Needs A Market-Based Solution To The Recurring Wheat Crises

Pakistan Needs A Market-Based Solution To The Recurring Wheat Crises
Despite being the seventh largest wheat-producing country globally, Pakistan has failed to develop a competitive wheat market. To ensure enough and smooth wheat supply, the country relies on Pakistan Agricultural Storage and Services Corporation (PASSCO) to procure wheat at the Minimum Support Price (MSP) from the farmers. The MSP is determined by the government based on the wheat supply and demand forecasts. This year the federal government has set Rs. 1650 per 40 kilograms as the MSP.

Will the announced MSP solve the problem of the wheat crisis permanently? The answer is a big no, for several reasons. One, the MSP is lesser then the respective prices in neighbouring countries (see table below). The lower price and therefore lower returns for the farmers will only encourage smuggling of wheat to neighbouring countries and consequent price escalation in local market.


Table: The Wheat Market in Asian Countries

India (USD) Iran (USD) Nepal (USD) Pakistan (USD)
MSP per Ton 260 140 240 80
Cost of production per HC 165 120 310 198
Market price 250 160 169 330
Cost of living 203 160 230 94
International price Per ton 221 221 221 221


Second, the MSP benefits only 5 per cent of the landlords. As the government buys only a fraction of the wheat produced at the MSP, the remaining 95 per cent of the farmers either do not sell wheat or are forced to sell at lower price in the market. Third, economic theory considers MSP as inefficient because it puts an extra burden on all consumers at the cost of few producers. Fourth, the MSP involves subsidizing; procurement of wheat from farmers and its release to the millers. This puts heavy financial burden on the federal budget which the nation bears by way of taxes.

PIDE has extensively researched this subject over the last few decades. Researchers have long argued that the current wheat procurement system, storage of wheat by government owned PASSCO and distribution leads to periodic miscalculations and has inherent informational and market inefficiencies.

Research suggests the following: One, wheat subsidy goes to only those farmers who own land; most of the farmers in Pakistan who do not own land are therefore not eligible for the bardana-brown bags - the bags used by the government to procure wheat. Thus, mostly the large landholder, the middlemen and the millers, who operate in grey areas, benefit from the MSP. Small farmers cannot sell directly to government. He sells through the middleman who buys at well below the MSP to make a heavy profit for his service.

Two, the large landholder manages to get hold of most of the bardana – the specific brown bags which are distributed by the government for procuring wheat. Thus, in essence mostly the big landlord manages to sell wheat to the government at the MSP.

Three, the wheat market has not developed due excessive involvement of the government. It is not surprising that this market, off and on, exhibits a situation of either excess supply or excess demand every few years. This has been amply demonstrated in all countries that run government-controlled markets (for instance, the former Soviet Union and other centrally planned economies).

Four, to procure wheat from farmers the government borrows from banks at a certain interest rate and then does not have enough money to repay timely. Thus emerges the circular debt of wheat which is ultimately born by common man by way of regressive taxation.

Five, under the terms of obtaining wheat from the government at controlled rates the flour mills are obligated to produce 65 per cent of flour from the wheat procured from government at subsidized rates, but they do not fulfill their commitment and instead produce other by-products, like suji and maida which can then be exported or sold locally at better prices.

What then is the solution to the wheat crises which emerges every now and then? The government should gradually step out of the wheat market and let the market forces work. The amount spent on subsidizing wheat through the MSP can be put to alternate uses like; developing physical infrastructure and agricultural research for better seed quality. However, to avoid extreme fluctuations in flour prices, the government will have to keep an eye on supply and demand of wheat.

The government should withdraw from fixing the MSP for wheat, framing; wheat export policy and the policy regarding the support price regime. The government's role should be to encourage R&D, monitor quality, and maintain buffer stocks to stabilize the market in case of extreme shortages. The fear that wheat shortages will occur is only a myth because shortfall in demand can always be met through imports at a short notice. The country is already importing several food items. And in case of shortages, which are likely to be rare, wheat could be just one of them. The will of the government to import as and when required will keep hoarders in check and therefore the potential of shortage as well.