Wheat crisis looming

By Asadullah Kamran

This isn’t Pakistan’s first rodeo concerning shortages of critical commodities essential to sustaining a stable economy, in this case wheat. These shortages are addressed through imports at the expense of the taxpayers due to basic mismanagement and inability to make decisions addressing future concerns. We might be in for another episode. This year doesn’t seem to bode well for the country either, and we’re not really having a good start. The active political strife, rising global commodity prices, climate change and now to cap it all off we might be facing a wheat shortage in the upcoming months which builds on the already long list of issues. Wheat is absolutely critical for any economy, it’s essentially the fuel that keeps people going and in turn the economy going. We only need to look at Africa and realise the absolute importance of wheat in a country’s food security. Shortages have the potential to quickly turn into crises. It should be categorised as a top priority item considering the fact that Pakistan has a huge middle class population that spends a significant portion of their earnings on food (i.e flour). An increase in price of a critical commodity stokes inflation and reduces an individual’s residual income to be spent elsewhere, essentially having an adverse impact on the whole economy.

“Due to lower area and reduced fertiliser application, marketing year (May/April) (MY) MY23 wheat production is forecast at 26.4 million metric tons (MMT), four percent lower than last year” predicts the report “Grain and Feed Annual” from the US department of agriculture.

Wheat imports according to the same report are estimated to be 1.5 MMT in MY23 to make up for the predicted domestic shortage, whereas the work done by BR Research indicates a shortage of between 3 to 6 MMT, based on future yield predictions. Either way a wheat shortage is on the cards and how the government deals with it is an important question.

First time? Nah.

Although generally speaking Pakistan is an agrarian economy just based on the figures of employment and overall contribution to the GDP. Then it would be safe to assume that Pakistan has the ability to address its domestic demand ? Wrong!

There was a massive sugar crisis last year, kicking up a lot of dust in the political arena for PTI, not to mention the distress and difficulties consumers faced sourcing this daily used commodity. Likewise the Pakistani consumers have witnessed shortages in wheat as well, an equally important staple if not more.

Pakistan back in 2020 had also imported wheat to the tune of 300,000 tonnes to ad-

dress a growing flour shortage crisis. Likewise last year due to untimely rains in the harvesting season, compounded by a host of other factors caused another shortage triggering the government to import around 1.3 million tonnes of wheat.

The continuous cycle of shotages is likely to persist and potentially aggravate in the future as well. Pakistan’s wheat output has not kept pace with local demand, causing the country to transition from a wheat exporter to a wheat importer. Climate change, a shortage of high-yielding research, population growth, water supplies, cultivable land and a little rise in support fees have all contributed to the shift.

Supply and demand

Consumption is expected to reach anywhere between 27 to 30 MMT in MY23 depending on which estimates are used. According to the latest reports from the US Department of Agriculture the consumption of Pakistan is estimated to be at 27.6 MMT, whereas according to BR Research consumption levels are expected to be 30 MMT. As earnings rise and consumers change to greater protein intake, growth in wheat flour-based goods is declining. However wheat still remains the major grain, accounting for 72% of Pakistan’s daily calorie intake and a per capita consumption of roughly 124 kilograms (kg) per year, one of the world’s largest. The Federal Committee on Agriculture (FCA) established a target of 28.9 million tonnes of wheat output for MY23, up from 27 million tonnes last year. Contrary to that, wheat output in MY2023 is expected to be 26.4 MMT according to numbers from the US department of agriculture, down 3.6 percent from last year. This is due to a 2.2% decrease in harvested area to 8.98 million hectares which has been announced by the Ministry of Finance. Apart from this a slightly lower average yield has also exacerbated the matter. Farmers additionally experienced shortages and higher-priced inputs during planting and throughout the crop development phase. Consequently, lowering the area and yield forecasts. The application of urea fertiliser was also reduced due to a lack of availability and excessive pricing. Despite the government’s plan to achieve its production targets for the MY23 harvest, the GOP has offered a support price of Rs 1,950 per (40 kg). The new price is Rs 150 more than the support price of Rs 1,800 from previous year. The GOP expected that the price hike would encourage farmers to produce more, with the eventual objective of meeting the national production target for wheat and avoiding imports. Historical evidence has shown time and time again that the rise in the support price is insufficient to cover increasing fertiliser, energy, and petroleum prices.

The government’s attempt to meet targets

The agricultural industry is critical to the country’s economic growth, food security, job creation, and poverty reduction, especially in rural areas. It contributes 19.2% to GDP and employs around 38.5% of the workforce. Due to this fact the industry is highly regulated, and farmers have to be educated on modern methods and techniques to maximise yields. This intervention has however upset the market forces of supply and demand that determine the price of a commodity. To encourage farmers to produce wheat the government offers to buy the excess stock at a predetermined support price. The current support price stands at Rs 1,950 which is up by Rs150 from the previous year. Although the price has been increased it hasn’t been enough to prevent a black market trade for the commodity. At present global supply chain issues, combined with the Russian-Ukrainian war where both countries have been international exporters for wheat, the prices are going up all over. This support price of Rs1950 per tonne is much lower than current international and local wholesale grain market pricing. The Federal Government is hesitant to raise the base price since it will be compelled to either raise the retail price of flour or increase the subsidy amount, neither is an ideal outcome. Resulting in smuggling across the country to get better prices abroad like in Afghanistan which is fast becoming a huge market for the local agriculture sector. An additional issue that has been adding pressure on the support price is hoarding and the farmers’ uncooperative attitude to selling their produce at the designated support price.

Solutions

How the government plans to overcome this shortfall has to be calculated and surgical to avoid any backlash from the opposition or the general public. It can be done through a number of ways that primarily rely largely on imports. The government organisation PASSCO (Pakistan Agricultural Storage and Service Corporation) is responsible for maintaining strategic reserves of the grain to avoid any shortages. However as things stand now according to government ministry officials “wheat stocks in the country stand at 3.3 million tons”.

Assuming a monthly demand based on the official annual target of FCA, this would mean a monthly demand of 2.4 million tonnes, our strategic reserves would barely last five to six weeks based on these estimates.

The announcement by the Prime Minister to import two million tonnes of wheat from Russia echoed similar sentiments regarding an impending shortage; however, the news came without a set timescale and was regarded as a measure to shore up the country’s strategic stockpiles. Although as of now it wouldn’t be wise trading with Putin’s Russia in the greater interests of the nation regardless of price.

According to BR Research, Pakistan’s wheat import cost can potentially reach $4.25 billion in the “worst-case scenario” for FY23, with the likely anticipated import bills ranging from $2.5 to $3.5 billion. These estimates are based on probabilities derived from historical trends.

Although the import bill might leave a hefty dent in the balance of trade, it can be overcome. The main source of concern in a volatile commodities market, however, isn’t really variability in pricing. The willingness of suppliers on such extreme price levels to match demand of a state with a massive purchase order is where the issue lies.

The government can alternatively place minor orders through traders, shoring up the reserves whilst keeping the interest of the suppliers. However, PTI at the moment does not have a lot of political capital to spare, and can face backlash in the likelihood that international prices go down in the future, essentially paralysing the government’s ability to make risky decisions.

A long term and somewhat apparent solution to the issue would be if the government was to raise the stipulated support price to match the international market rate. Although at the moment the government is not in a position to be making bold decisions.

By increasing the support price according to analysts at BR Research to the previous market equilibrium range of $300 per ton or Rs 2,100 per 40kg. The suggestion to increase the intervention price was based on the large price difference between international and local pricing, which had previously resulted in smuggling.

The government has to make hard decisions and it shouldn’t be paralysed by fear from the opposition from making those decisions. At the moment the oppositions party as well as the ruling party are prioritising politics over national interests. Critical decision making processes should be given the utmost attention, especially when time is of the essence. n