The mystery of rising wheat prices

Imagine if wheat was not regulated domestic prices would have settled somewhere near the average international prices

When participants of the Pakistan Democratic Movement (PDM) rally last week were asked why they were there, most of them cited inflation as the sole reason. For citizens, inflation is about energy and commodity prices. While prices of electricity, gas, petrol, sugar and vegetables have all affected the lower socioeconomic strata, what has affected them the most is the price of wheat and flour.

The price of a 20kg flour bag in many areas has climbed as high as Rs1,500-1,600 (with a few pockets still selling at Rs880), whereas the wholesale wheat price has risen to Rs2,400 per maund. This reflects a 90-100% increase over last year’s prices. What’s the reason behind such a massive increase?

The domestic wheat production fell short of the government’s projection of 27 million tons, by 1.7 million tons. But this shortfall is less than the monthly wheat consumption of the country and far too low to lead to almost doubling the price. There has to be more to the story.

Imagine if wheat was not regulated and it was a free market, the domestic prices would have settled somewhere near the average international prices i.e. approximately around Rs1,500-1,700 per maund. This means that a 20kg flour bag would be easily available for Rs850-950. But owing to a highly inefficient wheat subsidy and price control regime, the flour is now selling at almost double this price.

The government’s wheat intervention inherently pursues contradictory objectives of farmer support and consumer affordability. Without incurring huge fiscal costs, this is an impossible balance to achieve, the pursuit of which creates distortions in the market.

Besides this fundamental flaw in the wheat policy, there are four main reasons behind the present crisis. Firstly, the government inaccurately projected the wheat production estimates and it was only in September when it realised the real magnitude of the deficit. The international prices in the meanwhile had increased by $50 per ton, imposing an additional cost of $75 million just on the account of this price increase, for the 1.5 million ton of wheat imports that were previously not forecasted.

Secondly, the support price was announced without any regard to international prices, exchange rate, inflation and farmers’ cost of production. The wheat support price was maintained at Rs1,300 per maund from 2016-19, and marginally increased to Rs1,400 this year. In the meanwhile, the exchange rate has climbed from Rs104 to Rs163 per US dollar, while the international wheat prices have increased from $187 to $284 per ton.

Thirdly, as a result of this unrealistic support price, the government fell short of its procurement target by a massive 2.3 million tons. The government procurement, which is meant to support farmers, became a coercive exercise to meet the government’s procurement targets. The flour mills were stopped from procuring, which rushed to the market as soon as the government procurement concluded.

Lastly, even when the government decided that the TCP would import 1.5 million tons of wheat, the import process was painfully slow to make a dent in market prices.

Mismanaging this crisis any further could have huge political costs for the government. In the long term, the only viable solution is to do away with the current government intervention in the wheat market and let the market run freely. The government should only invest in a strategic reserve, procuring wheat at market prices, while keeping a minimum support price in place to prevent the market from crashing.

But in the short term, there is a need to aggressively release wheat in the market from the government stocks to stabilise the prices, while ensuring speedy imports to meet the needs of the approaching crunch season from December onwards.

Published in The Express Tribune, October 20^th, 2020.

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