The wheat market jigsaw puzzle

Published: August 25, 2013
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In May 2013, Passco drove a campaign to buy wheat at official market prices and deprived both farmers and traders of their right to sell and hold surplus quantity in the hope of making more money in future. PHOTO: ABID NAWAZ/EXPRESS/FILE

In May 2013, Passco drove a campaign to buy wheat at official market prices and deprived both farmers and traders of their right to sell and hold surplus quantity in the hope of making more money in future. PHOTO: ABID NAWAZ/EXPRESS/FILE

ISLAMABAD: 

Consider these three news items as part of a jigsaw puzzle.

May 24, 2013. Pakistan Agriculture Storage and Services Corporation (Passco) Managing Director Major General Tauqeer Ahmed has cautioned in a statement that those growers who will hold wheat with them to fetch high prices in future may have an equal risk of bearing losses.

He warned farmers that wheat prices may fall after the government achieves its procurement target.

August 3, 2013. Passco has posted a net profit of Rs421.312 million in the financial year ended June 30, 2013 because of sale of wheat crop purchased from farmers, which is described as the best performance in the past five years.

August 2, 2013. Pakistan is set to become a net wheat importer this year with purchases climbing to the highest in five years after delayed planting and reduced fertiliser use hit domestic output and drove up prices.

Let me make it plain for you. In May 2013, Passco drove a campaign to buy wheat at official market prices and deprived both farmers and traders of their right to sell and hold surplus quantity in the hope of making more money in future.

In August 2013, it announced historical profits on the sale of same wheat crop, in addition to previous stocks, which it had purchased a few months ago from farmers. In other words, Passco made profits at the cost of farmers’ prosperity. With the tax income the government has received, it will now claim to dole out welfare to same individuals whose wealth it has stolen.

In the process, Passco distorted the market in many ways. Not only it intervened through an artificial price, it also disturbed normal market operations. Buy when it is plenty and cheap, sell when it is short and dear. This is the golden rule of trade, which attracts investment in commodities.

With its leveraged capacity created by the state, Passco disrupted this market function. It dissuaded farmers from investing and growing more wheat in future which led to reduced supplies. Result is already out – Pakistan will become a net importer of wheat, scrambling for food security for the world’s sixth most populous nation.

The planners have always defended active presence of state in commodity markets. A key rationale provided is price stabilisation. However, with Passco itself profiteering on the basis of price fluctuation, it has undone its fundamental rationale of price stabilisation.

The second defence of planners for commodity operations is always food security and strategic reserves. Let me turn this argument on its head as well.

When Passco became active, it took away incentives from farmers and traders to invest more in future, because premium profits come by holding, not by instant selling. Premium profits also drive up investments. In this manner, Passco has become a threat to food security, not an asset, by pushing small farmers out of market.

Can Passco be made a low hanging fruit? Nawaz government has yet to announce any bold measures to reform the economy apart from tax increases on the already taxed citizens. While it has made some plans to bring additional investment, it has not taken any solid measures to stop bleeding of economy.

Passco has always remained on the list of entities, which the state can do happily without. However, the new government has conditioned privatisation to profitability of state-owned enterprises. Paradoxically, with high profits made now, Passco has actually qualified for privatisation! It must be dissolved and privatised at the earliest to bring prosperity for small and poor farmers, move towards greater food security and stop taxpayers’ money going to waste.

The writer is Executive Director of Policy Research Institute of Market Economy (PRIME), a free market think tank based in Islamabad

Published in The Express Tribune, August 26th 2013.

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Reader Comments (5)

  • Aug 26, 2013 - 8:35AM

    Now may not be the best time to get rid of Passco. IMO it is better to deregulate wheat prices – no more official price. End fertilizer subsidies because those never reach small farmers anyway. Also they should start taxing the agricultural sector. If they manage to do all of this it will be a big achievement in itself.

    IMO replacing Passco with a glencore type private sector commodity giant is not a good idea. If Passco is to be privatized it should first be broken up into multiple competing companies. We don’t want a monopoly regardless of whether it is in the private sector or the public sector.

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  • Raza
    Aug 26, 2013 - 2:13PM

    I would like to know from the writer or any of the learned leader how does a procurement agency bar growers to sell to other buyers ? Does it not work the other way ? i.e. ensuring that growers are not blackmailed or exploited by the middle man or commercial buyers. On the contrary the procurement agencies actually exploit the tax payer by eliminating market risk for growers. So the tax payers actually pay for the subsidies provided to the growers, and then instead of getting a return for this, taxpayers end up paying more for the bRecommend

  • Tayyab
    Aug 26, 2013 - 6:47PM

    How will the small farmer attain nirvana in a completely free market? State support in agriculture commodities is practised on a far more extensive scale in the bastions of free market where the author (probably?) got his training. If a SOE loses money, push for privatisation because its losing money, if on the other hand it ends up making money push for its privatisation. Also I am yet to see any small farmer in Pakistan who knows that futures markets exist or who has the knowledge or resources to trade on these markets. This complete copy paste of concepts learnt from an alien market and an alien system to the local context is extremely worrying. The concern for food security is noted. I don’t really understand how PASSCO being wound up will have a positive impact on food security. All in all quite an incoherent article.

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  • Ali Salman
    Aug 28, 2013 - 10:51PM

    @Raza: I think part of what you said in terms of eliminating risks for growers is what I also suggested. Growers will have to face the market. However, PASSCO not only uses an artificially high price now but also in fact aided by the food department through inspectors. I agree with your point otherwise. However, we create a lot of negative and unfounded impressions regarding the middleman- who actually runs the entire market- and absent government, will run more competitively. When you make PASSCO or any other agency a middleman, safe from fluctuations, you are ensuring market will fail.

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  • Ali Salman
    Aug 28, 2013 - 10:57PM

    @Tayyab- I wont let you worry too much about where I got my free market training but I can assure you that my every day experiences- including being an entrepreneur and above all a subject of the Pakistani state- have convinced me of the same. And I do believe in universality of certain principles- though local solutions and applications vary. However your idea of futures is a good one and should be a step forward for our farmers. Beginning has already been made in the shape of couple of commodity exchanges. It will take long time for small farmer even to appreciate this!

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