Supporting the wheat crop
It happens every year. First Pakistan exports wheat and then the country faces a shortage, causing the government to import it.
This nonsensical game of commodity musical chairs takes place every year because the agriculture ministry, as well as the commerce ministry, do not seem to have understood the dynamics of neither the international commodity markets nor the constraints and failures of the domestic market for wheat.
This year’s mess was further exacerbated by the fact that the government set the support price for wheat at far above the prevailing international market price. This has managed to serve as a stimulus to the rural economy and will likely buy the PPP-led administration more than a few votes in the 2013 elections.
But it also serves as an incentive for governments to continue to try and distort the market – not to correct genuine market failures but to further their own political agendas. The decision to double the support price has resulted in a large surplus crop of wheat. Unfortunately, with the government’s logistical capabilities being somewhat limited, and there being a severe shortage of storage capacity, this simply means that the country will end up exporting the surplus wheat.
One might be tempted to view that as a good thing, except that in the latter half of the year, the government will then import wheat, at a time when prices will likely be higher, to meet what will have turned into a shortfall. The reality is that support prices for agriculture are, at best, a stop-gap measure.
The only long-term solution involves improving rural infrastructure to allow more efficient markets to grow in agricultural commodities. Until that time, however, the least the government can do is to stop the surplus-export-import wheat policy for political gain.
This nonsensical game of commodity musical chairs takes place every year because the agriculture ministry, as well as the commerce ministry, do not seem to have understood the dynamics of neither the international commodity markets nor the constraints and failures of the domestic market for wheat.
This year’s mess was further exacerbated by the fact that the government set the support price for wheat at far above the prevailing international market price. This has managed to serve as a stimulus to the rural economy and will likely buy the PPP-led administration more than a few votes in the 2013 elections.
But it also serves as an incentive for governments to continue to try and distort the market – not to correct genuine market failures but to further their own political agendas. The decision to double the support price has resulted in a large surplus crop of wheat. Unfortunately, with the government’s logistical capabilities being somewhat limited, and there being a severe shortage of storage capacity, this simply means that the country will end up exporting the surplus wheat.
One might be tempted to view that as a good thing, except that in the latter half of the year, the government will then import wheat, at a time when prices will likely be higher, to meet what will have turned into a shortfall. The reality is that support prices for agriculture are, at best, a stop-gap measure.
The only long-term solution involves improving rural infrastructure to allow more efficient markets to grow in agricultural commodities. Until that time, however, the least the government can do is to stop the surplus-export-import wheat policy for political gain.