3/4/22, 8:00 PM Another wheat crisis in the offing?

- BR Research - Business Recorder

%) UNITY
27.12
▼ -0.18 (-0.66%) WAVES
14.35
▼ -0.10 (-0.69%) WTL
1.82
▼ -0.02 (-1.09%
BR100
4,513
-4.1 (-0.09%) BR30
16,575
-101.3 (-0.61%) KSE100
44,551
25.6 (0.06%) KSE30
17,429
19 (0.11%)

Coronavirus
Pakistan Deaths
Pakistan Cases

LOW 30,248
▲
11 24hr 1,512,707
▲
953 24hr
Source: covid.gov.pk

Sindh
Punjab
Balochistan
Islamabad
KPK

569,338 502,264 35,361 134,519 216,614

Mar 04, 2022

PRINT EDITION ►
BR MARKETS ►
Dollar to PKR ►

Home Latest BR Research Markets

BR RESEARCH

Another wheat crisis in the offing?

BR Research Updated 01 Mar, 2022

Facebook Twitter

Whatsapp Comments

https://www.brecorder.com/news/40157857 1/7
3/4/22, 8:00 PM Another wheat crisis in the offing? - BR Research - Business Recorder

A urea shortage; lower cultivated area; and a war in Europe. Is another wheat
crisis in the offing? Not yet. Between now and June, PTI government can take
several pre-emptive measures to avoid a looming supply-demand mismatch
from morphing into a full-blown crisis. But it will have to do more than
merely announcing import plans from a country facing severe economic
sanctions from the West.

First, domestic stock situation at present is not nearly as bad as early January 2020, when
retail prices rose by 13 percent in less than a month. At that time, flour had virtually
disappeared from the local market for over a week, as administration failed to stabilize the
market due to low carryover inventory.

https://www.brecorder.com/news/40157857 2/7
3/4/22, 8:00 PM Another wheat crisis in the offing? - BR Research - Business Recorder

In contrast, according to BR Research estimates, Passco stocks rose by an estimated one

million tons (imported wheat) during Sep - Dec 2021, long after local procurement season
was over. These stocks had not been released in the local market till December close.
https://www.brecorder.com/news/40157857 3/7
3/4/22, 8:00 PM Another wheat crisis in the offing? - BR Research - Business Recorder

Meanwhile, provincial Food departments have released stocks at a record pace to stabilize
prices, with nearly two million tons released during the last quarter of calendar year. Local
grain market may not be flush, but it is not exactly experiencing a ‘shortage’ yet, either.

However, supply situation in the local market is exposed to several near-term risks. If
official stocks continue to be released at present pace, provincial governments will run out
of inventory by March end. Open market prices have begun to reflect this development, as
wheat and flour prices take divergent trends. So far, administrative measures have
ensured that retail flour price remains under control. On the other hand, rising prices in
the international market; demand from Afghanistan; and, forecast of lower output in the
upcoming season have created upward price pressures in the grain market, with wholesale
wheat price rising to Rs 2,500 per 40kg (or $350+ per ton).

Back in 2020, the (then novice) incumbents were faced with a similar predicament.
National output fell short of target amid pandemic-induced demand uncertainty. In March
that year, the PTI government foolishly announced a very high procurement target of 8
million tons, nearly one-third of national production. MSP was also raised marginally but
remained significantly lower than the open market price (or import-parity price).

As a result, farmers showed reluctance to sell at officially notified rate of Rs 1,400 per
40kg (or $220 per ton), forcing government’s hand to use coercive measures to meet its
procurement target. Secondary market prices for both wheat and flour spiralled out of
control, rendering officially notified prices irrelevant.

Has PTI learned its lesson? Last week, the ECC rejected a summary to increase minimum
support price over Rs 1,950 per 40kg. At $280 per ton, this base price is (once again)
significantly lower than prevailing prices in the international and local (wholesale) grain
markets. The federal government seems hesitant to raise the base price as it will in turn
either be forced to raise flour price at retail level (with inflationary consequences), or raise
the quantum of subsidy. Sounds like a wise strategy? Hardly.

Each time the incumbents have attempted to cap grain prices, they have learned the hard
way that market prices bow to no god except those of supply and demand. While wheat
prices may very well collapse during procurement season (May and June), they rise back

https://www.brecorder.com/news/40157857 4/7
3/4/22, 8:00 PM Another wheat crisis in the offing? - BR Research - Business Recorder

up again no later than September. Attempts are then made to calm the market by flooding
it with Food department stocks, only for prices to rise back up again once public sector
stocks start to run out.

If the government resorts to ‘proven’ tactics yet again, and caps MSP below market
clearing rate, it will only be fleecing farmers to no one else’s benefit. A lower local market
price will inadvertently create incentive for smuggling, a symptom of long-term
governance failure that is not going to be fixed overnight. Meanwhile, whether local
market faces a shortfall or not will depend on whether PTI successfully avoids falling into
the price control trap.

As odious as it may be, raising the official base price will be the right thing to do in the
present circumstance. Back in January 2022, BR Research had recommended that
government should raise the intervention price at least up to historic market equilibrium
range of $300 per ton (or Rs 2,100 per 40kg). BR Research’s earlier call to raise the
intervention price was based on steep differential between international and local prices,
which in the past has led to disappearances (euphemism for smuggling). Since then, the
outbreak of war between Russia and Ukraine – responsible for 30 percent of world exports
– has caused a fresh price spiral in the international market, reinforcing BR Research’s
earlier position.

But setting an intervention price need not imply that the public sector must expand its
footprint. Although it would be foolish to expect public sector to exit wheat market
overnight, especially now during a period of severe price volatility, government can still
lower its expenditure by drastically reducing the procurement target. As BR Research has
previously insisted, an intervention price is different from an MSP in that it only requires
administration to step in (to protect farmers) if the market price falls below threshold,
chances of which are extremely low in the upcoming season anyway.

By letting the private sector enter wheat procurement during harvest season, government
can both allow market price to settle at its fair value (which it reaches, sooner or later
anyway), and curtail leakages and disappearances, as incentive for smuggling will reduce
greatly. Retail price of flour shall very well rise – as it has become inevitable under present
circumstance, which governments can partially mitigate by continuing targeted subsidy

https://www.brecorder.com/news/40157857 5/7
3/4/22, 8:00 PM Another wheat crisis in the offing? - BR Research - Business Recorder

through Ehsaas, Utility Stores, and other avenues. Remember, a price spiral is not same as
a shortage. PTI would do well to heed lessons from 2020, and avoid the temptation to
dictate the market.

AGRICULTURE SECTOR FLOUR PRICE WHEAT CRISIS WHEAT PRICE

PAKISTAN

At least 56 killed, 200 injured in Peshawar bomb

blast

Another wheat crisis in the offing?

Outrage as Russian forces attack Ukrainian nuclear plant

Australian legend Shane Warne dies of suspected heart attack: Fox Sports

https://www.brecorder.com/news/40157857 6/7
3/4/22, 8:00 PM Another wheat crisis in the offing? - BR Research - Business Recorder

Oil rebounds on escalating Ukraine conflict

Rupee closes the week with marginal gain against the US dollar

Ton-up Imam-ul-Haq punishes faltering Australia in first Test

Xiaomi inaugurates smartphone manufacturing facility in Pakistan

Hubco's Narowal Plant engines develop fault, electricity generation halted

Firecracker explosion in India kills at least 11

PTV attack case: President Arif Alvi says does not want to avail immunity

US says Iran nuclear deal 'close' but not certain

READ MORE STORIES

https://www.brecorder.com/news/40157857 7/7