Farmers fear price crash on bumper wheat crop
AS wheat harvesting starts in Sindh, and procurement season begins in three weeks time, farmers have started expressing fears of a price crash. The official planners, however, think that these fears are unfounded and are based on the most optimistic crop estimate, which may not turn out to be realistic.
Besides, the government is ready for procurement of a substantial quantity and to provide insurance cover against any possibility of price crash. Officials claim that Punjab Food Department is prepared for procurement of three million tons, with back-up arrangements for 3.5 million tons, which can be stretched to 3.8 million tons. With 350 procurement centres throughout the province actively buying wheat, the possibility of price crash is remote.
The farmers, however, have their own fears, which are not entirely unfounded. They argue that the federal government expects a crop of around 25 million tons. By that calculation, the tradable surplus (traditionally 30 per cent) will come around 8.33 million tons. But the official agencies have fixed the target of 6.5 million tons – 3.5 million tons by the Punjab Food Department, 1.5 million tons by the Pakistan Agriculture Storage and Supplies Corporation and 1.5 million by the Sindh Food Department.
Thus, there would still be around 1.83 million tons of surplus wheat in the market even after meeting official targets. Even if the Punjab Food Department stretches its target to 3.8 million tons, around 1.5 million tons would still be left in the market, leading to a substantial price crash.
In free markets, perceptions matter more than reality. If the season starts with a perception of 1.83 million of wheat, which no one would buy, nothing would stop price crashing with a bang.
If official procurement target is raised to eight million tons instead of 6.5 million tons, the sheer announcement would stabilise the wheat market on higher side.
The government, instead of a knee jerk planning, should base its target on the crop size and tradable surplus. But, it does not seem to be the case this season.
The government has been aware of the prospects of better crop ever since the cultivation area under wheat increased from 20.06 million acres last year to 20.2 million acres this season – registering an increase of 1.6 million acres. But, it did not bother to correspondingly increase procurement targets.
‘The government must increase procurement target by at least 1.5 million tons to keep the price stable, psychologically at least,’ says Ibrahim Mughal of Pakistan Agri Forum.
The official explanation, however, is that all estimates are a wild guess: there is a possibility of bumper crop but it is not certain yet. In Sindh, where harvesting has already started, the grain is reported to be weak and less in weight. If that is the case in
The possibility of bumper crop and complaints about procurement targets are still theoretical. The situation would be clear in next one month are so when
The farmers’ fear of price crash not only stems from prospects of bumper crop and official procurement targets, but also from other two crucial factors i.e. current release price and behaviour of the private sector.
The Punjab Food Department is currently releasing wheat at Rs730 per 40kg – Rs220 less than its purchase price, which is only three weeks away. If a miller purchases this wheat from the Food Department now, store it for three weeks and then re-sells it to the department, he will not only be making huge profits but also create glut in the market, leading to a price crash. The Punjab Food Department has been pleading for increasing release price, but none of the governments in the last one month have conceded for the fear of social and political retribution.
Shahbaz Sharif’s government delayed decision arguing that if it increases price now, people would hold it responsible for the increase whereas any rise during procurement could be deflected on the federal government and the current governing set-up, led by the governor, is reluctant to take the risk. The craven indecision because of political expediency is badly rigging wheat market, and might lead to a situation where farmers and consumers end up paying the price.
The third cause of farmers’ fear is the role of private sector, mainly millers, in procurement. The millers always base purchase on two factors: size of official stocks and price crash. If the millers know that the Food Department would end up having substantial stocks, they would avoid purchase: why purchase wheat when one can get subsidised wheat from the official agencies. Exceptionally high interest rates would only keep them out of shopping spree.
With the millers out of purchase and lower official targets, the possibility of price crash will only become a reality. Once price crashes, the millers might return to the market. But they would not enter the market as long price hovers around officially declared Rs950 per 40kg.
Current international price, hovering around Rs700 per 40kg, is also a source of worry for wheat farmers: it would largely keep international buyers (mainly from
All these factors may leave the official agencies being the sole buyer in the country. With less procurement targets, these agencies do not have much margin of manoeuvering. They would not be able to go beyond a certain point because of gunny bag restriction, which are central to any procurement planning, and take months for processing (placing order, manufacturing and reaching the centres). The general liquidity crunch is also making it difficult for every one to arrange finances, the official agencies including.
These factors are creating the worst fears among farmers. If the wheat price crashes, it would be the third crop suffering in the last one year – cotton and rice being the other two – making a mockery of all poverty alleviation efforts by the government.
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