Pakistan raised the support price for the upcoming wheat crop to Rs1200 per 40 kilograms ($312/ton), up 14 per cent over the existing price of Rs1050 per 40kg ($292/ton).
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USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S. GOVERNMENT
GAIN Report Number:
Government of Pakistan Increases Wheat Procurement Price
Grain and Feed
Richard Todd Drennan
Government of Pakistan raised the support price for the upcoming wheat crop to Rs1200 per 40
kilograms ($312/ton), up 14 per cent over the existing price of Rs1050 per 40kg ($292/ton). The
increase will not have any immediate effect on current flour prices, but rather will occur next August when the
government starts releasing wheat stocks to flour millers at the new rate. Government’s decision will also
increase the level of circular commodity debt, increasing pressure on an already fragile economy.
On November 22, the Government of Pakistan raised the support price for the upcoming wheat crop to Rs1200
per 40 kilograms ($312/ton), up 14 per cent over the existing price of Rs1050 per 40kg ($292/ton). According to
an official statement, the support price was increased on a recommendation by the Ministry of National Food
Security and Research (NFSR) stating that in order to ensure sufficient domestic production, farmers need help
in offsetting the increase in the cost of inputs. It’s interesting to note that on November 19, Secretary NFSR
informed USDA during a meeting that the wheat procurement price was currently being analyzed, and gave no
indication that the increase was imminent.
Belated Announcement Raises Doubts about Government Intentions
The decision to increase the procurement price was made after about sixty percent of the current wheat
planting was completed. According to farmers’ organizations, the government is two months late in its
announcement as it will have less influence on farmers’ decisions. Pakistan’s wheat planted area has decreased
by five percent during the last two years. It is however interesting to note that in spite of reduced area Pakistan
has been able to maintain a steady production level. This is due to better yields as a result of the deposition of
rich soils due to floods and availability of new wheat varieties.
The government’s decision to increase the procurement price has aroused suspicions from different quarters.
Trade and milling industry view the announcement as a political rather an economic decision. It’s viewed as an
apparent attempt by the government to appease its rural based constituency to gain support in the next year’s
upcoming general elections. Increasing support prices is perceived as a move to help the party win back rural
voters estranged due to multiple issues ranging from a deteriorating energy crisis to a dwindling law and order
Government sources indicate that NFSR and the Agriculture Policy Institute, after a detailed analysis and
consultation with the provinces, had initially proposed to the government to retain last year’s procurement
price because the price of fertilizer was the same as last year. However, NFSR later had to revise the proposal
bowing to the political influence.
Concerns regarding Increase in Food Inflation
The increase in the wheat procurement price will not have any immediate effect on current flour prices, but
rather will occur next August when the government starts releasing wheat stocks to flour millers at the new
rate. The flour prices have risen by 60percent since 2008 and are likely to rise by another 14 percent in August
of next year (Graph 1). The graph also indicates the increase in the government procurement price has always
resulted in a proportional increase in price of flour.
Circular Commodity Debt Likely to Increase
Food inflation isn’t the only disadvantage of higher wheat price. It will put additional burden on the government
to borrow more funds from banks to cover its wheat procurement operations and storage of costs.
Pakistan maintains a government controlled wheat marketing system. The Federal government guarantees
financing for the purchase of wheat and sets a ceiling price in an effort to provide incentives to farmers. Bank
loans are utilized to procure, hold, and maintain stocks of wheat. Provincial governments take on more debt to
buy wheat from the new crop every year. The borrowed amount is in addition to the outstanding loans and
mark up from last year. This has resulted in a situation where the outstanding amount continues to increase,
creating the phenomena of circular debt. According to latest data, commodity debt increased to $4.5 billion
dollar by end of June 2012. Government’s decision to increase the procurement price will also increase the level
of circular commodity debt, increasing pressure on an already fragile economy.
This year, the government procured 5.7 million tons of wheat; however it has yet to announce a procurement
target for the next crop. The government will need about $1.8 billion to procure wheat if it decides to maintain
the previous wheat crop’s procurement level.