Cheap flour: a brief overview of market forces

Cheap flour: a brief overview of market forces

Wheat is the main staple food for 250 million Pakistanis, eaten at least twice a day. All governments have sought to ensure wheat availability since the 1950s and rely on minimum support prices and procurement plans to maintain strategic reserves through domestic and imported wheat purchases.

Except for a few years, the country has witnessed an increase in the price of wheat flour. During such a crisis, neither wheat nor flour disappeared from the market, rather nefarious players created price spikes due to “protectionism” in wheat policy. Since the 1950s, Pakistan has spent trillions of rupees and billions of dollars to ensure wheat affordability through inefficient policies. The economic cost of this flawed policy has finally been paid by the public.

Protectionism through indirect subsidies neither developed the flour industry to compete in the international arena nor helped wheat growers. Consumers are always at the mercy of the flour manufacturing cartel. The real market economy is inactive and debt related to commodity operations runs into billions of rupees. The current economic scenario is a wake-up call for policy makers to choose to overhaul policies and stop massive extraction of resources.

From July 2023 to March 2024, Pakistan imported about 3.64 million tonnes of wheat. Despite government procurement from growers at an all-time high support price, large quantity imports worth $1 billion show that existing policies have failed to encourage an increase in domestic production.

On the other hand, the procurement policy has caused losses every year. The federal and provincial governments release their stocks to flour mills at subsidized prices to ensure the availability of flour in the market but frequent flour crises reflect the failure of that policy, which is contrary to the market economy.

It is time to give freedom to growers to cultivate their choice of crops such as high value oilseeds or other crops and let all stakeholders in the wheat sector compete in a healthy manner. The current drop in flour prices may prove short-lived, but it carries a strong message for policymakers to move away from support prices and procurement policies. If the recent arrival of low-cost imported wheat has corrected the market price, let it run its course and cancel the old policy.

Disadvantages of import and export ban

Price volatility: Bureaucratic decisions to ban the export or import of wheat regularly in response to local price fluctuations can lead to uncertainty and volatility in the domestic market.

Exports of wheat flour and its value-added products should be kept open to attract private sector investment and after completion of the local harvest, wheat imports should be allowed until the start of the new sowing season. This will eliminate hoarders and stabilize flour prices.

Market distortions: Import and export bans, and large government acquisitions of stocks disrupt the natural flow of wheat, leading to inefficiency and misallocation of resources. However, smuggling must be dealt with with an iron fist. Shortages: Import bans can exacerbate shortages in the domestic market, especially during times of high demand or poor harvests.

Reduced competition: Restrictions on imports and exports reduce competition, allowing certain actors, such as state-owned TCP and Passco, to make inefficient imports, or well-connected individuals to manipulate the market.

Rent seeking and manipulation

Profit motive: Government officials and well-connected individuals can exploit their positions to profit from the wheat trade, whether through commissions on imports, hoarding or price manipulation.

Corruption: Corruption is often endemic in such systems, with officials accepting bribes to facilitate or influence wheat imports, exports or resource allocations.

Black or parallel markets: Import and export bans can lead to undocumented wheat trade with a reduction in tax collection and further price distortions.

What should the government do?

The federal government spends a huge amount each year to get wheat from growers through Passco. Provincial administrations also set their support prices for procurement through the food department, which incurs high costs including ancillary charges and stock theft.

In addition, the commodity is damaged due to lack of proper storage as often stocks are seen lying around in the open air. Rains and floods destroy stocks along with the theft of grain stored by corrupt officials.

To overcome all the financial costs mentioned above, the government should do the following: One – the private sector including traders, flour millers, commercial exporters and importers should be allowed to obtain wheat from the domestic market or make imports subject to a compulsory stock keeping policy. About 10% of the commodities should be stored in Passco and TCP warehouses subject to payment of market-based rent for a period of one year.

Two – Stock can be replaced with new ones from time to time. Three – Flour millers and commercial exporters should be allowed to export flour against storing 10% of the wheat stock in government-designated warehouses. Four – Importers can also import against the same 10% stock allowed to exporters. All interested parties will sign an agreement with Passco and TCP that in the event of any shortage, the government can purchase the stored commodity at the cost of buying local or imported wheat. This will help the government build a strategic reserve stock without any financial cost.

Five – Passco and TCP will store stock in warehouses according to international grain storage standards and will smoke periodically. The private sector will pour investment into grain storage in modern silos while flour mills will export wheat flour, refined flour (Maida), semolina and other value-added products.

Six – A special quota for Afghanistan according to the consumption of their population is allocated to the private sector through open bidding because the dollar rate in Afghanistan is less than in Pakistan.