Editorial : Wheat surplus - Thursday 7th April 2011

REPORTS that farmers are expected to harvest a bumper wheat crop this season is a definite boon from a food-security point of view. Coming a year after devastating floods, the bumper crop is expected to be around 25 million tonnes, comfortably exceeding projected domestic consumption — pegged at 22 million tonnes but somewhat elastic because of smuggling to neighbouring countries. Yet, there is a dark side to this otherwise sunny picture. Thanks to the government`s pledge to purchase 6.57 million tonnes of wheat through Passco and the provincial food departments at a guaranteed price of Rs950 per 40kg, the state is going to shell out Rs165bn to purchase wheat this year. The sum will likely be extended by the State Bank of Pakistan as conditio- nal funding. The logic of support-price mechanisms through the use of state resources has long been questioned by independent economists and bankers. Yet, they continue to exist because the ECC, which determines the policy, is stacked with agricultural interests who benefit from high support prices. From a fiscal point of view, it makes little sense to have the State Bank extend loans for the sake of a wheat crop that will likely stay in the same range of production with or without the support price. But so powerful are the groups which benefit from support prices that even if the State Bank were to deny funding, the government would simply turn to the private sector — further crowding out private-sector investment.
There is a more tangible cost of the support-price mechanism: wheat, a staple food crop, has far more people on the consumption side than on the production side. High support prices mean that the price of wheat will be distorted upwards, even when the tradable surplus exceeds the procurement target. With food insecurity threatening swathes of the population and inflation rampant, surely public interest demands the support-price mechanism be discontinued or substantially reformed. Short of financing purchases directly, the state could take on a regulatory/oversight role. Almost anything would be an improvement on the present system — but is the ECC willing to sacrifice a lucrative racket for some in order to benefit the many?

Source : http://www.dawn.com/2011/04/07/wheat-surplus.html

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