Wheat output: steady won’t cut it

According to this news reports, wheat support price for upcoming rabi harvest has been set at Rs1,400/40kg in an ECC meeting held last week. Earlier, target for wheat procurement was set at 8.25million tons, up by a massive one-third compared to last four-year average.

On the supply side, that’s good news. As the harvest closes in, increasing support price this late into cultivation will manage precious little in increasing output for the ongoing season. Nevertheless, what it may ensure is that come harvest, a higher share of total output is sold to government procurement departments, resulting in adequate supply to flour mills.

Recall that last year, factors exogenous to crop production played a role in wreaking havoc on wheat market, even as the national output target was only missed by mere five percent. On one hand, rupee devaluation suddenly made domestic produce attractive in international market, incentivizing smuggling through Afghan transit. On the other hand, inadequate availability of corn for poultry forced feed millers to substitute it with wheat. Together, these multi-faceted triggers were enough to drive the staple price 12 percent higher compared to previous season.

Now that the currency has stabilized (or had, until Covid-19 triggered another round of panic), it is clear that the government is aiming to eliminate the arbitrage opportunity by increasing domestic procurement rate. Moreover, since approximately 40 to 50 percent of output is consumed on farm, a higher proportion of the remainder 12million tons will make its way to provincial food departments.

Except, higher notified rate will also drive price in domestic market upwards, as it is used as a base price by market players. Consider also that according to a report issued by UN-FAO in the first week of March, national output target for the ongoing season is also set to be missed by nearly 7 percent.

This is bad news for supply in the domestic market. Based on UN-FAO’s estimate, although total production will record an uptick of 3 percent over the previous season, a downward revision this early during the season does not augur well for the crop. Meanwhile, market reports from southern Punjab of heavy rainfall over the past fortnight suggests crop has already faced some damage. If last years’ experience is any guide, untimely precipitation during April could cause crop lodging, dramatically reducing yield.

This means that the staple grain is in for a bumpy ride for the rest of the calendar year. While COVID-19 may suppress demand for most things, consumption of subsistence items such as flour is expected to remain stable – if not higher – as people spend more of their savings to ensure provision of survival essentials.

While it is fortunate that the federal government had set a significantly higher procurement target, the next step in this challenge will be to ensure adequate disbursement of earmarked funds to provincial food departments, which procure the lion’s share – over 75 percent – of total target. If provincial governments become increasingly liquidity-strapped due to diversion of funding for pandemic mitigation, meeting procurement target may become increasingly tenuous. What is clear, however, is that wheat and flour prices will continue their upward trajectory in the months to come.