Ungainly wheat procurement

Despite apprehensions of crop shortages following the devastating floods last year, production outlook for wheat in Pakistan remains robust.
Against an approximate annual demand of 22 million tons, production for the year is estimated to be between 23-24 million tons, implying excess wheat production.
Local prices are currently hovering between Rs25-Rs28 per kg.
Despite the seemingly fair market dynamics, the government went ahead with wheat procurement again this year, at about 6.57 million tons.
At Rs950 per 40 kg, the support price offers Rs23.75 per kg to local farmers. This is lower than the prevalent prices in the domestic market, and thus, the so-called benefit of offering a lucrative price to small farmers is far from apparent.
Besides, storage facilities for the procured wheat are insufficient, and there are fears that some wheat might be damaged in the absence of adequate storage space. Adding to the ado are the hefty bills for wheat procurement. The Economic Coordination Committee recently approved Rs165 billion bank guarantee for wheat procurement, instigating IMF concerns, since the current outstanding amount on account of commodity operations was already at Rs293 billion as at March 12 2011, in addition to the high interest charges of commodity financing. Together, these clog market liquidity considerably.
Given these scenarios, no rational being would deem procurement to be a viable option when the authorities have neither the financial nor storage capacity to procure the grain, and nor are market prices too low for farmers.
But rationality does not seem to be the factor influencing this decision. In a previous conversation with BR Research, Dr Ashfaque Khan, Director General & Dean NUST Business School, alleged that wheat procurement was supported by lobbies of big farmers and middlemen, while the small farmer continues to suffer.
When market prices are high, middlemen may be able to obtain wheat at much lower procurement prices and sell them for a higher price in the market.
An analogous situation to the above has recently vexed farmers in Sindh, where, in the absence of procurement setups, traders are fleecing farmers by buying wheat at rates even lower than the support price and selling it at higher rates in the market.
A better option would, perhaps, be to facilitate growers to sell directly to the market, without any intermediary, to let market dynamics take control.
A recent praiseworthy step is allowing wheat exports to international markets, which helped ease the burden of commodity financing to a considerable extent this fiscal year, especially since international prices are currently higher than the local support price at over $340 per ton.
These are expected to go up further due to increased demand from Japan on fears of food contamination, and lower expected wheat yields due to dry weather conditions in the US.
However, exporters should be encouraged to directly purchase their supplies from growers to enable better market dynamics to take lead.
Thorough monitoring of the stock position can also be of help in deciding limits of allowable exports, and the right quantity of buffer stock that might need to be procured.