Wheat: imports high, exports nil

The authorities reported that two flour mills have been blacklisted for importing substandard wheat from Ukraine unfit for human consumption. However, this is not the first time this has happened; in April, news surfaced of around 0.7 million tons of tainted wheat being imported from Ukraine and Russia.
Maybe its connivance with customs officials, maybe its negligence on the part of the exporting nation, but what is inexcusable is creating a situation where mills are importing wheat in the first place when there is a sizeable surplus.
In a previous article, (see The mismanagement of wheat, published April 17, 2015), BR Research highlighted that Pakistan is unable to find export markets for its 9.2 million ton wheat surplus. All the while, mills have been resorting to importing wheat owing to the unreasonably high support price.
Wheat pricing and procurement is both a provincial and federal matter. But for the sake of simplicity, lets use the federal governments price of Rs1300 per maund; this translates to Rs32.5 per kg of wheat. In the international market, the price of wheat is just around Rs20.3 per kg. As a result, we have a situation where, despite sitting on a huge surplus, wheat exports for eleven months ended FY16 have been $0.2 million, while wheat imports were $155 million. This is mismanagement at its finest.
This situation persists in spite of an export subsidy of $55 per ton to Punjab and $45 per ton to Sindh, and an import tariff of 40 percent. But that shouldn come as a surprise; an export subsidy of $55 per ton puts the price of Pakistani wheat at Rs26.9 per kg - a 33 percent premium to the international price. And the import tariff of 40 percent puts the price of international wheat at Rs28.4 per kg - a 13 percent discount to the local price. So why wouldn mills import wheat, and why wouldn our surplus stock go to waste?
Chairman of Pakistan Flour Mills Association, Mahmood Hasan confirmed that it is still cheaper to import wheat despite the 40 percent import duty. He added that the export subsidy of Punjab is set to expire on July 31 and Sindhs has already ended. Moreover, he estimated that the added cost of procurement from the governments end (transportation, storage, fumigation, bank interest, and so forth) is around Rs5 per kg. Although this cost is subsidized to some degree, it is nevertheless passed on to the mills, who then pass it on to the consumer.
What needs to be done is to bring down the support price of wheat. Not only will this make the life of the common man easier by reducing flour prices, it will also get rid of the surplus that is rotting away, bring in foreign reserves, and put an end to unnecessary wheat imports, all in one broad stroke.