Raising paddy procurement price

The government has fixed the procurement price of paddy at 700 rupees per 40 kilograms. The obvious question is: why has the procurement price been raised in spite of the fact that rice output is expected to be 10 percent more than last year, due mainly to land diversion in Punjab and Sindh from cotton production to rice; and about 4.1 million tonnes of rice surplus, in excess of domestic consumption, is targeted to be exported to earn valuable foreign exchange?
The answer is to protect the growers whose input costs are no longer being met due to the decline in the domestic price of rice from 800 rupees of Irri-6 per 40 kg to 550 rupees. The government has, therefore, stepped in to ensure that the growers remain protected. The government's detractors are likely to allege that this decision reflects the political compulsions of the present government rather than economic need. However, it is pertinent to note at this stage that any rise in exports must be supported given the abysmal foreign exchange reserve position today.
Rice is likely to emerge as a major foreign exchange earner for Pakistan in the current fiscal year as far as primary commodity exports are concerned. Exports of primary commodities declined from 44 percent of total exports in 1980-81 to 11 percent in 2006-07 and 10 percent in July-March 2007-08.
This decline is symptomatic of a structural change in the economy with exports of manufactured goods rising over time. At the current juncture in our economic history Pakistan needs valuable foreign exchange and it is hoped that the rice surplus that is forecast would provide the country with some valuable foreign exchange.
Earlier this year there were food riots in several countries where rice and flour were a staple food item in protest against the rise in their prices world-wide. Some of the immediate causes of the price spike for rice are similar to that of other crops: the cost of fertiliser, closely related to energy prices, is the most obvious.
Futures speculation by financial intermediaries may also have played a part, though rice futures trading is almost insignificant compared with other major crops. Since then the price of rice has been declining in the international marketplace.
Be that as it may the restricted nature of the international rice market makes its price highly volatile as less than 6 percent of global production is traded internationally mainly because most countries produce, first and foremost, to meet their own consumption needs. However a downward trend in price has been clearly visible since the 1980s mainly because of a reduced demand and an abundance of exportable surplus, notably in Asian countries.
While an exportable surplus in the short term can increase price instability in the international market however rice remains highly susceptible to climate risks with a poor monsoon year wreaking havoc on the crop output, exchange rate fluctuation, and the dichotomy between harvesting that takes place two to three times a year and consumption which is throughout the year. The government would, therefore, be well advised not to count its chickens before they are hatched.