As Pakistan braces for a shortfall in wheat output, will price of bread and roti be the only casualties? As global commodity markets indicate, prices of other food commodities – especially grains and cereals – have also come under pressure due to the crisis in the Black Sea. But does the same whole true for grain prices in the local market?
Readers may recall that the 2020 inquiry report into the last wheat crisis identified use of wheat for poultry feed production as one of the major contributors to the price spiral. Major cereals – whether rice, maize, or wheat – are used as inputs for silage and feed production to varying degrees, depending on price and availability. A rapid rise in maize prices during mid-2019 pushed feed mills to switch to wheat grain, depleting wheat stocks held by the public sector.
The situation is diametrically different in 2022. Public sector wheat stocks are running low, amid forecast of low wheat output in the upcoming harvest season. Meanwhile, Pakistan witnessed record corn production last year, with reverberations of similar performance for the 2021-22 season (both autumn and spring corn crops). Reportedly, Pakistan has also been exporting limited quantities of corn in recent years, both in the form of grain and as silage preparation. Given upbeat maize crop forecast, can a wheat shortfall force corn prices to run amok as well?
The correlation between various local cereal prices is not very straightforward. Intuition demands that as wheat and rice are alternate cereals (for human consumption), an abnormal increase in price of one commodity would give rise to substitution effect. Surprisingly, local rice prices appear to trend virtually independent of wheat prices, possibly due to peg with international market. Remember, Pakistan exports almost half of rice production, and exchange rate depreciation means that rice prices only slide in one direction in local currency (at least since mid-2018).
Meanwhile, due to limited foreign trade of wheat and corn and high tariff on imports, local prices of the two commodities don’t always traverse in lockstep with international markets. Local wheat prices, in fact, are more strongly impacted by the timing of government wheat procurement and release operations, where administration becomes the price setter in the market for at least six months in a year.
But local wheat and corn prices still display some level of synchronicity. On various occasions over the past four years, wholesale price of each commodity as tracked by PBS appears to either act as leading or lagging indicator for the price of the other.
One intuitive explanation for the phenomenon is their use as substitutes in livestock and poultry feed/silage preparation. Another theory insists that because corn is a higher volume and lower price grain, mills sometimes include it as an input in flour production to increase output and average-out cost. Note that mixing of corn is strictly prohibited under officially sanctioned definition of wheat-based flour, and any such incidence if true may not be more than in the ratio of 1:5 to ensure the sanctity of its composition. Lest the change in quality attracts consumer attention.
But if the practice is rife (even if) on a small scale, will wheat output shortfall impact local corn prices significantly? The question merits both attention and research.
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