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The State Bank of Pakistan (SBP) has said that growing wheat stock is posing one of the major policy challenges for the government. According to SBP's annual report, the country's wheat stock with procuring agencies continue to surge and reached 5 million tons in May 2016, which was almost 50 percent higher than the May 2015 level. The government, through its designated agencies, procured more than 5.9 million tons of wheat this year. Last year, these agencies were able to procure 5.3 million tons.
High support price provided a considerable financial incentive for wheat growers. As a result, not only the area under wheat reached a record high level for the third successive year, production also increased to 25.5 million tons very close to the highest-ever output of 26.0 million tons realised in FY14, it added.
Interestingly, this was yet another year when wheat production exceeded domestic consumption, resulting in a further build-up of wheat stocks in the country. Therefore, disposing off this excessive stock has now become a major policy challenge for the government
According to SBP during FY15, federal and provincial authorities announced a combined subsidy amounting to $90 per ton for exports of 1.2 million tons of wheat. Despite this incentive, only 7 percent of the export target was met. The situation remained more or less unchanged during FY16, when the government maintained the export subsidy at the FY15 level, but set the export target at 0.6 million tons. The actual exports reached only 8,000 tons 1.3 percent of the target during FY16.
This year, the difference between the domestic and international prices has grown even wide. Although the government maintained the wheat procurement price at Rs 1,300 per 40 kg, subdued global prices further enlarged its premium to more than 70 percent, from 65 percent last year. The wheat procurement price of Rs 1,300 per 40 kg translates into $310 per ton (at exchange rate of Rs 104.4 per $). In comparison, the US Hard Red Winter Wheat was traded at an average rate of $179 per ton in FY16.
Moreover, the global wheat price is not expected to rebound anytime soon, as global stocks, already at record level, are expected to grow further due to better crop harvest. In this situation, the government is finding it difficult to dispose of the growing stocks, despite hefty export subsidy.
The inability to get rid of this large stock also entails costs, eg, escalation in funding expense, pilferage, and quality deterioration because of pest and fungus infestation. This means, the desire to protect wheat growers from falling global prices has led to a policy trade-off where both maintaining or selling wheat stocks entail substantial costs, the SBP said.

Copyright Business Recorder, 2016

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