In January 2021, Pakistan recorded lowest food inflation level in nearly two years. While many - correctly – pointed to the high base effect from last year, food inflation returned to upward trajectory the very next month, February, when the year-on-year base effect should have been strongest (food inflation had touched 10-year highest in Feb-20). As international food commodity prices continue their bull run since the great pandemic crash, will domestic food inflationary pressures slowdown any time soon?

Enter wheat – with its nearly four percent weight in national CPI basket. While international prices have rallied in the past three quarters, domestic prices have found some semblance of normalcy since Oct-20. While some commentators attribute this to import of 2.9 million tons, an all together different variable may have helped knock senses in speculators and traders: the forecast of wheat support price for upcoming harvest season March-May 2021.

Recall that last October, the ECC raised wheat support price level from Rs 1,400 to Rs 1,650 per 40kg, showing cognizance of increasing cost of production for domestic farmers. However, the farming community largely deemed it ineffective, insisting that support price be set equivalent to landed cost of imports. Based on PBS reported figures for imports made during 7MFY21, that would come out at Rs 1,760 per 40kg. Meanwhile, the Sindh government played another gambit: it recommended wheat support price level of Rs 2,000 per 40kg to the federal government.

Impressively, the federal government stood its ground and resisted pressure to woe farming vote – including from within the ruling coalition – to match support price recommended by Sindh. Despite 12 percent rise in global wheat prices since that time national prices have remained stable. But will the calm continue?

Its hard to be certain. Yesterday, the food department of GoS notified the support price level at Rs 2,000, referring to a decision taken in provincial cabinet meeting on February 11th. Sindh government’s strategy appears to be two-pronged: one, to prove PPP’s pro-farmer credentials; and, second, to meet the provincial procurement target, after ban on inter-provincial trading by Punjab was overturned by court last year. Impressive political play, but will it pay off?

Documents made available from ministry of NFS&R show that under Rules of Business following 18th amendment, the support price setting mechanism for wheat crop had been retained at the federal level to ensure national food security. Although the provision may appear counter intuitive to the spirit of devolution – considering agriculture is a devolved subject – since 2011, wheat support price has been routinely announced by the Centre, ‘in consultation with the provinces.’

Before it is pointed out, the comparison with sugarcane support price does not hold as the MSP for that crop has historically been fixed by provinces since at least 1973. While any federal ministry’s Rules of Business fall under purview of constitutional courts, and the Sindh government remains free to mount a legal challenge, the precedence of intervening period – that is 2011 to 2020 – shall tilt in favour of the Centre.

While an argument can always be made that MSP level must be set equivalent to international prices to discourage hoarding and smuggling – especially at a time of global price spiral – historic context must be emphasized. While international commodity prices may see a return of bears, as they did between 2013 and 2018, domestic support price level are never revised downward, not only rewarding the inefficiencies in domestic agricultural practices, but also ensuring that consumers never benefit from global commodity busts due to restrictions on import (historically).

Moreover, it must be emphasized that past governments could afford to ignore trends in global markets and increase support prices (which led to surplus production & procurement) because the exchange regime was rigged. Now that the exchange regime is market based (and intends on being so), increasing support price levels permanently while the currency regime is also market-based will serve a double whammy to domestic consumers; as domestic prices will rise each time currency depreciates in order to discourage smuggling and shortfall.

There are no easy choices available to the federal government. Because the international prices are on a bull run, it will risk missing procurement targets if MSP is not support at parity. Whether it has the spine to take a long-run view in the interest of larger population remains to be seen. The Sindh government has made its first move. By timely challenging it in the court, the Centre can seize back initiative. But it must do so quickly before harvesting and procurement begins. Tick tock.