Yesterday, Islamabad announced its Wheat Release Policy for 2021-22, fixing the issue (release) price of 40kg grain bag at Rs 1,950. The price is ‘seemingly’ 32 percent higher than last year’s issue price, which was set at Rs 1,475 per bag. However, it is only 8 percent higher than government’s wheat purchase price – the minimum support price paid to farmers – which had been fixed at Rs 1,800 per 40kg for the harvest season April – June 2022.

To put the record straight, media reports claiming that the government has ‘abolished grain subsidy’ are misleading. According to a press statement by the finance minister, per bag cost of procurement during FY22 stands at Rs 2,050. This includes incidentals such as cost of gunny/jute bags, silos/storage cost, administrative expenses and, debt servicing on bank loans to finance procurement operations.

Last year, when [full] cost of procurement stood at Rs 1,575 per 40kg, release price was fixed at Rs 1,475 per 40kg. Thus, the administration rightfully claims that subsidy amount per bag – Rs 100 per 40kg – has remained unchanged. The incumbents’ PR machinery is leaving no stone unturned in convincing the public that wheat price increase is purely a result of commodities supercycle in the international markets. Although such glossing over of facts may appear necessary to some, it misses two crucial aspects.

One, that the government is forced to increase the issue price now only because it deemed fit to raise the minimum support price in the first place, despite repeated advice against the same. Earlier, minimum support price had stood at Rs 1,400 per bag, which was raised by Rs 400 per 40kg bag during the latest harvest season. Back in October last year when MSP of Rs 1,800 was first recommended, international commodity prices were still reeling from pandemic induced bears, trading under $240 per ton, well within long-term range.

The increase recommended in MSP at the time, thus, had no basis in global commodity market trends, and was purely intended to prop up farm incomes. Because the administration is eventually forced to pass on the increase to end consumers, MSP is akin to a transfer payment from consumers to farm economy, de-merits of which have been discussed in this space previously. (Read “Increasing MSP: Playing with fire”, published on 02 November 2020).

Second, the rate of increase in issue price (32 percent) over last year is higher than rate of increase in support price paid to farmers (28 percent). While support price was increased by Rs 400, issue price has risen by Rs 475 per bag. Put differently, cost of incidentals is now Rs 250 per bag, compared to Rs 175 last year, which represents welfare loss due to inefficiency. Consumers are thus not only paying a higher price to growers, they shall also pay a higher price for administrative mismanagement.

Which brings us to the question: will flour prices now increase as a result? In recent months, open market wheat trading has already been taking place at well-above Rs 2,000 per 40kg bag. As the government has fixed a lower rate, it may not necessarily lead to an increase in secondary market prices. An increase will follow only if market players had expected a lower release price.

Although Pakistan Flour Mills Association had demanded issue price of Rs 1,875, the lobbying group was clearly playing hard ball. By standing its ground, the administration has saved the exchequer from an incremental loss of Rs 10.3 billion, which would have taken form of a subsidy; without guaranteeing lower prices for consumers. Read, “Flour Prices: trouble beckons?” published on 15 September 2021)

But this does not answer the question whether the price could have been fixed at a different level? At prevailing exchange rate, the issue price translates into $285 per ton. This is at parity with wheat price in international markets, implying that even if MSP had not been raised, domestic consumers would not have been able to purchase wheat at a lower price. Why then is the government constantly receiving criticism, as if it has committed a mortal sin?

The original sin, of course, is the very existence of MSP. Without going into hidden costs of administrative mismanagement and disappearances of grain stocks maintained in the public sector, the steep rise in MSP also causes substantive welfare loss to domestic consumers in the medium to long run. How?

Once the short-lived bull run in global commodity price is over, international market prices will eventually return to saner territory ($200 - $250 per ton). That may happen as quickly as by calendar year-end, or may take as long as 18-months. At that time, wheat will become much cheaper in international markets, but local market prices will have increased irreversibly. If subsequent governments then refuse to further increase the MSP, farmers will shift to alternate crops, reducing the output. And so, the cycle shall continue. (Read, “Wheat: the full story”, published on 28 October 2020)

At the risk of boring regular readers: raising MSP in response to international prices may offer farmers one-time abnormal profits at the expense of consumers. But it does not guarantee sustainable productivity gains; leads to welfare loss; increases subsidy outlays; nor allows consumers to benefit once international prices fall.

Has PTI treated Pakistan’s wheat sector any differently from past governments? Not at all. And that maybe the very heart of the problem.