To the federal cabinet secretary in charge of the wheat inquiry committee: Happy hunting, sir.

Afterall, if a target has already been painted on the backs of private sector importers prior to the commissioning of the inquiry, then why bother going any further. Let’s be clear: yes, by importing wheat during the months leading up to harvest, traders in the private sector have made abnormal profits – some even more than 50 percent(on FOB Khi cost). Commission an audit of importing firms, impose a super tax on their abnormal returns, and be done with it.

But that’s just the tip of the iceberg. And only a naïve (or compromised) observer would insist there is no need to dig deeper.

The blame game over wheat imports is a shrewd attempt by the ruling party to distract the public. Yes, that’s right. Insatiable as they may be, private-sector importers are not responsible for the collapse in the price of wheat. That fault squarely lies with the Punjab government.

Protesting farmers would also be well advised to not lose sight of the ball, and keep a razor-sharp focus on the only question that matters right now: is it lawful for the provincial government to take actions that actively precipitate a collapse of grain prices, causing growers to incur business losses?

The explicit objective of the state’s grain procurement policy is to stabilize market prices. To this end, it enforces price floors, in the form of a guaranteed purchase mechanism known as minimum support price. Yes, it is true that the government is not obligated to purchase wheat from every farmer who wishes to sell to it. Neither does the law require the state to prefer small-hold growers over large, nor does it compel the government to purchase in specific quantities.

In fact, the provincial procurement arm – the Food department - is free to lower or raise the procurement target, as it deems fit. For as long as it meets one condition:

Once a support price level is announced, the government must see to it that market prices do not fall below it. If they do, the administration must intervene such that open market prices stabilize above the government price floor.

What then would happen to market prices, if overnight the Food department of the largest province - traditionally responsible for two-thirds of the buying- determines that it is going to retreat from its procurement functions? Instead of stabilizing market prices, a decision to suddenly pull out of the market would result in a completely contrary outcome.

Punjab’s decision to lower buying has in fact destabilized the market, causing wheat prices to collapse in a matter of days.

Don’t buy it? Look at the evidence. Throughout Sep 2023 to March 2024, wheat imported by the private sector was priced in the narrow band of FOB Karachi cost of Rs3,200 – 3,425 per 40kg. Yet, despite the substantive (and publicly known) volume of imports, the price of wheat in the local wholesale market remained north of Rs4,500 per 40kg until the beginning of April 2024 (source: AMIS, Punjab).

By this time, not only had the imported wheat made its way to the domestic market, local grain mandis were also awash with Sindh’s crop where harvest was near completion. Yet, neither of these events had a discernible impact on lowering local market prices, which remained well above the expected guaranteed purchase price of Rs4,000 per 40kg.

In fact, local market prices only began to fall precipitously in earnest after Eid ul Fitr, when the Punjab government ‘delayed’ its buying, first under the pretext of heavy rains, and then reportedly due to higher moisture content in grain. By April end, the provincial administration finally admitted that the high inventory financing cost, last year’s carryover stocks, leakages due to weak monitoring, and debt burden were behind its restrained buying. Instead, the provincial Food minister noted that direct cash transfers under Kisaan card would better serve the goal of targeting subsidy to the most vulnerable communities: the small growers.

That admission single-handedly sent the open market into a tailspin.

It does not matter whether in the past the Food department procured from small farmers or big landlords; nor is relevant that traditionally, large farmers have been the primary beneficiary of the policy. While extending the safety net to small farmers is a worthy goal, that has never been the objective of state intervention in the grain market. As this section has explained previously, the government’s guaranteed purchase price functions as the reference rate for private-sector transactions. Without it, there is no alternate market clearing mechanism.

Let’s try to understand.

Up to half of the wheat produced in the country stays on farms, either for food/feed uses, or seed requirements. Of the surplus that makes its way to the market, one-half was previously procured by the provincial Food departments within eight weeks of harvest, while the remainder half would be traded between private sector participants over subsequent months. If the public sector ceases procurement, the available surplus in the market during the peak harvest period would double instantly.

As of today, no private sector player has the capacity to absorb this surplus. The largest flour mill in the country has a storage capacity of less than a hundred thousand metric tons. Over the past five years, the Punjab government annually procured four million metric tons of grain on average. That’s a difference of forty times! The market value of grain procured by Punjab last year was Rs 450 billion. For context, that’s higher than the annual turnover of OGDC, or that of all Fauji Foundation group companies put together.

Simply put, Pakistan’s private sector market participants simply do not have the financial depth or investment capacity to stabilize the market right now. More importantly, it also lacks appropriate storage capacity and the infrastructure such as silos or grain elevators to handle the surplus stocks. Its market access is also restricted, meaning it cannot make speculative investment to export the grain, since wheat export is banned altogether.

The downstream industry is also underdeveloped and does not have the value-addition capacity to process the grain into higher value, longer shelf-life products such as confectionary or cookies (beyond what can be sold to the captive local market). And most importantly, at existing historic markup rates and stable currency outlook, few private sector participants would have the investment appetite to take exposure on a commodity, which by the way, isalso trading at a discount in the international market.

Why is this significant? Because reducing public sector intervention is a necessary but insufficient condition for efficient functioning of markets. The efficient functioning of commodity markets is premised on ensuring a balance between the bargaining power of sellers (farmers) and buyers (traders, mills). Currently, this balance is skewed heavily in favor of the buyers, as growers do not have the holding power to carry the surplus inventory in the face of adverse market conditions without engaging in distress selling.

Grower’s inventory carrying capacity is not only contingent on the availability of adequate storage infrastructure where grain can be held without compromising its quality, but also on two more crucial elements: access to credit and risk management instruments, and, access to information.

The first ensures that in case farmers choose to hold on to their inventory, they have adequate access to liquidity to continue farm operations for the following season. Farmer access to formal credit – as is well known – is non-existent. Two, if farmers are to compete with the international market, they must have access to minimum revenue protection in the form of crop insurance or forward contracts.

But most importantly, there must exist a degree of information symmetry between market participants. In an efficient market, producers must have some visibility of expected future prices, and an ability to take a ‘selling’ or ‘holding’ position based on their expectations for the future.

Compare this to the local market, where price volatility is so high and the flow of information so broken that market prices fell by over a third in just a fortnight, without any meaningful change in future demand trend or consumption patterns.The fact that market rates persisted at abnormally high levels over international prices until the end of March 2024 is proof of information asymmetry.

Without the existence of efficient markets, the government cannot decide to quit its regulatory role of ensuring market stability cold turkey, never mind how inefficient the old, guaranteed purchase mechanism may have been. Right now, in fact, the government’s behavior has turned into a source of disruption for the market. Which begs the question: to what end?

Excess carryover stocks are not a novel occurrence. In fact, in 2018, the same PML-N government went on a buying spree and procured 6MMT, despite historic opening stocks of 5.85MMT held with the public sector. That year, the Trading Corporation of Pakistan had to offload the surplus inventory by allowing exports against a per ton subsidy of a hundred dollars. Afterall, no way could buying be delayed in the runup to general elections which at that time were only months away.

It is difficult to believe that this time round, the decision to scale back has been taken purely out of a need for fiscal responsibility. There is some indication that promises have been made to multilateral agencies to restrain the buildup of the commodity operations debt going forward. But that could have been achieved by clearing up the unsecured, hardcore debt overhang rather than abandoning the state’s role to maintain price stability.

Similarly, there is also the matter of past commitments made to the World Bank under the SMART program to always limit Punjab’s reserve stocks up to a maximum of 2MMT. The donor program expires June 2024, and most of the funding available against the $300 million facility has already been availed.

Or maybe, the motivation behind exiting grain procurement without advance notice was to deliver shock therapy to growers and push them en masse towards the private sector led electronic warehouse receipt regime, which so far has failed to gain traction.

Regardless of whatever prompted Punjab’s decision to exit procurement, it is troubling that such a transformative break from past policy has been dealt with in a ‘classified’ manner. If an in-principal decision has been taken to exit procurement, why hide behind lame excuses such as untimely rains, use of the Bardana app or moisture level? The issue pertains to food prices, not a covert operation to take over occupied Kashmir. If the policymakers actively avoid transparency, then it is only natural for media and public to sniff around for the three vile Cs – conspiracy, collusion, and corruption.

It is baffling why Pakistan’s decision-makers – both civilian and the not-so-civils – refuse to be honest about their policy intents and engage in a public conversation about the trade-offs arising from various policy options. Why, for example, could it not be stated out loud that the procurement mechanism had outrun its useful life; that it benefited banks and flour mills more than the farmers and consumers. Crucially, why must policy input on reform be limited to listening to what the bureaucrats and consultants have to say? Rather than engaging the real stakeholders in an open conversation over how a better outcome could have been achieved, while also minimizing any negative spillover from market reform.

To borrow from the finance minister, the “what and the why” of what’s wrong with the wheat market were well known for a long time. Unfortunately, the manner in which the ‘how’ part has been dealt with leaves much to be desired.

It has become cliched to insist that Pakistan’s economic issues are over-discussed, and in fact, decision-making and execution are the need of the hour. The truth is, that policymakers in Pakistan have a primal urge to avoid constructive debate – whether it is on the issue of gas pricing, setting up of IPPs, doling out concessional TERF loans, or attracting investments under SIFC.

That the wheat value chain could benefit from deregulation was always painfully obvious. But maybe, it wouldn’t have hurt to debate the ‘how’ part, just a little bit.