INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

IFPRI

Productivity, Growth and Poverty Reduction in Rural Pakistan Pakistan Strategy Support Program (PSSP)

First Annual Conference December 13-14, 2012 Islamabad, Pakistan

Pakistan Wheat Procurement Policy Reform

Paul Dorosh

International Food Policy Research Institute

Government Wheat Market Interventions

Domestic procurement at fixed “support price” in excess of open market prices • Large farmers who sell wheat to government

benefit most Significant losses in government storage,

and high costs of handling and transport Sales of wheat to flour mills at fixed

“release price” below open market prices Subsidies on sales of imported wheat

• In some years, subsidized sales of exports

Financial Losses: 2009-10 Wheat Marketing Year

Support price: 950 Rs/40 kg (23.75 Rs/kg) Official estimates of storage, handling and

transport costs: 196 Rs/40 kg (4.90 Rs/kg) Release price set at 975 Rs/40 kg (24.38

Rs/kg) Subsidy on wheat procured in 2009-10 and

sold in same year: 171 Rs/40 kg (4.28 Rs/kg)

Possible Per Kg Financial Losses* on Domestic Wheat Procurement and Sales (Rs/kg)

* Possible financial loss (unit subsidy) for each year is calculated as the domestic procurement price plus the cost of incidentals minus the release price.

Support Incidentals Release UnitYear Price PASSCO Punjab Sindh Price Subsidy*

(Rs/kg (Rs/kg (Rs/kg (Rs/kg (Rs/kg (Rs/kg2005-06 10.38 1.83 1.73 - 10.75 1.40 2006-07 10.63 2.30 1.95 2.25 11.63 1.13 2007-08 15.63 2.30 2.00 2.40 15.63 2.15 2008-09 23.75 3.03 2.50 2.73 18.75 7.76 2009-10 23.75 4.80 5.00 4.98 24.38 4.28 2010-11 23.75 --- --- --- --- ---

Financial Losses: 2009-10 Wheat Marketing Year

Subsidy on wheat procured in 2009-10 and sold in same year: 171 Rs/40 kg (4.28 Rs/kg) Massive quantity of procurement: 9.2

million tons (compared to normal procurement of 3.9 to 4.5 million tons) Potential losses at 2009/10 release price:

9.231 million tons (total procurement) 4.28 Rs/kg subsidy = 39.5 bn Rupees Total releases: 5.985 million tons times 4.28

Rs/kg subsidy = 25.6 bn Rupees

Possible Financial Losses on Domestic Wheat Procurement and Sales

* Possible per kg financial loss (unit subsidy) for each year is calculated as the domestic procurement price plus the cost of incidentals minus the release price.

** Financial loss is unit subsidy times quantity of procurement.

Procurement Support Release Unit Financial FinancialYear Quantity Price Price Subsidy* Loss** Loss**

('000 tons) (Rs/kg (Rs/kg (Rs/kg (bn Rs) (bn 09/10 Rs)2005-06 3,939 10.38 10.75 1.40 5.51 8.982006-07 4,514 10.63 11.63 1.13 5.08 7.672007-08 4,422 15.63 15.63 2.15 9.51 12.832008-09 3,917 23.75 18.75 7.76 30.41 33.972009-10 9,231 23.75 24.38 4.28 39.46 39.462010-11 6,700 23.75 --- --- --- ---

Possible Financial Losses* on Domestic Wheat Procurement and Sales

* Possible financial loss for each year is calculated as the domestic procurement price plus the cost of incidentals minus the release price, times the quantity of domestic procurement.

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Value of Sales to Flour Mills Financial Loss

Possible Financial Losses* on Domestic Wheat Procurement and Sales (bn 2009-10 Rs)

* Possible financial loss for each year is calculated as the domestic procurement price plus the cost of incidentals minus the release price, times the quantity of domestic procurement.

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Possible Financial Losses* on Domestic Wheat Procurement and Sales

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Financial Loss

* Possible financial loss for each year is calculated as the domestic procurement price plus the cost of incidentals minus the release price, times the quantity of domestic procurement.

2010 Floods and Wheat Markets

Prior to the floods, government stocks were at record levels due to the large domestic procurement in May-July 2009 and May-July 2010 • Stocks reached an estimated 11 million tons in July 2010 • Some stocks, estimated at about 800 thousand tons, were lost in the

floods, but stock levels remain very high • Most of this stock was held outside of godowns or silos, and

typically incurs substantial storage losses in quantity and quality

The size of the 2011 wheat harvest was uncertain immediately after the floods, but ultimately the overall harvest was good in spite of the floods • Flood waters may have prevented October/November sowing of

some of the wheat crop in Sind • Seed quality in flood-affected areas may have suffered where

farmer seed stocks were lost • However, parts of Punjab may have benefited from nutrient rich

sediments

Pakistan: Initial and Estimated Peak Wheat Stocks* 1991-92 to 2010-11

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* Peak wheat stocks are estimated as end-April stocks plus May-June domestic procurement.

Wheat Markets and Procurement: 2011

Real wheat prices in major wholesale markets were stable after the July 2010 floods, evidence that wheat supply was adequate Given huge domestic stocks, domestic

procurement was cut back sharply in April-May 2011 from an average of 4.0 mn tons/year (2002-2008) to only 2.3 mn tons. Domestic prices did not collapse.

Pakistan: Wheat Procurement and Production 1989-90 to 2011-12

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Note: Procurement generally takes place in April and May. Season ends June 1.

Pakistan: Nominal Wholesale, Import Parity and Support Prices of Wheat

Despite 50 percent lower wheat procurement in 2010-11 relative to the average of 2000-01 to 2007-08, wholesale wheat prices did not collapse.

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Lahore Wholesale Price Import Parity(Lahore) Procurement Price

Real Wholesale and Procurement Prices of Wheat 2002-2012

Real wheat prices have declined since 2009, but are still higher than average levels for 2002-07.

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Domestic and International Wheat Prices

Government interventions in domestic wheat markets make private international trade (wheat imports or exports) unprofitable. • In terms of price formation, wheat behaves as a non-traded

good, with domestic prices not directly linked to international prices.

In most years since 1990, domestic sales of government imports of about 2 million tons/year kept domestic prices below international (import parity) prices, so private imports were not profitable.

When international prices rose sharply in 2008, export restrictions prevented exports and kept domestic prices from rising to export parity levels

Pakistan Wheat Prices (US$/ton) 2002-2012

Since late 2010, domestic wheat prices have generally been about $100/ton (25 percent) below import parity (Lahore).

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Pakistan Wheat Prices (US$/ton) 2002-2012

In years of high international prices (2002, 2007-08, early 2011, late 2012), Pakistan domestic prices have been at or slightly below export parity.

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Lahore Wholesale Price Import Parity(Lahore) Export Parity (Lahore) Support Price

Recent Developments: Procurement

Procurement in April-May 2012 (at 1050 Rs/40kg) increased to 5.66 mn tons (from 2.23 mn tons in 2011). • Credit advances for procurement (not counting

storage and handling costs) are 5.66 mn tons x 26.25 Rs/kg = 149 bn Rs (about 1.5 bn dollars)

• Subsidized sales of this wheat would result in large fiscal costs.

In December 2012, the procurement price for

April-May 2013 was increased to 1200/40kg (30 Rs/kg)

Current International Wheat Prices

In mid-2010, international wheat prices increased sharply and have remained at a level of about $450/ton import parity (Lahore) through the end of 2012. Domestic wholesale prices have been far

lower (about $300/ton) • There has been no incentive for private sector

imports in this period.

Pakistan Wheat Prices (US$/ton) 2002-2012

Since late 2010, domestic wheat prices have generally been about $100/ton (25 percent) below import parity (Lahore).

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Current Domestic Wheat Prices

Real wheat prices have risen for both producers and consumers since 2002-07

• In real terms (2012 prices), wholesale prices in

2011-12 were 14 percent above their average levels of 2002-03 to 2006-07 (27.7 Rs/kg as compared to 24.2 Rs/kg)

• Procurement prices increased by 30 percent in real terms over the same period

Real Wholesale and Procurement Prices of Wheat 2002-2012

Real wheat prices have declined since 2009, but are still higher than average levels for 2002-07.

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Wheat Policy Conclusions

Setting domestic procurement prices too high relative to domestic release prices results in massive fiscal costs with little or no benefit to consumers and to small farmers that do not sell wheat to government agencies.

Substantially reduced domestic procurement in 2010-11 (April-May 2011) resulted in substantial fiscal savings and did not lead to substantially lower nominal or real wholesale prices

Real prices of wheat are higher than they were in

2002-07 to the benefit of net sellers and the detriment of net buyers.

Wheat Policy Next Steps

Pakistan’s complex wheat markets and policies require continued policy analysis, monitoring and coordination across government agencies. Further work is planned to model the

distributional implications of wheat procurement, sales and import policies.