Massive carryover stocks and large expected wheat crop put the government in a difficult situation and created some challenges for the policymakers, said the State Bank of Pakistan (SBP). According to the SBP, there is a risk of wheat losses due to insufficient storage capacity as with low export prospects due to excess supply in the global markets, it is feared that the government may not be able to offload the surplus wheat, which increases the cost of financing for the wheat procurement.
The State Bank, in its second quarterly report, has included a special session titled “Prospects of Wheat Exports” to discuss the issues related to wheat, a major crop and largely contributed to economic growth. “While a better showing by the wheat crop would certainly help overall economic growth, this brings some policy challenges as well. Specifically, with already high level of wheat inventories in the country, the key challenge for the government is to offload this surplus wheat,” the report said.
A large expected wheat crop in 2014-15, high level of carryover stocks and limited storage capacity put the government in a difficult situation as it was required to offload surplus wheat before the arrival of the next crop. The end-January 2015 wheat stock with provincial governments and Passco, were as high as 5.80 million tons, considerably higher than 3.75 million tons a year earlier, it added. In the meantime, the private sector imported 0.7 million tons of wheat in response to a sharp decline in international wheat prices. The prices of imported wheat ranged from Rs 2,800 to 3,000 per 100-kg bag, inclusive of overhead charges, while the government”s food department was issuing wheat at Rs 3,450 per bag. Latter, effective from November 1, 2014, the government announced a 20 percent regulatory duty on wheat to curb the wheat import. Consequently, the release of wheat stocks held by the government was considerably slower than the normal.
One option is to encourage export of these stocks and given the available stocks and a large (expected) crop size, the government allowed wheat export of 1.2 million tons. However, as international wheat prices are even lower than the procurement cost for these stocks, this wheat cannot be exported unless the government provides a subsidy to exporters. Realising this, in January 2015, the government offered subsidy in the range of $45-55 per ton on the export of 1.2 million tons of wheat from its surplus stocks in Punjab and Sindh. Punjab allowed 800,000 tons export while Sindh allocated export quota of 400,000 tons of wheat. Furthermore, taking notice of unhindered import of wheat by-products, the government also issued instructions for immediate ban on their import. Later on, as international prices fell further, the government raised the subsidy to $90 per ton, the report said.
Interestingly, almost a similar situation has evolved in the sugar sector. In view of depressed international prices and surplus sugar stock in the country; the government has allowed 650,000 tons of sugar export till 15th May 2015. Furthermore, to get rid of surplus stocks ahead of fresh sugar, the government also offered a price subsidy of Rs 2 per kg on inland freight and Rs 8 per kg in cash. Even after adjusting for this subsidy, the FoB price of wheat at Karachi port comes to around $275 per ton, which still exceeds the current rate of $210-220 per MT offered by the Russian Federation and Ukraine by a wide margin.
Unfortunately, global wheat prices are likely to remain low in near future due to a record crop and a large build-up in stock, weak demand, and a better supply of competing grains. According to the SBP, in this scenario, supporting farmers against the continuing depressed prices of their produce is not an easy task. On one hand, availability of surplus wheat may drag down the market price below the support price of Rs 1,300 per 40 kg. On the other hand, potential procurement volume is constrained by available storage capacity.
“Even if the government procures wheat in large volume, it may not be able to export the surplus quantity due to lower prices in the international market. Hence, this may lock-in a significant amount of money in wheat finance,” the report concluded. The SBP has suggested that one way to avoid such situation in future is to strengthen market based instruments, eg, warehouse receipts, crop insurance, commodity exchange, etc, for protecting farmers against fluctuations in the market prices. The outstanding stock of commodity loans against wheat procurement reached Rs 363 billion by end-December 2014.
(Source – http://www.blackseagrain.net/novosti/wheat-issues-put-government-in-a-difficult-situation-sbp)