Tuesday, January 15, 2008

Wheat Flour Shortage in Pakistan

Rising Atta Prices
The rising prices and acute shortages of atta (wheat flour), a staple in Pakistan, are clearly distressing to the people. However, putting it in perspective, this wheat crisis is not isolated to Pakistan. There are widespread fears of food shortages and lack of affordability in
many countries around the world.

According to a recent report in Wall Street Journal, the prices of Illinois corn and soybeans rose 40% and 75%, respectively, from a year ago. Kansas wheat is up 70% or more. And a growing number of economists and agribusiness executives think the run-ups could last as long as a decade, raising the cost of all kinds of food.

World Wheat Stock At 26-Year Low
Global Demand is leaving end-of-year grain inventories at levels that are less than 20% of the total amount used each year; a graph of stocks as a percentage of use is as follows:

Source: US Dept of Agriculture

No More Cheap Grain
"The days of cheap grain are gone," says Dan Basse, president of AgResource Co., a Chicago commodity forecasting concern.

Rising prices and surging demand for the crops that supply half of the world's calories are producing the biggest changes in global food markets in 30 years, altering the economic landscape for everyone from consumers and farmers to corporate giants and the world's poor. The biggest increases in demand are the result of rising incomes in the developing nations where a large number of people have moved up into the middle class. Meanwhile production has failed to keep up with the rising demand. In Canada, for example, Statistics Canada trimmed its spring wheat production estimate to 509.8 million bushels, down from its October forecast of 526 million. In 2006, Canada produced 684 million bushels of spring wheat. Canada produced less
spring wheat this year than in 2006 due to reduced plantings and unfavorably hot conditions during the growing season.

USDA Report on Pakistan Wheat Crisis
According to a US Dept of Agriculture Report in December 2007, Prime Minister Shaukat Aziz announced in Sept, 2007 that the GOP would import one million tons of wheat, stating that this action was necessary to “maintain a reasonable buffer stock for the future.” The export price for Pakistani wheat during the April-May export window was approximately $225-232 per ton. For December 2007 delivery, Pakistan is now
looking at an estimated import price of $380-400 per ton, exclusive of transportation. The timing couldn’t be worse. World wheat stocks are at a 26-year low, mainly due to severe weather conditions in the major production areas of Canada, Australia, the EU and Ukraine. Consequently, wheat prices have hit all-time record highs.
The Government of Pakistan subsequently decided to make smaller wheat purchases, rather than a single 1 million ton purchase. Pakistani officials cited overbooking at the Port of Karachi and the problems berthing larger vessels as well as the need for a monthly review of the wheat situation as reasons for moving away from a single tender. They have also hinted that they may lift the ban on private imports. The Government of Pakistan could provide a subsidy for the imported wheat to cover the differential between the government issue price and the import price.
Clearly, Pakistan witnessed a perfect storm scenario on wheat in 2007 with an overly optimistic wheat crop estimate, a well-intentioned decision to lift the four-year wheat export ban to raise farm prices, severe weather conditions in the major world wheat production areas, and increased demand during Ramadan. In hindsight, lowering the official crop estimate should have had the same effect on farm prices as exports, while keeping more wheat within Pakistan. This report clearly spells out some of the mis-steps by Pakistani Government leading up to the current crisis.

Food Subsidies
Many developing nations, such as Pakistan, control and subsidize food prices by procuring the harvest from farmers at a fixed price and by providing subsidies to keep the retail prices low. The world market price for raw wheat comes to about Pak Rs. 24 per kilo in large quantity purchases excluding the cost of transportation, milling and bagging. Pakistan Government has set the retail price of atta(wheat flour) at Rs.16 per kilo. Large differentials in prices and availability across national borders encourage smuggling for profiteering. Add to this the endemic corruption in many developing nations, and you have all the ingredients for a serious food shortage. Measures such as the use of the military to guard grain storage and milling and distribution centers can help temporarily. But these are just band-aids.

The Future
There is no obvious long term solution, other than systematically increasing production, building state wheat reserves (instead of wheat exports), and by providing special assistance to the low-income people. I hope I am wrong but there is clearly a possibility of atta riots in Pakistan to add to the already precarious security situation. The politicians opposed to Musharraf would be all too happy to take advantage of this situation, as the media play up the shortages to stoke widespread public anger.

1 comment:

Anonymous said...

I dont think there is any short term solution. But any solution should involve a mix of subsidy to the poor whilst developing local production and also importing products.

I have been in discussion with leading European wheat flour exporters at Federation Flour Mills

They have provided me with a great deal of useful information as they export wheat flour, bran, grain and animal feed materials to industrial consumers throughout the region.

From the resources they provided it is plain to see this is a complex problem.