With global commodity prices and inflation hitting new highs, Pakistan and other emerging economies are faced with serious challenges. The rising inflation of staples such as wheat has already claimed Pakistan's former ruling coalition as a victim. Many other developing countries' governments are likely to fall as well unless these challenges are addressed effectively.
Knowing the importance of wheat for Pakistanis, the government of Prime Minister Syed Yousaf Raza Gillani has begun to take steps to alleviate the wheat crisis. The first steps, announced yesterday by Ministry of Food and Agriculture, deal with providing incentives to farmers to grow more wheat. The price of 40Kg of wheat has been raised by more than 20 percent to Rs. 625.00 (US$9.90) from Rs 510.00 (US$7.90). The government plans to build a 5-million-tonne strategic reserve from the 2007/08 crop, but farmers had rejected the procurement price of 510 rupees per 40 kg as below domestic and international market levels. In addition to price support, the government has announced support for agriculture equipment purchases with the first batch of 50 bulldozers (out of total 300) arriving from China in July this year. These would be put on trial for two months in difficult terrain of NWFP and Balochistan to increase wheat production.
Pakistan saw a surge in wheat and flour prices in the domestic market after a shortage in September and had to import nearly 1.6 million tonnes in spite of producing 23.3 million tonnes of wheat in the 2006/07 crop year.
The south Asian country of 160 million people consumes about 22 million tonnes of wheat a year, according to Reuters.
For the financial year 2007/08, the government has fixed a wheat output target of 24 million tonnes, but farmers and food ministry officials say that target is impossible to achieve and estimate output will be 21 million to 22 million tonnes.
Industry officials say lower-than-expected output may force the government to import between 1 million and 2 million tonnes for stocks and domestic needs.
In addition to the wheat crisis, the other major crisis angering Pakistanis is the continuing brown-outs resulting from 2500-3000MW electricity shortage. Prime Minister Yousuf Raza Gilani is all set to ink the first-ever power sector pact of his government with a Chinese company, Dong Fong, today for setting up 525 MW thermal power plant with an investment of $450 million at Chichoki Mallian (Sheikhupura), sources close to the Private Power Infrastructure Board (PPIB) managing director told Business Recorder, Pakistan's Financial Daily Newspaper.
Business Recorder is reporting that its sources have expressed serious concern over the cost escalation, saying lower project cost could have been negotiated by a team of experts. The Dong Fong was already in the process of setting up thermal power plant of 450-500 MW at Nandipur (Gujranwala), though several questions had been raised by the Euro Dynamics International, a Lahore-based firm, that the second lower bidder joint venture of Chinese company does not meet the qualification and requirement of combined cycle plant.
Earlier, former prime minister Shaukat Aziz had signed a memorandum of understanding (MoU) with the Qatar Investment Authority (QIA) and the Alstom-Marubini to set up 450-500 MW thermal power plant at Chichoki Mallian, but a couple of months ago, the pact was terminated when the sponsors did not come up with tariff petition.
Notwithstanding allegations of cost escalation and possible corruption, these are all steps in the right direction by Mr. Gillani's new government. The real question is: Would these steps be sufficient to address the severity of the two crises? Or do we need a more comprehensive plan of action beyond these first steps? A comprehensive, long range plan that addresses the underlying issues of the impact of growing population, increasing global demand and rising inflation that show no signs of abating? Let's wait and see what Mr. Gillani's "first 100" days deliver.
Showing posts with label Wheat Flour. Show all posts
Showing posts with label Wheat Flour. Show all posts
Monday, March 31, 2008
Tuesday, March 18, 2008
Fighting the Twin Crises of Inflation and Power Cuts
As Pakistanis suffer greatly from the twin crises of hyper inflation and prolonged, daily power cuts, the life for them is getting more and more difficult every day. The traditional approaches to solve these problems such as increasing governmental subsidies for food and fuel and building more conventional fossil-fuel based generating capacity are not likely to work cost-effectively and sustain ably in the long run. It is time for Pakistanis to explore creative options to find workable, long-lasting solutions.
Economists often talk about the impact of supply and demand and consumer behavior on inflation. In fact, the consumer price index calculations in the US rely partly on consumers substituting cheaper alternatives for commodities experiencing higher inflation. For example, it is assumed that when the price of steak goes up, consumers start eating chicken instead. The often-criticized substitution process rationalizes this method to eliminate inflation from the US Bureau of Labor Statistics (BLS) basket of goods and services. Indeed, substitution is proof of inflation. When a product's price rises out of consumers' ability to afford purchasing it, its clearly evidence of inflation.
Unfortunately, this assumption of substitution is not always valid, particularly when a staple food or a common form of energy is involved. For example, the people in Pakistan rely on wheat flour for most of their caloric intake. It is possible but not easy to make a substitution, particularly in a very short time-frame unless it is forced upon them due to complete lack of availability or affordability. Similarly, people are used to getting electricity from the grid or using an existing diesel-based emergency generator.
With continuing and dramatic increases in world-wide food and fuel prices, it is clear that heavy subsidies will only bankrupt the emerging nations' governments and prove ineffective in the long run. Instead, it is incumbent upon all governments, including Pakistan and India, to promote substitutions such as potatoes, rice or other sources of starch for wheat. On the energy front, solar power (roof-installed, local and central generation) or wind power should substitute for fossil-fuel generated electricity grid. Recently, Kyocera has announced production of 1.6MW roof-installed solar panels for homes that can easily supply all the needs of a large home, particularly in mostly sunny South Asia. While expensive upfront, such a strategy would alleviate the widespread power shortages and prove more cost-effective in the long run. It will also help reduce environmental pollution and greenhouse gas emissions.
Substitution should be pursued as a strategy to give incentives to both the private sector and the consumers to produce and use alternatives for commodities experiencing the highest inflation rates. In general, each nation needs to diversify its sources of food and energy by encouraging more production and consumption of such alternatives. The governmental incentives can come in the form of tax credits, partial subsidies, and bringing foreign expertise and capital to help set up production of desirable alternatives. With growing populations and world demand, there will continue to be upward pressure on prices of basic commodities. The strategy of developing alternatives, therefore, needs to be a long term and a sustainable strategy.
The substitution strategy can set the stage for a larger effort to grow the economy and improve the living standards without damaging the environment. It can spur innovation and unleash the creativity of the people in Pakistan to deal with the real problems of the day while creating opportunities, jobs and wealth and build a stronger society. It can begin to address the serious environmental issues of the day such as global warming that threatens all life on the planet. It can help Pakistan avoid making the mistakes the West has made in its drive to industrialize. It can help Pakistan do well and do good at the same time.
Economists often talk about the impact of supply and demand and consumer behavior on inflation. In fact, the consumer price index calculations in the US rely partly on consumers substituting cheaper alternatives for commodities experiencing higher inflation. For example, it is assumed that when the price of steak goes up, consumers start eating chicken instead. The often-criticized substitution process rationalizes this method to eliminate inflation from the US Bureau of Labor Statistics (BLS) basket of goods and services. Indeed, substitution is proof of inflation. When a product's price rises out of consumers' ability to afford purchasing it, its clearly evidence of inflation.
Unfortunately, this assumption of substitution is not always valid, particularly when a staple food or a common form of energy is involved. For example, the people in Pakistan rely on wheat flour for most of their caloric intake. It is possible but not easy to make a substitution, particularly in a very short time-frame unless it is forced upon them due to complete lack of availability or affordability. Similarly, people are used to getting electricity from the grid or using an existing diesel-based emergency generator.
With continuing and dramatic increases in world-wide food and fuel prices, it is clear that heavy subsidies will only bankrupt the emerging nations' governments and prove ineffective in the long run. Instead, it is incumbent upon all governments, including Pakistan and India, to promote substitutions such as potatoes, rice or other sources of starch for wheat. On the energy front, solar power (roof-installed, local and central generation) or wind power should substitute for fossil-fuel generated electricity grid. Recently, Kyocera has announced production of 1.6MW roof-installed solar panels for homes that can easily supply all the needs of a large home, particularly in mostly sunny South Asia. While expensive upfront, such a strategy would alleviate the widespread power shortages and prove more cost-effective in the long run. It will also help reduce environmental pollution and greenhouse gas emissions.
Substitution should be pursued as a strategy to give incentives to both the private sector and the consumers to produce and use alternatives for commodities experiencing the highest inflation rates. In general, each nation needs to diversify its sources of food and energy by encouraging more production and consumption of such alternatives. The governmental incentives can come in the form of tax credits, partial subsidies, and bringing foreign expertise and capital to help set up production of desirable alternatives. With growing populations and world demand, there will continue to be upward pressure on prices of basic commodities. The strategy of developing alternatives, therefore, needs to be a long term and a sustainable strategy.
The substitution strategy can set the stage for a larger effort to grow the economy and improve the living standards without damaging the environment. It can spur innovation and unleash the creativity of the people in Pakistan to deal with the real problems of the day while creating opportunities, jobs and wealth and build a stronger society. It can begin to address the serious environmental issues of the day such as global warming that threatens all life on the planet. It can help Pakistan avoid making the mistakes the West has made in its drive to industrialize. It can help Pakistan do well and do good at the same time.
Tuesday, February 26, 2008
Wheat Price Up 400 Percent
Wheat Price Touches $900 Per Ton
Triggered by wheat export curbs by Kazakhstan and the lowest world inventory in 26 years, wheat price hit a new record at $25 per bushel or about $900 per ton. This translates into Pakistan Rs. 55 per kilo for raw wheat in bulk excluding transportation, milling and bagging. It represents a 400% increase in less than a year. According to the U.S. Department of Agriculture's Foreign Agricultural Service, Kazakhstan is the sixth-largest exporter of wheat, behind the U.S., Canada, Russia, Argentina and the European Union. Kazakhstan is in the belt of wheat production that stretches from Ukraine through southern Russia. It already has exported nearly seven million tons of grain, of the available 10 million tons from the 2007-08 crop, Agriculture Minister Akhmetzhan Esimov said.
Price Doubled Since Dec, 2007
In my January 15, 2008 blog post Wheat Flour Shortage in Pakistan, I wrote as follows: " Former Prime Minister Shaukat Aziz announced in Sept, 2007 that the Pakistani government 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." Well, here we are in February 2008 and the price of wheat has more than doubled yet again since Dec, 2007. In fact, the inflation of wheat prices now exceeds all other commodities including oil, gold, metals etc.
Implications For Pakistan
Like most developing nations, the average person in Pakistan has very low discretionary spending,with the bulk of his or her income spent on food, clothing and shelter. The dramatic increases in commodity prices, particularly food, is very troubling for the vast majority of populations living in the developing countries such as Pakistan, India, China and the African nations. The exceptions, of course, are the nations with their own significant production of food and fuel and other natural resources. The nations producing and exporting food, fuel, and metals actually benefit from this trend of higher commodity prices.
The incoming government in Pakistan will face a very difficult challenge in containing tremendous inflationary pressures on basic commodities such as food and fuel. A failure in this effort can lead to significant instability and has the potential to threaten the future of democracy in Pakistan.
Triggered by wheat export curbs by Kazakhstan and the lowest world inventory in 26 years, wheat price hit a new record at $25 per bushel or about $900 per ton. This translates into Pakistan Rs. 55 per kilo for raw wheat in bulk excluding transportation, milling and bagging. It represents a 400% increase in less than a year. According to the U.S. Department of Agriculture's Foreign Agricultural Service, Kazakhstan is the sixth-largest exporter of wheat, behind the U.S., Canada, Russia, Argentina and the European Union. Kazakhstan is in the belt of wheat production that stretches from Ukraine through southern Russia. It already has exported nearly seven million tons of grain, of the available 10 million tons from the 2007-08 crop, Agriculture Minister Akhmetzhan Esimov said.
Price Doubled Since Dec, 2007
In my January 15, 2008 blog post Wheat Flour Shortage in Pakistan, I wrote as follows: " Former Prime Minister Shaukat Aziz announced in Sept, 2007 that the Pakistani government 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." Well, here we are in February 2008 and the price of wheat has more than doubled yet again since Dec, 2007. In fact, the inflation of wheat prices now exceeds all other commodities including oil, gold, metals etc.
Implications For Pakistan
Like most developing nations, the average person in Pakistan has very low discretionary spending,with the bulk of his or her income spent on food, clothing and shelter. The dramatic increases in commodity prices, particularly food, is very troubling for the vast majority of populations living in the developing countries such as Pakistan, India, China and the African nations. The exceptions, of course, are the nations with their own significant production of food and fuel and other natural resources. The nations producing and exporting food, fuel, and metals actually benefit from this trend of higher commodity prices.
The incoming government in Pakistan will face a very difficult challenge in containing tremendous inflationary pressures on basic commodities such as food and fuel. A failure in this effort can lead to significant instability and has the potential to threaten the future of democracy in Pakistan.
Tuesday, February 19, 2008
Pakistan Vote: Against Musharraf Or For Opposition?
Many commentators in Pakistan and the World are in overdrive talking about mandates and profound meanings of the February 18 vote in Pakistan. Some are claiming it is a mandate to restore an independent judiciary, media and democracy while others are talking about it as rejection Musharraf's pro-US policies, "extremism" and "war on terror" etc.
In my humble opinion, there is a far simpler explanation for it: People voted in a predictable way based on the issues that affect them directly on a daily basis. These issues are the basic bread and butter issues such as the availability of cheap atta (wheat flour), more reliable supply of fuel and electricity and improved sense of security. Overall macro-economic improvements, significant growth in GDP, per capita income, explosion in mass media etc over the last 8 years did not count for much as people voted.
The reason I call it "predictable" is because all humans want their basic physiological and safety needs met before they turn their attention to higher level issues of civil society, liberty and realization of full potential. In fact, this is something all managers dealing with people routinely learn as "Maslow's Hierarchy of Needs" in management training so they can get better at motivating the people they manage.
Maslow's hierarchy of needs is a theory in psychology that Abraham Maslow proposed in his 1943 paper "A Theory of Human Motivation", which he subsequently extended to include his observations of humans' innate curiosity. The diagram above shows that most Pakistani voters were operating at the two lower levels of the pyramid in their decision to punish the ruling party. This conclusion is further re-enforced when you look at how the results of the IRI (International Republican Institute) opinion polls changed from September 2006 to January 2008. According to an IRI poll in September 2006, Musharraf had a 63 percent approval rating. But last October 11, IRI released a poll showing him at 21 percent. By late January 2008, Musharraf's approval rating plummeted to 14%. What happened in this intervening period that affected people directly: It was increase in suicide bombings following Lal Masjid, the wheat flour price hike and shortage, serious electricity load-shedding and brown-outs, the firing of the chief justice, his restoration and then re-firing, and Benazir Bhutto's assassination. While each contributed to the drop in Musharraf's approval, the biggest drop came between November 2007 and January 2008 with the food, fuel, electricity crises intensifying and Benazir Bhutto assassination. The final straw came when people directly felt the full impact of the food, the fuel, the power and the security issues. In the end, it was clearly a vote to punish the ruling party of PML-Q and Musharraf rather than to give any mandate to the PPP and and the PML(N).
The fact that MMA, who ruled NWFP and Baluchistan, suffered the same fate further illustrates the fact that the people voted to punish those in charge. It was "Throw The Rascals Out" votes cast in anger and protest all over the country.
The winners will probably get a very short honeymoon period before people start demanding quick resolution to their basic concerns with food and fuel prices and security. Given the worldwide commodity price inflation and the worsening situation in Afghanistan and Pakistan's FATA region, the new government faces very difficult challenges as soon as it takes charge. If the winners choose to focus on settling scores with Musharraf and other political opponents rather than attend to the real bread, butter and security issues, they will quickly lose the support of the people who have elected them.
In my humble opinion, there is a far simpler explanation for it: People voted in a predictable way based on the issues that affect them directly on a daily basis. These issues are the basic bread and butter issues such as the availability of cheap atta (wheat flour), more reliable supply of fuel and electricity and improved sense of security. Overall macro-economic improvements, significant growth in GDP, per capita income, explosion in mass media etc over the last 8 years did not count for much as people voted.
The reason I call it "predictable" is because all humans want their basic physiological and safety needs met before they turn their attention to higher level issues of civil society, liberty and realization of full potential. In fact, this is something all managers dealing with people routinely learn as "Maslow's Hierarchy of Needs" in management training so they can get better at motivating the people they manage.
Maslow's hierarchy of needs is a theory in psychology that Abraham Maslow proposed in his 1943 paper "A Theory of Human Motivation", which he subsequently extended to include his observations of humans' innate curiosity. The diagram above shows that most Pakistani voters were operating at the two lower levels of the pyramid in their decision to punish the ruling party. This conclusion is further re-enforced when you look at how the results of the IRI (International Republican Institute) opinion polls changed from September 2006 to January 2008. According to an IRI poll in September 2006, Musharraf had a 63 percent approval rating. But last October 11, IRI released a poll showing him at 21 percent. By late January 2008, Musharraf's approval rating plummeted to 14%. What happened in this intervening period that affected people directly: It was increase in suicide bombings following Lal Masjid, the wheat flour price hike and shortage, serious electricity load-shedding and brown-outs, the firing of the chief justice, his restoration and then re-firing, and Benazir Bhutto's assassination. While each contributed to the drop in Musharraf's approval, the biggest drop came between November 2007 and January 2008 with the food, fuel, electricity crises intensifying and Benazir Bhutto assassination. The final straw came when people directly felt the full impact of the food, the fuel, the power and the security issues. In the end, it was clearly a vote to punish the ruling party of PML-Q and Musharraf rather than to give any mandate to the PPP and and the PML(N).
The fact that MMA, who ruled NWFP and Baluchistan, suffered the same fate further illustrates the fact that the people voted to punish those in charge. It was "Throw The Rascals Out" votes cast in anger and protest all over the country.
The winners will probably get a very short honeymoon period before people start demanding quick resolution to their basic concerns with food and fuel prices and security. Given the worldwide commodity price inflation and the worsening situation in Afghanistan and Pakistan's FATA region, the new government faces very difficult challenges as soon as it takes charge. If the winners choose to focus on settling scores with Musharraf and other political opponents rather than attend to the real bread, butter and security issues, they will quickly lose the support of the people who have elected them.
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.
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.
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