The country’s headline inflation rate has started to decline, projected to touch 15% soon. This drop is largely due to a significant decrease in wheat and flour prices. However, a controversial decision to import approximately 3.5 million tonnes of wheat in early 2024 is also contributing to this easing of inflation.
Bumper Harvest and Market Dynamics
This year’s bumper wheat harvest, totaling around 30 million tonnes, coupled with prior wheat stocks, has driven market prices down, particularly impacting farmers. In a free-market economy, these prices reflect the basic principles of supply and demand. Despite this, last year’s announcement of an exaggerated minimum support price (MSP) saw a 77% increase from the 2021-22 level, contrasting sharply with a 46% increase in the cost of production, from Rs2,105 to Rs3,075 per 40kg, according to the Agriculture Policy Institute (API).
Impact of Minimum Support Price (MSP)
With an MSP set at Rs3,900, market prices soared to as high as Rs6,500, creating significant profits for wheat traders and hoarders but burdening consumers. It was estimated that the per capita annual expenses on wheat consumption would rise by around Rs5,000 if the MSP increased from Rs2,200 to Rs3,900. This increase heavily impacted non-farming consumers, who had to bear the cost of the higher MSP.
Cost of Production vs. MSP
The gap between the average cost of production (COP) and the MSP was minimal until 2020-21. However, from 2020-21 onwards, the divergence widened significantly, peaking in 2022-23 at around 80% of the COP. This sharp rise in MSP has led to increased consumer costs and subsidies for the farming community, covering fertilisers, machinery, solarisation, and other support measures.
Government Support and Production Increases
The State Bank of Pakistan set a 26% higher disbursement target for agricultural credit for 2023-24, rising from Rs1.78 trillion to Rs2.25 trillion. With substantial public sector support, wheat production was expected to increase as farmers shifted from other crops to wheat, which was sown on approximately 23.7 million acres, surpassing the target of 22.2 million acres for 2023-24. This represents a 7% growth compared to the previous year.
Market Prices and Food Security
Despite higher-than-average MSP in previous years, non-farming consumers faced food security issues due to inflationary pressures, with wheat flour being a major contributor. The government has maintained the same MSP for 2023-24, but the divergence between MSP and COP remains significant. This situation continues to provide a fair margin for wheat producers while burdening consumers.
Fiscal Burden and Procurement Challenges
State-enforced MSP policies involve additional costs for logistics, storage, and administration, adding to the fiscal burden. This cost is ultimately borne by the masses, particularly the urban middle and lower-middle classes. Additionally, large farmers with better market connections benefit more from these policies than subsistence farmers with minimal marketable surplus.
Future Considerations
Many economists advocate for a market-based pricing system. Maintaining the current wheat economy under an MSP regime can help stabilize food prices in the coming months, potentially improving the purchasing power of the lower and middle classes. Exercising restraint in state-funded wheat procurement for the current year could be beneficial. Future MSPs should consider COP calculations by the API or other reliable sources to ensure fair pricing.
In summary, balancing state intervention and market dynamics is crucial for stabilizing wheat prices and ensuring food security. A cautious approach to state-funded procurement and a rational assessment of COP for future MSPs can help achieve these goals, ultimately benefiting both consumers and producers.
