Evaluation of Wheat Support Price Policy in Pakistan

By

Imran Ashraf Toor

1

Introduction

Agriculture is an important Contributor to the National Economy in Pakistan: Contributes a quarter to GDP Employs 47% labor force Over 50% of industrial production comes from agro business Earns (directly or indirectly) 70% of export revenues More than 67% rural households depend on agriculture

2

Improved Wheat Varieties

• • • • • •

Total Varieties Released Yield Increase Attributable to HYVs Area Covered by Improved Varieties Total Wheat Production (2007) Total Value of Wheat Production Value Contributed by Improved Varieties 70 25% 90 % of the total wheat area 23.5 million tones Rs. 250 billion Rs. 56 billion per year

3

Wheat Production Trends in Pakistan

24 20 16 12 8 3.4

4

Local Wheat

0

1948 ( + ) 147 %

3.9

1966 HYV ( + ) 133 % 1977

9.1

8.4

Coordinated Efforts ( + ) 192 %

23.5

4

2007

Area and Production of Wheat 1991 to 2008

25000 20000 15000 10000 5000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Area Production 5

Yield Gap Analysis – Wheat

12 10 8 6 Achievable potential 5.0 Mt/ha 4 2 2.6 Mt/ha 0

National Average Yield Progressive Farmers Average Yield

Source: Pakistan Agricultural Research Council 10 Mt/ha

Biological Yield Potential 6

Crops Wheat Rice Maize Sugarcane Cotton (m bales)

Productivity Improvement (1950 – 2006-07)

1950 2006-07 Production (million tones) 3.9

0.8

0.4

7.8

1.3

23.7

5.0

9.8

47.2

14.3

2007 Increase in production (in times) 6 6 24 6 11

7

What is Wheat Support Price

Support price means that minimum price for a product, established by a government and supported by payments to producers in the event that the market price falls below the specified minimum.

Another definition is that support price is meant to act as a minimum but guaranteed price for the farmers during the post-harvest period. It is not meant to replace the market-determined price but to correct the shortcomings and failures of the market system during the harvest season when prices often fall to the disadvantage of farmers.

8

Economic justification of wheat support prices

Neo-classical economists argue that rising prices without other policy measures can serve the purpose and is therefore the only viable policy instrument. But sometimes rising prices are fruitless or even counter productive.

The critics point out that the introduction of higher support prices without an appropriate scale-neutral technology or without the appropriate institutions are unable to achieve the required results.

9

Mechanics of support price

10

Determinants of wheat support price

(i) Current cost of production of wheat crop (ii) Export and import price parity (iii) Farmers’ input and output price parity (iv) Existed domestic demand, supply and stock position (v) World demand, supply, stock and trade (vi) Domestic and international market prices (vii) Possible impact on other substitute crops (viii) Likely impact on the cost of living of the farmers (ix) Expected production response to prices (x) Inclusion of risk factor such as flood or draught

11

Impact of support price on Consumer

Ghani (1998) found that the lowest income group spends almost two-and-half times more of their total expenditure on wheat and wheat products as compared with the highest income group. Therefore, wheat and its products are important items of expenditure for average income households in Pakistan.

A rise in the price of food raises the real incomes of food producers in the short run and lowers the real incomes of food consumers, since in the short run the supply is fixed.

Consumer and producer prices can be separated by a system of taxes and subsidies, but in practice there are real constraints.

12

Poverty in Pakistan

Proportion of Population Under Poverty Line

year Pakistan 1986-87 1987-88 1990-91 1992-93 1993-94 1996-97 1998-99 2000-01 29.1

29.2

26.1

26.8

28.7

29.8

30.6

32.1

Urban Rural 29.8

30.3

26.6

28.3

26.9

22.6

20.9

22.7

28.2

29.3

25.2

24.6

25.4

33.1

34.7

38.9

Source: Planning Commission, GoP 13

Impact of support price on different farmers

The composition of farmers will change as a result of a rise in the price of food. The deficit farmers may become surplus farmers, and landless laborers may become urban poor.

The urban poor consumers may consume less wheat due to increase the price of wheat. .

14

Support price impacts on market price

The effect of the volume and price of domestic procurement on market prices of wheat depends crucially on whether the government buys less than the amount of wheat that farmers and traders are willing to sell in the market.

In this case, market prices will remain below the support (procurement) price and will be set by the equilibrium of the supply and demand of wheat quantities.

15

Wheat support price and inflation

High and persistent inflation is a regressive tax which unfavorably impacts the poor part of the society and their economic prospects.

The poor have a small number of options to protect themselves against inflation.

16

Wheat support price and inflation

17

Input prices and wheat support price

• • • • • • • •

Fertilizer Prices Testified Seed Prices Electricity use for Tubewell Oil Prices use for Tubewell Irrigation water supply Tractor and Other farm Machinery Pesticide Prices Availability of Agricultural Credit

18

Shortage of wheat production inputs

* Water Shortage

* Fertilizer Shortage * Non-availability of Agricultural Credit * Testified Seed * Electricity Shortage

19

Challenges related to wheat support price

1. Wheat prices in Pakistan have always remained low relative to import wheat prices.

2. Pattern of double cropping with rice and cotton widely practiced in Pakistan.

3. Government institutions have weak structure in Pakistan. No coordination between agriculture department and other departments.

4. Nor create inter-provincial harmony or work for the well-being of the poor farmers 5. Government usually does not announce new support price due to the involvement of great subsidies transfer to the consumers and farmers.

20

Suggestions

1. If the market price in a good harvest year falls below the announced support price, which generally happens immediately after the harvest, the government should be obliged to purchase the whole production which is offered by the growers.

2. The government should recognize the complementary role of the private sector which can play a significant role in stabilizing prices.

3. There is a need to design economic strategy in agriculture to treat symptoms of the farm problem. The root cause of the problem is the misallocation of resources between agriculture and the rest of the economy.

21

Suggestions

4.

5.

6.

7.

8.

Investment in input delivery system (rural roads, markets, seed, fertilizer, electricity, water) National Agricultural Research System (NARS) upgrading/strengthening Dissemination of technology and farmers’ education Policy to promote corporate/commercial farming Government ould establish a strong crop forecasting and information system.

makers and the private sector.

This system should responsible to provide timely information to policy

22

Conclusion

Increasing support price policy only cannot enhance wheat production because other significant factors like the subsidized electricity, fuel, fertilizers and testified seed are had important rule for wheat production.

Furthermore, severe irrigation water shortage will not only affect the wheat-sowing process but could also force farmers to lose interest in investing in this crop.

There is also important the availability of agricultural loans and pesticides at affordable prices during the harvest season. This can be only happened if government has a better management policy.

23

Thank You

24