The ongoing protests by farmers against the government’s wheat procurement policy have triggered a debate.

Some question why the government persists with a controlled wheat marketing system despite its widespread recognition as a failure, particularly in supporting smallholders, who make up over 90 per cent of the total farmers.

It is pertinent to mention that this large-scale procurement, often relying on unsustainable commercial borrowing at high interest, is usually justified in the name of smallholders or national food security, especially when the announced wheat support price exceeds the international price, as in 2024.

Every year, the government’s intervention in wheat procurement begins with announcing the wheat support price. This matter frequently sparks intense controversy, as farmers and the government are often at odds.

Farmers always insist on cost-plus support price, as they have no sensible justification or incentive to grow wheat otherwise. Additionally, they compare the financial returns of various crops and make rational choices based on potential profitability. Their cost structure depends on the prices of agricultural inputs such as fertiliser, diesel, electricity, seed, pesticides, and labour.

Govt’s inability to set a sustainable wheat support price policy due to the cumbersome and corrupt procurement system harms farmers’ profits and national agricultural productivity

The cost of agricultural inputs rises every year, and since farmers sometimes have to buy these inputs over the notified prices — fertiliser is a classic example — they expect support prices to increase proportionally, regardless of international market trends.

However, since we live in a global village with frequent trade between countries, any policy discussion would remain incomplete without factoring in the dynamics of global markets. Data from the past 10 years on wheat support prices, corresponding international prices, and the dollar exchange rate on April 1 — the start of the harvest season — reveal that in 2014, 2020, 2021, 2022, and 2023, farmers received lower than the international prices.

For instance, on April 1, 2022, the international wheat price was $495 per metric ton, and the dollar exchange rate stood at Rs183.4, which equated to Rs4,287 per 40kg. Yet, the government support price was just Rs2,200. Assuming that farmers kept 50pc of the total national production — 26 million metric tonnes — for their own consumption and as seed for the next crop, with the remaining sold, this amounted to Rs678 billion taken out of farmers’ pockets in a single year due to price disparity.

However, there is another side to the story. In 2015, 2016, 2017, 2018, and 2019, Pakistan’s farmers received higher wheat prices than international ones (as of April 1). This was largely due to the PML-N government’s much-criticised policy of artificially capping the dollar exchange rate at about Rs100, which made food imports cheaper — a strategy that could not be sustained over the long term.

For example, on April 1, 2016, the international wheat price was $187 per metric ton. With an exchange rate of Rs104.72, this translated to Rs783 per 40 kg, while the government paid Rs1,300 to farmers.

Regrettably, during these years, smallholders — those with less than 12 acres of land whose interests are often cited in policy discussions — did not benefit from the support prices due to the cumbersome, sluggish, and corruption-ridden government procurement system. As a result, they had to sell their wheat in the open market at significantly lower prices.

Conversely, in years when international prices were high, government authorities restricted the inter-district movement of wheat. They forcibly lifted wheat stocks from farmers’ houses, disregarding even the sanctity of ‘chadar and char-diwari’. In both scenarios, smallholders ended up disadvantaged, while medium-large farmers with political clout, middlemen, and millers were the ultimate beneficiaries of the procurement system.

With a carry-forward of four million metric tons of wheat, mainly due to the import of over 3.2m metric tons just before the new crop’s harvest, coupled with the low procurement targets set by the Federal and Punjab governments, wheat is currently being sold in the grain markets far below the support price almost equal to international prices. The announced support price has become nothing more than a joke.

In this context, if the government finds itself unable to procure significant quantities of wheat at the support price due to persistent financial constraints, a potential policy option could be for the government to stop announcing a support price from next year onward and let the wheat market operate based on market dynamics, similar to the rice and maise markets in Pakistan.

However, the government could still procure wheat from the private sector to the extent necessary to ensure food security and price stability. To stabilise the domestic wheat market, the government can consider importing wheat or releasing its strategic reserves, with or without subsidies, depending on the situation.

The question is: what will farmers do if the government does not announce a support price and international prices also remain low?

Since the production cost and, in turn, profitability per 40kg vary from farm to farm depending on crop yield, farmers with lower crop productivity would try to increase their yields, given the significant yield gap between progressive and conventional farmers.

Alternatively, they could switch to other alternative crops like canola, mustard, sunflower, chickpeas, and maise. Already, excessive wheat cultivation has limited the acreage available for chickpeas and edible oilseeds, leading to large-scale imports of these crops every year.

In conclusion, it makes economic sense to specialise in crops that enable a more efficient allocation of resources at the national level.

However, for the proposed policy to succeed, it is imperative that our grain markets and agricultural inputs markets — especially fertilisers — function efficiently and fairly, free from the manipulation of mafias.

Khalid Wattoo is a farmer and development professional, and Dr. Waqar Ahmad is a former Associate Professor at the University of Agriculture, Faisalabad.

Published in Dawn, The Business and Finance Weekly, May 6th, 2024