In Pakistan, as the harvesting season unfolds for major crops like wheat, rice, maize, cotton, and oilseeds, market dynamics invariably lead prices to their annual lows. This pattern has been particularly pronounced in Punjab during the recent wheat season.

The prices experienced a significant downturn, plummeting by approximately 40 per cent to hover between Rs2,400 to Rs3,000 per 40 kilograms, well below the government’s support price of Rs3,900. As a consequence, farmers have suffered financial losses.

This phenomenon is primarily driven by a market glut resulting from oversupply. Two key factors contribute to this situation. Firstly, most farmers are facing financial constraints and urgently need funds to repay bank loans, settle outstanding credits for fertiliser and pesticide dealers, and procure inputs for the next crop. Secondly, there is no dearth of farmers who lack adequate storage facilities, such as godowns, to store harvested crops.

In either scenario, farmers must sell their produce immediately after harvest, regardless of market prices. However, the trend observed in previous years suggests that market prices typically rise towards the end of the harvest season as the supply to grain markets diminishes.

Improved crop storage capacities could help prevent market glut, stabilise wheat prices and reduce post-harvest losses

Addressing these challenges to ensure a more sustainable and resilient agricultural market requires three types of interventions: improving farmers’ access to credit, enhancing storage facilities for agricultural produce, and implementing policies that stabilise prices during peak harvest periods — the government’s wheat procurement program is a classic example.

Zarai Taraqiati Bank Limited, commercial banks, microfinance banks, and other financial institutions offer agricultural loans for crop production and agricultural development at market-based and subsidised markup rates to improve farmer access to credit.

During July — February in FY24, agriculture credit disbursed by banks and other financial institutions amounted to approximately Rs1.4 trillion — an increase of 33.6pc compared to the previous year.

Such loan products address farmers’ needs for acquiring crop inputs, agricultural machinery and implements, high-efficiency irrigation solutions, and solar-powered tube wells. However, improving farmers’ storage facilities has generally been a neglected area requiring significant attention and action.

Several countries, including the United States, Poland, Hungary, Bulgaria, Argentina, Brazil, and a few African countries, have implemented the warehouse receipt system (WRS) with varying degrees of success. This system, known as inventory credit, offers a practical solution to tackle farmers’ dual challenges of lack of storage space and cash crunch.

Under the WRS, farmers deposit their crops in approved warehouses and use the proof of ownership as collateral to secure bank loans. This approach not only streamlines access to credit but also contributes to market stability by balancing supply and averting market oversaturation.

Pakistan has achieved several milestones towards implementing WRS, and the State Bank of Pakistan (SBP) launched Electronic Warehouse Receipt Financing in 2022. Nevertheless, challenges such as high policy rates, the absence of uniform quality standards and grading systems for agricultural produce, and a complex and inadequate legal and institutional framework remain significant constraints to its success in the country.

In the absence of a widespread commercial warehousing system, small and medium-sized farmers have no other option but to rely on their own spaces. They often use their village houses or a covered area on farms to store crops for a few months in order to secure relatively better prices.

However, most of these farmers face space constraints, making it difficult to accommodate their entire produce. Given these circumstances, banks and other financial institutions must offer customised loan products to these farmers, enabling them to build their own storage capacity within their houses or on their farms.

A farmer with a landholding of 12 acres would hardly require 500 square feet of space to store his entire crop of wheat, paddy (rice), maize, etc. In a rural context, a large brick-and-mortar room with basic finishing can effectively serve this purpose. Apart from storage, such a room can offer multiple utilities for farmers.

To enhance storage capacity, the SBP initiated the Financing Facility for Storage of Agricultural Produce (FFSAP), with subsidised markup rates, to facilitate the private sector and farmers in setting up silos, warehouses, and cold storages, with a maximum financing limit of Rs500 million.

Nonetheless, the scheme’s scope and objective are mismatched with the modest needs of small and medium-sized farmers, who need loans ranging from 1m to 3m for the above-mentioned civil work. Additionally, commercial banks are reluctant to grant such small loans due to their obligation to get reimbursement for each disbursed loan by the SBP.

Another relevant initiative is the Prime Minister’s Youth Business and Agriculture Loan Scheme, which also offers loans at low markup rates. This financing scheme has its own limitations regarding its objective, scope, and applicant’s age. Thus, it falls short of addressing the specific financing need for the construction of a crop storage facility within a farmer’s house or on his farm.

In conclusion, the Punjab province contributes nearly 75pc of the country’s wheat production. Nevertheless, contrary to the established practice in previous years, the Punjab government has employed delay tactics to avoid wheat procurement from farmers under the pretext of high moisture content in harvested wheat and the presence of 2.3m tonnes of carryover stocks.

Yet, it is worth noting that despite the Punjab Food Department’s carryover stocks being almost equal to or even greater than the current ones, in 2016, 2017, and 2018, it still procured around 4m tonnes each year.

Therefore, if the Punjab government remains uninterested in procuring wheat from farmers in significant quantities this year and in the future, it would be strategically important to prioritise enhancing farmers’ storage capacity through rolling out a dedicated financing facility and customised loan products.

Such an initiative would help prevent market oversaturation during harvesting, stabilise wheat prices, reduce post-harvest losses, and, most importantly, save farmers from financial setbacks.

Khalid Wattoo is a farmer and a 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 20th, 2024