The country’s headline inflation has started to slide down and is expected to touch 15 per cent. This has been possible mainly because of a significant drop in wheat and flour prices. However, the alleged and controversial decision to import around 3.5 million tonnes of wheat in early 2024 can be ascribed to the easing of inflation.

The current year’s bumper wheat harvest of around 30m tonnes amidst a prior wheat stock has suppressed the market price of wheat, especially for farmers. In an era of the free market economy — supported by many economists and policymakers — the current price reflects supply and demand.

Considering the price support history for wheat in recent years, an exaggerated support price was announced last year, with a 77pc increase from the previous year, 2021-22. Although the minimum support price (MSP) was raised by 77pc for the year 2022-23, the per 40kg cost of production was reported to increase by 46pc — from Rs2,105 to Rs3,075, as per the Agriculture Policy Institute (API).

However, with an Rs3,900 MSP, the market price went as high as Rs6,500, yielding exorbitant profits for wheat traders and hoarders. The consumers, being in the majority vis-à-vis wheat producers and traders, had to suffer the heavy burden.

The state would be in a better place if restraint is exercised in government-funded procurement, at least for the current year

Nevertheless, it was then estimated that the per capita annual expenses on wheat consumption would increase by around Rs5,000 if MSP was raised from Rs2,200 to Rs3,900. This is how an average urban or rural, non-farming consumer has to bear increased wheat MSP.

The margin between wheat’s average cost of production (COP) and the announced wheat MSP was very little till 2020-21. Beyond the cropping year 2020-21, the divergence between COP and MSP started to widen, reaching a maximum in 2022-23. The divergence as a percentage of COP for this year stood at around 80pc, whereas for the rest of the years, it ranged between 1.8pc in 2018-19 and 31.5pc in 2021-22.

With such a massive increase in MSP in 2022-23, which was over and above 80pc of the COP, non-farming consumers were destined to pay a heavy toll on sacrificing their consumer surplus. At the same time, they would have been taxed, one way or the other, to subsidise the farming community in many ways — fertilisers, farm machinery, solarisation, electricity for groundwater extraction given highly underpriced surface water availability for years, laser levelling, farm credit and so on.

Considering farm credit only, the State Bank set a 26pc higher disbursement target for the year 2023-24 compared with the previous year’s actual disbursement, from Rs1.78 trillion to Rs2.25tr.

With all this support from the public sector, wheat production had been predicted to increase courtesy of the substitution of wheat for other crops — wheat was sown on around 23.7m acres as against the set target of 22.2m acres for 2023-24. The actual area under wheat in the previous year was around 22.3m acres, registering a nationwide 7pc growth in the wheat area.

From the farmers’ perspective, they, too, enjoyed market-determined prices based on supply and demand during the years 2023-24, with no voice for government intervention by the producers/farmers’ unions. Take examples of many daily-use items, such as onion, chicken, potato, cotton, etc., whose market prices remained significantly high for an extended period of time.

Wheat has undoubtedly been grown by a majority of the farming community; this majority, along with other supply and value chain actors, benefited significantly thanks to the previous year’s higher-than-average MSP.

On the other hand, the urban and rural non-farm families were frequently reported to have compromised their food security mainly because of inflationary pressure, wheat flour being one of the major drivers.

For 2023-24, the government opted for the same MSP as the previous year, but the divergence between MSP and COP of 2023-24 still has a weight greater than prior years (the years 2021-22 and 2022-23 had greater divergence, in percentage, than for 2023-24). This fact further supports the existence of a fair margin for wheat producers.

With the enforcement of MSP through state procurement, the cost of administering this policy, along with logistics (bandana, transportation, and storage), would further add to the government’s fiscal burden, which would ultimately be borne by the masses and most likely by the urban middle and lower-middle class. Many agricultural producers would find options to evade any sort of direct taxation.

Another motive for the non-procurement of wheat is that a majority of the farmers practising subsistence agriculture — having a paltry marketable surplus — would hardly be allured to a higher market price. Here, the large farmers having sufficient linkages and influence can be the major beneficiaries of such a policy.

As many economists argue for a market-based price setting, the current wheat economy operating in the realm of supply-demand (although under an MSP regime or Rs3,900) can help stabilise food prices in the coming months, improving the purchasing power of the lower and middle class who can later afford relatively higher prices in the later part of the year.

In a nutshell, the state would be in a better place if a sort of restraint is exercised in state-funded procurement, at least for the current year. Next year’s MSP needs to heed the COP worked out by API or any other reliable organisation based on a representative sample.

The writer is an Associate Professor, Institute of Agricultural and Resource Economics, University of Agriculture, Faisalabad
Email: azhar.abbas@uaf.edu.pk

Published in Dawn, The Business and Finance Weekly, May 27th, 2024