In the wheat sector, the government has decided to take two major policy shifts: abolishing the decades-long practice of setting a support price and discontinuing direct procurement from farmers.

These policy measures mark a shift towards deregulating the wheat market, a longstanding demand of the International Monetary Fund (IMF) and other international lenders.

Historically, the wheat support price, along with government procurement, served three key purposes: ensuring national food security through maintaining strategic reserves, stabilising the wheat market by releasing buffer stocks to flour mills, and guaranteeing farmers a minimum return after accounting for agricultural input costs so they would continue cultivating wheat instead of shifting to alternative crops.

However, the government’s abrupt policy shift may disrupt market stability and cause multiple unintended effects on wheat farmers and consumers, which must be thoroughly assessed.

First, crop switching has become increasingly common in Pakistan. Farmers usually opt for alternative crops when they face high production risks (reduction in yields) or market risks driven by local and global market dynamics. The seven per cent reduction in wheat acreage for 2024-25 is a direct consequence of the low market prices for the 2023-24 wheat crops.

An end to support prices raises concerns that a few well-capitalised players could manipulate the sector to maximise their profits at the expense of market stability

According to the World Bank’s Commodity Markets Outlook (October 2024), global wheat prices are expected to decline further by around 2pc in 2025. This scenario could put additional financial strain on farmers, potentially leading to a further decline in wheat cultivation next year.

In 2025, with a carryover stock of four million tonnes and a projected harvest of 25-27m tonnes — affected by high temperatures and drought-like conditions — Pakistan would face a wheat shortfall against its 30m tonne requirement. By 2026, import reliance could rise sharply, which would further strain foreign exchange reserves. Therefore, the government must now decide whether to abandon wheat — a strategic crop crucial to national food security — or support it via alternative policy instruments.

Second, government procurement has historically stabilised the wheat market during the harvest season, when small farmers go for distress sales, and oversupply creates a glut in the market. With the state withdrawing from procurement, prices are likely to plunge during peak harvest days, severely impacting small farmers, who constitute over 90pc of the total 8.2m. Beyond the Kissan Card and Hari Card — aimed at strengthening agricultural credit but reaching fewer than 15pc of farmers — the government has no concrete plan to protect them from financial distress.

Third, a deregulated wheat market — driven solely by demand and supply — would increase price volatility, as the government will no longer hold buffer stocks to stabilise the market. In the coming years, shrinking wheat acreage and rising global prices could create a precarious situation leading to sharp price hikes; consumers would be adversely affected by this. What measures, if any, does the government have in place to mitigate this risk?

Fourth, the country requires 2m tonnes of strategic wheat reserves, which the government may procure through private-sector contracts via a tendering process. In previous years, the federal and provincial governments collectively procured 6-7m tonnes annually. With the government now limiting procurement to 2m tonnes, a critical question arises: who will purchase and store the remaining 4-5m tonnes (around 40pc of the marketable surplus) worth Rs0.4 trillion?

It seems that large private sector players, including 2023-24 wheat importers and major flour mill owners, may step in to fill this vacuum created by this policy shift. This raises concerns that the wheat sector could fall under the control of a few well-capitalised players who can manipulate stocks to maximise their profits at the expense of market stability — much like the sugar industry.

A viable solution is to increase the wheat storage capacity of those small and medium-sized farmers, who often sell their harvest immediately due to their inadequate storage facilities. The State Bank could introduce a subsidised financing facility for constructing one-room storage units at farms or houses, enabling such farmers to hold surplus wheat.

To sum it up, the concept of setting a support price and procuring wheat from farmers is not inherently flawed; many countries implement similar policies successfully. In Pakistan, the real issue lies in financing such procurement through high-interest commercial bank loans. The problem worsens due to delayed loan repayments by the government, as seen in Punjab, where outstanding debt ballooned to Rs0.68tr in June 2023, with annual interest payments reaching Rs0.11tr in 2023-2024.

Adding storage costs, pilferage, and wastage inflates procurement costs by 20-30pc above the support (procurement) price. This inefficient model, riddled with corruption, prompted international lenders to push for deregulating the wheat market.

The government decision lacks thorough planning and a clear strategy to address food security concerns and the challenges faced by farmers and consumers. We should not forget that Pakistan has a history of adopting lopsided policies, often designed with a narrow, unidirectional perspective rather than a comprehensive, well-rounded approach.

As a result, their unintended consequences often outweigh their intended benefits. Consequently, frequent policy reversals, inefficiencies, and missed opportunities have become a recurring challenge in governance and economic planning.

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, February 17th, 2025