THE government is likely to face tough competition in exporting the surplus stock of wheat in 2016 as the global production of the commodity is expected to be 1.5pc higher than that of last year.

Export volume is expected to decline as several major wheat importers have good production prospects of their own. Iran (which is a buyer of wheat from Pakistan), has now other choices following the lifting of sanctions.

As a result, the stock-to-use-ration, a measure of the abundance of supplies relative to demand, is expected to reach a 14-year high this year despite higher global wheat consumption.

The World Bank Commodity Markets Outlook released last week projected wheat production in Pakistan close to 26m tonnes during 2016.

A joint World Bank and FAO report points out that the existing government intervention programmes in the agricultural sector restrict private sector-driven capital spending, including the much-needed investment in grain storage facility

There are some fourteen major producers of wheat in the world. When the production of wheat by smaller regions is included, the total world production will be 735.4m tonnes next season.

Wheat is a staple crop in Pakistan. About 80pc of farmers cultivate it on a total of 9m hectares or 40pc of the country’s total cultivated land.

The agro-ecological potential for irrigated wheat in Punjab — the country’s primary production area — suggests that yields could be raised to about six tonnes per hectare from current yields of 2.5-3 tonnes. Assuming that this potential wheat yield is realised through sustainable, intensified crop production, Pakistan could increase the annual wheat production to 32.5-38m tonnes from the area currently planted.

The Food and Agriculture Organisation (FAO) suggests that any policies and support programmes aimed at increasing wheat productivity must take into account existing constraints in the wheat supply chain, especially the lack of storage facilities.

Wheat currently contributes 37pc of total food energy intake in Pakistan. As incomes increase and a stronger middle class emerges, consumers will likely shift towards more dairy, meat and other high-value food products in their diet.

A review of the wheat sector and grain storage issues jointly carried by the World Bank and FAO points out that the existing government intervention programmes restrict private sector-driven investment, including for the much-needed investment in grain storage facility.

Continuing the current costly support policies — aimed at supporting farmers, stabilising consumer prices and subsidising all consumer groups regardless of income — will pose a significant public expenditure burden, which may not be sustainable in the long term.

Further research is needed to determine the extent to which farmers rather than other wheat supply chain actors benefit from existing support programmes, and to identify possible policy changes based on recent sector developments.

Farmers in Pakistan retain about one-third of their wheat production for seed and household food consumption. The government is the main buyer of farmers’ wheat, with actual volumes of government procurement often reaching 25-30pc of total production, driven by both food security and market intervention objectives.

Given the predominantly subsistence nature of wheat farming, the government procurement may reach 35-50pc of marketed wheat. While food security is an important concern in Pakistan, there is little doubt that high volumes of state wheat procurement leave little room for private sector trade and investment in the post-harvest supply chain, says the FAO report..

The private sector dominates wheat production, transportation and milling, but has a somewhat limited role in wheat trade. Pakistan’s private sector is interested in investing in grain transportation, storage and marketing, but is unlikely to do so unless the government’s role is rationalised and the private sector is left free to make rational investment decisions for improving the sector’s efficiency.

According to FAO, the relatively high domestic wheat procurement prices and secure government cash payments to farmers give farmers little incentive to use post-harvest financing instruments such as grain warehouse receipts through which they pledge their crops to obtain financing from input suppliers, agricultural traders or banks.

Although the use of warehouse receipts can increase liquidity in the wheat trade and has the potential to reduce the costs of wheat trade financing from their current 16-17pc to 10-14pc per year, such post-harvest financing instruments are unlikely to become operational under existing sector policies.

The FAO suggests that the public private partnership model of investment for improving wheat storage may be a better option than public investment.

The use of modern temporary storage technologies is limited. The new permanent grain storage facilities need to be constructed; and the entire handling and transportation system be adjusted; silo bags and other temporary solutions for wheat storage be considered alternative solutions, especially at the sites where grain is received from farmers after harvest (the so-called ‘flag stations’), the FAO report says.

The FAO estimates economic losses due to the deterioration of wheat quantity and quality at Rs3,874/tonne per year. That includes the costs of physical product losses, bags, loading, unloading and other expenses associated with the current bag handling system.

Even assuming that only 30pc of the government’s annual wheat purchases are subject to this loss rate, Pakistan’s economy loses Rs6-7bn per year because of the lack of adequate wheat storage.

The fair average quality (FAQ) standard used for wheat specifies only basic quality indicators related to moisture content and grain impurities, and is of very limited effectiveness for the quality control of bagged wheat at the peak of the procurement season. Criteria based on test weight, protein, gluten content, falling number and other parameters are not specified in the FAQ.

The report viewed that the existing standard creates uncertainties for domestic millers and provides no real incentives for maintaining wheat quality in storage. Quality testing and sampling appear arbitrary to many market players.

There is a need to introduce a systematic third party or government-controlled laboratory testing and certification scheme to verify the quality parameters for wheat’s final uses, replacing the current sampling method of piercing bags with a bamboo stick and subjecting their contents to visual inspection.

Published in Dawn, Business & Finance weekly, February 8th, 2016