GRAIN wastages occur at every level across the food supply chain. However, in many developing countries, most of these losses occur at the post-harvest stage due to inadequate grain handling and storage.

According to the FAO report, up to 40pc of the total production in developing countries gets wasted due to lack of appropriate agriculture infrastructure.

In the case of agriculture infrastructure, Pakistan’s score at 40.7 is 14.6 points less than the world average of 57.9.

According to some reliable estimates, poor grain handling and storage alone results in 15-18pc loss of grains and 25-40pc loss in case of fruits and vegetables. This wastage results in financial losses that run in billions of rupees besides posing a threat to food security and causing environmental damage.

When the lack of infrastructure is combined with the prevailing inadequate market structure, the challenges facing the agriculture sector are compounded. With almost 65pc of the total farming households operating at subsistence level, their access to finance and yield enhancing technologies is very limited. This locks a big chunk of rural population in the vicious cycle of chronic poverty.

To elaborate further, the wheat crop is the single largest crop in Pakistan, grown at a national level by 6.9m of the 8.3m farming households in the country, with production exceeding 26m tonnes in FY15. As a dietary staple, the wheat crop contributes over 10pc to value added in agriculture and 2.1pc to GDP.

Given its strategic importance, the government has an elaborate policy for the wheat crop where the support prices are set at the federal level for domestic procurement while there is a restriction on inter-provincial movement and export of wheat.

In order to maintain strategic stocks of wheat for regulating price and ensuring food security, the federal government procures about 20-25pc of the total wheat production which is stored and handled by Pakistan Storage and Services Corporation (Passco). The government procurement target for FY15 was 6.6m tonnes at a support price of Rs1,300/maund.

“Poor grain handling and storage alone results in 15-18pc loss of grains and 25-40pc loss in case of fruits and vegetables”

Around one-third of the wheat produced is kept by farmers for seed and their own consumption. The total grain storage facility available is around 5.5m tonnes. Much of this outdated storage (1.7m tonnes) is controlled by the government and results in high level of pilferages and quality losses.

Besides directly posing a threat to food security, the interventionist policies of the government are causing significant economic and financial losses.

One estimate is that around 2m tonnes of wheat are lost every year due to bad handling and storage by government authorities. The economic losses as a result of current storage inefficiencies are estimated to be around Rs3,900/tonne per year. Assuming that the government purchases around 6m tonnes of wheat, the losses amount to around Rs24bn per year because of inadequate agriculture infrastructure.

The purchase of wheat at the support price of Rs1,300/maund results in very high borrowing costs to the government. According to the SBP data, between 11-15pc of the total procurement cost is paid to the commercial banks in terms of interest.

Due to high incidence of corruption and systematic inefficiencies, most of the small farmers cannot sell their produce at the support price. Because of their immediate need for cash for sowing the next crop, these farmers are forced to sell their produce at discounted prices to the middlemen.

The existing government intervention programmes pose significant constraints to private sector-driven development, including to the much-needed investment in grain storage infrastructure. Continuing the current costly support policies aimed at supporting farmers, stabilising consumer prices and subsidising all consumer groups (regardless of income) pose a significant financial burden, which may not be sustainable in the long-term.

An alternative to this system is making investments in grain storage facilities and introducing the warehouse receipt (WHR) financing system. Such a system would have significant advantages in terms of better resource efficiency through reduction of post-harvest losses.

Besides ensuring quantity and quality preservation, the system will also significantly reduce the expenses incurred by the government in wheat procurement and storage (a system can be implemented where only the differential between the markets price as indicated by the WHR and support prices).

Such a system will also provide collateral for landless farmers to obtain cheaper financing from banks (as opposed to private lenders) and will therefore help in the financial inclusion agenda as well. Through increased transparency, the government will be able to monitor accurate level of strategic stocks in real-time. The increased transparency will also reduce price volatility and information asymmetry.

Published in Dawn, Business & Finance weekly, March 21st, 2016