Presentations made at the PSSP First Annual Conference - December 13, 14, 2012 - Planning Commission, Islamabad, Pakistan

1. IFPRI
Pakistan Wheat Procurement
Policy Reform
Paul Dorosh
International Food Policy Research Institute
Productivity, Growth and Poverty Reduction in Rural Pakistan
Pakistan Strategy Support Program (PSSP)
First Annual Conference
December 13-14, 2012
Islamabad, Pakistan
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

2. Government Wheat Market Interventions
 Domestic procurement at fixed “support
price” in excess of open market prices
• Large farmers who sell wheat to government
benefit most
 Significant losses in government storage,
and high costs of handling and transport
 Sales of wheat to flour mills at fixed
“release price” below open market prices
 Subsidies on sales of imported wheat
• In some years, subsidized sales of exports

3. Financial Losses: 2009-10 Wheat Marketing Year
 Support price: 950 Rs/40 kg (23.75 Rs/kg)
 Official estimates of storage, handling and
transport costs: 196 Rs/40 kg (4.90 Rs/kg)
 Release price set at 975 Rs/40 kg (24.38
Rs/kg)
 Subsidy on wheat procured in 2009-10 and
sold in same year: 171 Rs/40 kg (4.28 Rs/kg)

4. Possible Per Kg Financial Losses* on
Domestic Wheat Procurement and Sales (Rs/kg)
Support Incidentals Release Unit
Year Price PASSCO Punjab Sindh Price Subsidy*
(Rs/kg (Rs/kg (Rs/kg (Rs/kg (Rs/kg (Rs/kg
2005-06 10.38 1.83 1.73 - 10.75 1.40
2006-07 10.63 2.30 1.95 2.25 11.63 1.13
2007-08 15.63 2.30 2.00 2.40 15.63 2.15
2008-09 23.75 3.03 2.50 2.73 18.75 7.76
2009-10 23.75 4.80 5.00 4.98 24.38 4.28
2010-11 23.75 --- --- --- --- ---
* Possible financial loss (unit subsidy) for each year is calculated
as the domestic procurement price plus the cost of incidentals
minus the release price.

5. Financial Losses: 2009-10 Wheat Marketing Year
 Subsidy on wheat procured in 2009-10 and
sold in same year: 171 Rs/40 kg (4.28 Rs/kg)
 Massive quantity of procurement: 9.2
million tons (compared to normal
procurement of 3.9 to 4.5 million tons)
 Potential losses at 2009/10 release price:
9.231 million tons (total procurement) 4.28
Rs/kg subsidy = 39.5 bn Rupees
 Total releases: 5.985 million tons times 4.28
Rs/kg subsidy = 25.6 bn Rupees

6. Possible Financial Losses on
Domestic Wheat Procurement and Sales
Procurement Support Release Unit Financial Financial
Year Quantity Price Price Subsidy* Loss** Loss**
('000 tons) (Rs/kg (Rs/kg (Rs/kg (bn Rs) (bn 09/10 Rs)
2005-06 3,939 10.38 10.75 1.40 5.51 8.98
2006-07 4,514 10.63 11.63 1.13 5.08 7.67
2007-08 4,422 15.63 15.63 2.15 9.51 12.83
2008-09 3,917 23.75 18.75 7.76 30.41 33.97
2009-10 9,231 23.75 24.38 4.28 39.46 39.46
2010-11 6,700 23.75 --- --- --- ---
* Possible per kg financial loss (unit subsidy) for each year is calculated as the
domestic procurement price plus the cost of incidentals minus the release price.
** Financial loss is unit subsidy times quantity of procurement.

7. Possible Financial Losses* on
Domestic Wheat Procurement and Sales
300
250
200
billion Rupees
150
100
50
-
2005-06 2006-07 2007-08 2008-09 2009-10
Value of Sales to Flour Mills Financial Loss
* Possible financial loss for each year is calculated as the domestic procurement price plus the cost
of incidentals minus the release price, times the quantity of domestic procurement.

8. Possible Financial Losses* on
Domestic Wheat Procurement and Sales (bn 2009-10 Rs)
300
250
billion (2009-10) Rupees
200
150
100
50
-
2005-06 2006-07 2007-08 2008-09 2009-10
Value of Sales to Flour Mills Financial Loss
* Possible financial loss for each year is calculated as the domestic procurement price plus the cost
of incidentals minus the release price, times the quantity of domestic procurement.

9. Possible Financial Losses* on
Domestic Wheat Procurement and Sales
45
40
35
billion (2009-10) Rupees
30
25
20
15
10
5
-
2005-06 2006-07 2007-08 2008-09 2009-10
Financial Loss
* Possible financial loss for each year is calculated as the domestic procurement price plus the cost
of incidentals minus the release price, times the quantity of domestic procurement.

10. 2010 Floods and Wheat Markets
 Prior to the floods, government stocks were at record levels due
to the large domestic procurement in May-July 2009 and May-
July 2010
• Stocks reached an estimated 11 million tons in July 2010
• Some stocks, estimated at about 800 thousand tons, were lost in the
floods, but stock levels remain very high
• Most of this stock was held outside of godowns or silos, and
typically incurs substantial storage losses in quantity and quality
 The size of the 2011 wheat harvest was uncertain immediately
after the floods, but ultimately the overall harvest was good in
spite of the floods
• Flood waters may have prevented October/November sowing of
some of the wheat crop in Sind
• Seed quality in flood-affected areas may have suffered where
farmer seed stocks were lost
• However, parts of Punjab may have benefited from nutrient rich
sediments

11. Pakistan: Initial and Estimated
Peak Wheat Stocks* 1991-92 to 2010-11
12
10
8
(million tons)
6
4
2
0
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
2005-06
2007-08
2009-10
Initial Stocks Intial Stocks + Domestic Procurement
* Peak wheat stocks are estimated as end-April stocks plus May-June domestic procurement.

12. Wheat Markets and Procurement: 2011
 Real wheat prices in major wholesale
markets were stable after the July 2010
floods, evidence that wheat supply was
adequate
 Given huge domestic stocks, domestic
procurement was cut back sharply in April-
May 2011 from an average of 4.0 mn
tons/year (2002-2008) to only 2.3 mn tons.
 Domestic prices did not collapse.

13. Pakistan: Wheat Procurement and Production
1989-90 to 2011-12
35 45%
40%
30
35%
25
30%
(mn tons)
20 25%
15 20%
15%
10
10%
5
5%
0 0%
Procurement Production Procurement / Production
Note: Procurement generally takes place in April and May. Season ends June 1.

14. Pakistan: Nominal Wholesale, Import Parity
and Support Prices of Wheat
50
45
40
35
30
Price(Rs/kg)
25
20
15
10
5
0
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Lahore Wholesale Price Import Parity(Lahore) Procurement Price
Despite 50 percent lower wheat procurement in 2010-11 relative to the average
of 2000-01 to 2007-08, wholesale wheat prices did not collapse.

15. Real Wholesale and Procurement Prices of Wheat
2002-2012
70
60
50
Rs (2012) / kg
40
30
20
10
0
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Lahore Wholesale Price Import Parity(Lahore) Support Price
Real wheat prices have declined since 2009, but are still higher than average
levels for 2002-07.

16. Domestic and International Wheat Prices
 Government interventions in domestic wheat markets
make private international trade (wheat imports or
exports) unprofitable.
• In terms of price formation, wheat behaves as a non-traded
good, with domestic prices not directly linked to international
prices.
 In most years since 1990, domestic sales of government
imports of about 2 million tons/year kept domestic prices
below international (import parity) prices, so private
imports were not profitable.
 When international prices rose sharply in 2008, export
restrictions prevented exports and kept domestic prices
from rising to export parity levels

17. Pakistan Wheat Prices (US$/ton)
2002-2012
600
500
400
(US$/ton)
300
200
100
0
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Lahore Wholesale Price Import Parity(Lahore) Support Price
Since late 2010, domestic wheat prices have generally been about $100/ton (25
percent) below import parity (Lahore).

18. Pakistan Wheat Prices (US$/ton)
2002-2012
600
500
400
(US$/ton)
300
200
100
0
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Lahore Wholesale Price Import Parity(Lahore) Export Parity (Lahore) Support Price
In years of high international prices (2002, 2007-08, early 2011, late 2012),
Pakistan domestic prices have been at or slightly below export parity.

19. Recent Developments: Procurement
 Procurement in April-May 2012 (at 1050
Rs/40kg) increased to 5.66 mn tons (from 2.23
mn tons in 2011).
• Credit advances for procurement (not counting
storage and handling costs) are 5.66 mn tons x 26.25
Rs/kg = 149 bn Rs (about 1.5 bn dollars)
• Subsidized sales of this wheat would result in large
fiscal costs.
 In December 2012, the procurement price for
April-May 2013 was increased to 1200/40kg (30
Rs/kg)

20. Current International Wheat Prices
 In mid-2010, international wheat prices
increased sharply and have remained at a
level of about $450/ton import parity
(Lahore) through the end of 2012.
 Domestic wholesale prices have been far
lower (about $300/ton)
• There has been no incentive for private sector
imports in this period.

21. Pakistan Wheat Prices (US$/ton)
2002-2012
600
500
400
(US$/ton)
300
200
100
0
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Lahore Wholesale Price Import Parity(Lahore) Support Price
Since late 2010, domestic wheat prices have generally been about $100/ton (25
percent) below import parity (Lahore).

22. Current Domestic Wheat Prices
 Real wheat prices have risen for both
producers and consumers since 2002-07
• In real terms (2012 prices), wholesale prices in
2011-12 were 14 percent above their average
levels of 2002-03 to 2006-07 (27.7 Rs/kg as
compared to 24.2 Rs/kg)
• Procurement prices increased by 30 percent in
real terms over the same period

23. Real Wholesale and Procurement Prices of Wheat
2002-2012
70
60
50
Rs (2012) / kg
40
30
20
10
0
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Lahore Wholesale Price Import Parity(Lahore) Support Price
Real wheat prices have declined since 2009, but are still higher than average
levels for 2002-07.

24. Wheat Policy Conclusions
 Setting domestic procurement prices too high
relative to domestic release prices results in massive
fiscal costs with little or no benefit to consumers and
to small farmers that do not sell wheat to
government agencies.
 Substantially reduced domestic procurement in
2010-11 (April-May 2011) resulted in substantial
fiscal savings and did not lead to substantially lower
nominal or real wholesale prices
 Real prices of wheat are higher than they were in
2002-07 to the benefit of net sellers and the
detriment of net buyers.

25. Wheat Policy Next Steps
 Pakistan’s complex wheat markets and
policies require continued policy
analysis, monitoring and coordination
across government agencies.
 Further work is planned to model the
distributional implications of wheat
procurement, sales and import policies.