Money Matters

A perennial deficit

By Majyd Aziz
Mon, 02, 16

Pakistan is primarily an agriculture country.

Pakistan is primarily an agriculture country. However, the agriculture mix is heavily based on cotton, wheat, maize, rice, and sugar. Notwithstanding the importance of these crops in the farmland, the unwillingness of agriculturists to branch out to other crops is blatantly evident. Pakistani farmers are not keen to forcefully address edible oil crops despite the growing demand for these products. Hence, Pakistan depends on huge imports to cater to the local needs.

The reluctance to develop a strong base to grow rapeseed, canola, and sunflower is basically due to considerations of profits, but it has also to do with bare utilization of modern farming practices. The farmers are comfortable with the traditional crops and would prefer to grow pulses rather than, for example, sunflower. This is evident from the statistics provided by Pakistan Oilseed Development Board for the last three years. The production of rapeseed for 2012-13, 2013-14, and 2014-15 was 216,000, 189,000, and 181,000 tons while the rapeseed oil produced was 66,000, 60,000, and 58,000 tons. The canola production of oilseed and oil has remained stagnant at 16,000 tons and 6,000 tons respectively. The production of sunflower oilseed during the above period was 244,000, 190,000, and 178,000 tons while oil produced was 95,000, 76,000, and 68,000 tons.

The above figures reflect the missed opportunities of crop diversification, demonstrate a massive dependence on imports, and reveal the inability of the policymakers to pro-actively support the farming community and convince them to grow these crops. The bureaucratic mindset to take the easy way out and rely on fast-track imports is never a prudent policy. The volatile global marketplace, the vagaries of climate, especially El Niño, the currency factor, and the inland transportation freight are factors that impact on the overall cost of imports.

The imports of rapeseed, canola, sunflower, and soybean seed is worth considering. Rapeseed/canola imports for 2013, 2014 and 2015 on basis of arrival were 534,384, 982,870, and 806,766 metric tonnes while imports of sunflower seeds went up from 185,985 to 193,186 metric tonnes and then drastically dropped to only 30,486 metric tonnes in 2015. However, soybean seeds imports commenced in 2014 with a negligible import of only 9,094 metric tonnes but shot up to 579,724 metric tonnes in 2015. This exhibits a strong preference for soybean by the solvent extractors in Pakistan.

The prime reason for the upsurge in soybean imports was the shift from rapeseed/canola to soybean. Najib Balagamwala, who spearheaded the imports and facilitation of soybean seeds, stated, "24 solvent plants shifted from canola because it had reached a saturation point resulting in negative profit margins from crushing. Today, the position is that Pakistani importers have contracted around 1.45 million metric tonnes of soybean. Of course, this shift led to a shortage of canola oil and sunflower oil as nearly 45% of the mills crushed only soybean seeds."

Rasheed Janmuhammad, a big name in edible oil, said, "there has been substantial increase in oilseeds into Pakistan every year, that is, 62.4 percent in 2014 compared to 2013 and 19.56 percent in 2015 compared to 2014". He added that "2015 has been the first year that Pakistan has embarked very aggressively on the journey of importing soybean due to quite weak global prices and the duty advantage over other oilseeds. This shift of buying soybean will ultimately reduce the import of other oilseeds like canola, rapeseed, and sunflower." He further disclosed, "the huge crop of edible oil and oilseeds all over the world has made the sellers do aggressive marketing and thus there is a glut of edible oils at the consumption stage. The case of Pakistan is worth considering. Domestic entrepreneurs have covered a reasonable quantity of soybeans during 2015 and sufficient coverage for their requirements for the first six months of 2015." Najib Balagamwala echoed this statement and said that over 32 Pakistani entrepreneurs visited Romania and Australia to study the oilseed business and firm up future deals.

Shakil Ashfaq, Vice Chairman, All Pakistan Solvent Extractors Association, lamented that "the growth of local crops has been disappointing, with less than 15 percent of the total edible oil demand being currently met through domestically produced oilseeds". He reasoned, "the support price for wheat being maintained by government is too high compared to international market and this has hampered the growth of oilseeds crops". He also added that "Pakistan is the 11th largest poultry producer in the world, with a production exceeding 8 million metric tonnes of poultry feed. With the recent trend among feed millers to increase soybean in the formulation, the demand for soybean is rising rapidly. However, the current inclusion rate for soybean meal in poultry feed is about 12 percent which is fairly low. Given that poultry is growing steadily at rate of 8 percent, there is a great potential for growth in crushing of soybeans."

The annual per capita consumption of edible oil in Pakistan is only 17 kg with total consumption around 3.70 million metric tonnes. Pakistan produces between 0.50-0.70 million metric tonnes and thus 2.60 million metric tonnes are imported. The total import bill for edible oil is about $2 billion while the imports of oilseeds are approximately $0.50-0.60 billion. Pakistan has emerged as a major global player in edible oil market. The production of soybeans in the world has increased much faster than that of other oilseeds. At the same time, the trend towards utilizing soybean in Pakistan would ensure ample supplies of imported soybeans, and it is predicted that this would ensure continuity and attractive prices. Najib Balagamwala estimated that he foresees imports of 2 million metric tonnes of soybean and 1 million metric tonnes of canola, rapeseed and sunflower, mainly due to industry stability and duty protection for the solvent extractors and oil mills.

It can be rightly said that the local farmer is not eager to switch to canola, rapeseed, or sunflower due to production and cost viability. Thus, dependence on imported soybean augurs well for the local solvent extractors. At present, the import duty is 2 percent, the Federal Excise Duty is Rs 400 per metric tonnes, sales tax is 6 percent, and advance income tax is 5.5 percent. It is proposed that these front-loading duties and taxes must be zero-based so that the consumers get the finished product at favorable rates and, at the same time, Pakistan would be in a position to export to neighboring countries. A cost-effective and efficient supply chain would be the ensuing result. Pakistan has the potential and expertise to excel and further develop the edible oil industry.

The writer is former president of KCCI