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October 25, 2020

With price already on the higher side: Govt wheat support price not to impact domestic retail price

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October 25, 2020

ISLAMABAD: The Rs1,750 per 40kg wheat support price proposed by the Ministry of National Food Security and Research will not impact domestic retail price because it is already on the much higher side, shows a research conducted by the Pakistan Institute of Development Economics (PIDE).

Researchers Abdul Jalil, Saud Ahmed and Nasir Iqbal found that wheat was one of the most strategic crops globally, which had always been a big challenge for many governments.

Over the last few months, the Government of Pakistan was struggling to fix wheat prices due to weak governance and mismanagement. For the current price of Rs1,400, the market price of wheat was Rs2,256 per 40kg in the first week of October.

To ensure a smooth supply of wheat and incentivize farmers to produce more, the Pakistan Agricultural Storage and Services Corporation (PASSCO) procured wheat on the minimum support price (MSP). This price is determined based on the excess and shortage of wheat supply in Pakistan.

Through the MSP, farmers will receive a fair amount of price for their upcoming crops to invest in agricultural commodities production.

The Ministry of National Food Security and Research suggested that wheat’s support price should be increased to motivate farmers to increase production in future.

The Economic Coordination Committee (ECC) consulted ministers and special aides to conclude whether the support price should be increased by 25%, i.e., from Rs1,400 per 40kg to Rs1,745.

Food prices are climbing fast in recent months, posing a possible threat to the poor livelihood. Furthermore, food inflation remains the major contributor to various inflation episodes over the last ten years.

Wheat and wheat flour remain the primary drivers of the recent episode of food inflation. Notably, wheat inflation was driving food inflation in most cases (see figure 2) over the last ten years. Recently, the government is going to announce an increase in the MSP of wheat. It is essential to review the inflationary consequences of any price change in the wheat.

The research finds a low correlation between MSP and food inflation as compared to retail wheat prices. More interestingly, retail wheat inflation was even negative in 2014 and 2015 when the government increased MSP from 1200 to 1300. Furthermore, the retail wheat price is much higher than MSP; therefore, we shall not see the complete pass-through of the MSP increase in inflation.

Several scenarios were developed for the impact of wheat minimum support price increase. The findings suggest that if the government sets Rs1,750 MSP, it will increase inflation by 29bps. However, a bumper crop and good governance may reduce the pass-through on inflation and vice versa. Therefore, the government has to have a reasonable control over the administrative side to have a minimal impact on food inflation. The retail wheat price is much higher than the proposed MSP; therefore, the researchers do not see complete pass-through of the MSP increase in inflation.

The research suggests appropriate measures to reduce the gap between wheat MSP and retail price and promote competitiveness in the wheat market to reduce market distortion costs and avoid illegal trading. The cost of wheat production is high, with low productivity in Pakistan than neighboring countries India and Iran. The government can tackle inflationary pressures by promoting competitiveness in the wheat market.