Towards A Wheat Procurement Policy

Towards A Wheat Procurement Policy

In my last article in this space, I advocated for a wheat procurement policy that, amongst other objectives, could work towards limiting discretion in wheat procurement. That implied discretion prevailing in the fixation of the minimum support price (MSP) and the issuance of bardana. I had proposed that a systematic and formal criterion should be adopted to shortlist farmers eligible to receive ‘bardana’ and a calibrative model / economic methodology should work in the background of the MSP calculation. Such an exercise is neither technically infeasible nor very expensive to accommodate within the government’s resource envelope. While such policy recommendations do appeal to senses, they must not give an impression that the current calculation of the MSP is an entirely political process and the fixation is done randomly and on the whims and personal preferences of those who have the authority to make policy decisions in the wheat sector. It only implies that the current calculation is not based on a formal methodology which needs to be developed in consultation with sector experts and stakeholders.

The same can be said for the issuance of the bardana which is a purely non-market based allocative decision and thus, remains open to political misuse. In the case of the issuance of the bardana, the idea is not to make calculations using some calibrative / economic model, but to understand that there needs to be an equitable and inclusive criterion based on which bardana could be distributed alike between small and big farmers. There is an economic rationale behind this line of thinking and beyond the economics of it, lies the moral reason to lean towards equity and inclusivity. Many reports and papers suggest issuing bardana on the basis of some predetermined and formal criterion and it is my personal experience that such desires also find ownership and expression within the senior levels of the bureaucracy, however, how to do this seems to be the bigger problem than the decision of whether or when to do this. This piece would initiate the discussion on the ‘how’ question and leave the whether and the when to those who actually formulate policy.

In a sub-sector that produces a staple food commodity and on which depends a large part of the economy, allowing the government to have some market power, which clearly it must exercise to achieve the collective good, is not a bad idea after all

The principal policy question that the government must consider is if it should procure any wheat from private sellers beyond what it requires to reserve for strategic purposes. Like every policy question, there may not be a single definitive answer to this. However, the practice of procuring certain quantities of wheat from private producers/sellers allows the principle advantage to the government using which it is able to have some influence over private producers. This influence is useful in regulating the other, “non-price aspects” of this government-producer relationship. This means that by fixing the minimum support price and by procuring certain quantities of wheat, the government is able to push its non-price regulations through and exercise market power. In a sub-sector that produces a staple food commodity and on which depends a large part of the economy, allowing the government to have some market power, which clearly it must exercise to achieve the collective good, is not a bad idea after all. Even those bitterly against regulations - and we know our free-market fundamentalists would not like to see any regulations at all - would find little reason to dismantle the regulatory regime in sectors like wheat.

While I do not endeavor to formulate a shadow policy here, I intend to initiate policy thinking that could help the policymakers identify the direction in which they could begin to move. I have listed some policy recommendations that the government may like to consider, below:

  1. The existing wheat procurement policy is largely invested in the determination of the quantity that has to be procured. The bardana that licenses the holder to sell a certain quantity of wheat to the government is a quantity-based regulation that, while providing necessary financial support to the producer, does not gear us towards better standards of quality. The government may formulate and enforce minimum standards of quality beneath which it would not issue bardana.

  2. The issuance of the bardana is open to administrative discretion which, as evidence suggests, is often compromised at the hands of a self-serving bureaucracy. Instead, issuance of the bardana may be based on a multi-dimensional criterion comprising of factors like the quality of wheat, the overall quantity that a certain farmer has produced, the socio-economic status of the farmer (enabling pro-poor strategies) and farm/non-farm productivity. The government may also include some weightage for the farmers’ independent commitment to explore international markets for exports. The issuance of the bardana infact could be linked entirely to exports for instance; procurement could be made as a multiple of the quantity exported by a farmer. That will serve the triple purpose of ensuring export growth, incentive for farmers that produce export quality wheat and limiting of administrative discretion.

  3. To control administrative discretion, a policy of not procuring more than 50% of what each farmer produces should be adopted. This will ensure equitable and transparent procurement of wheat and also that each producer is included in the procurement plans of the government.

  4. The MSP could be fixed as a 15% mark-up over total cost which would cater for both producer cost and the costs incurred by the intermediary. This will incentivize producers to ensure farm productivity and produce at internationally competitive prices. Production costs data could be improved by modelling moving averages of costs from previous years and from the different regions of the country. Cost analysis will be a critical determinant of a market-based and growth-centered MSP.

  5. An independent commission should be setup to procure wheat after ensuring that it attains a certain quality standard and that the farmer has produced after achieving a prescribed level of farm / non-farm productivity. This could be achieved by linking the independent commission with extension workers and agriculture officers in the field.

  6. A ceiling of 10% of the total annual wheat production to be earmarked for building strategic reserves.

  7. Based on time-series data, wheat consumption demand to be projected for next 10 years.

  8. Wheat procurement may not, at any time, be in excess to the projected consumption demand for that year.

  9. Compliance with State Bank of Pakistan’s financing rules to be ensured with a string emphasis on ensuring that the rules continue to respond to the changing financing needs / context of the industry.