Discussion Paper on the Wheat-Flour Industry in Pakistan

WHEAT- FLOUR INDUSTRY IN PAKISTAN Discussion Paper

by Geoffrey Quartermaine Bastin Sadia Sarwar Zain Asadullah Kazmi

Islamabad, September 2008

Competitiveness Support Fund Discussion Paper on the Wheat-Flour Industry in Pakistan

Table of ContentsINTRODUCTION EXECUTIVE BRIEF Part I: Policies and Prices Part II: Supply and Processing Part III: Demand RECOMMENDATIONS PART I: POLICIES AND PRICES A. WHEAT POLICY 1. Outline of the 2008 wheat crisis 2. Main elements of policy 3. Instruments of policy B. PRICES 1. Domestic Price Trends 2. Trade . .4 . 7 ....7 ...8 ..9 .10 ...11 ..11 11 ...13 ....15 .. 21 . 21 .. 23 .24 .24 ..27 ..31 ..31 34 ..35 ..35 .. 36 . 37 43 ...43 ..43 .47 ..50 .50 ..52 .53 ..56 .57

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PART II: SUPPLY AND PROCESSING A.THE WHEAT GRAIN INDUSTRY IN PAKISTAN B.WHEAT GRAIN COSTS OF PRODUCITION AND MARGINS C. WHEAT GRAIN LOGISTICS 1. Harvesting, threshing and primary transport 2. Primary storage D. GOVERNMENT PROCUREMENT AND STORAGE 1. Procurement 2. Public Storage E. FLOUR MILLING INDUSTRY PART III: DEMAND A. CONSUMPTION 1. Perspective on the demand for food in Pakistan 2. Demographics 3. Poverty 4. Summary of overall consumption patterns B. CONSUMPTION OF WHEAT FLOUR 1. Wheat requirement to satisfy demand 2. Balance of supply and demand PART IV: CONCLUSION AND RECOMMENDATIONS

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List of TablesTable 1: WHEAT GRAIN PROCUREMENT AND ISSUE PRICES ........................ Table 2: WHEAT PROCUREMENT MECHANISM ................................................ Table 3:PRODUCTION BY PROVINCE ................................................................. Table 4: MAJOR CROP OUTPUTS ....................................................................... Table 5:PROPROTIONS OF MAJOR CROPS IN VALUE ADDED ........................ Table 6: WHEAT COSTS AND MARGINS ............................................................. Table 7: COMPARITIVE COSTS WHEAT PRODUCTION .................................... Table 8: THE COMPOSITION OF ATTA Table 9: MAIN DEMOGRAPHIC INDICATORS FOR PAKISTAN .......................... Table 10: CALCULATION OF DEMAND FOR CEREAL-BASED NUTRIENTS ..... Table 11: CALCULATION OF SUPPLY OF WHEAT GRAIN ................................. Table 12: CALCULATION OF WHEAT FLOUR PRODUCTION . Table 13: WHEAT FLOUR SUPPLY- DEMAND BALANCE ...................................

List of ChartsChart 1: WHEAT GRAIN; GOVERNMENT PROCUREMENT AND ISSUE ........... Chart 2: PRICES OF WHEAT AND FLOUR........................................................... Chart 3: MAIN GROWING AREA FOR WHEAT ................................................... Chart 4: WHEAT AREAS AND YIELDS .................................................................

List of FiguresFigure 1: Soldiers guard a flour mill during the current wheat crisis ....................... Figure 2: Flour exports blocked at Chaman ........................................................... Figure 3: Manually harvesting wheat crop .............................................................. Figure 4: Sheaved wheat before threshing ............................................................ Figure 5: Transportatoin of Wheat.......................................................................... Figure 6:Field threshing in Punjab.......................................................................... Figure 7: Basic wheat grinding in the Tirah Valley neat Afghanistan...................... Figure 8: Small scale (les than 1 ton/day) commercial wheat mill .......................... Figure 9: Wheat flour loading ................................................................................. Figure 10: Pakistani roti ........................................................................................

This is a Discussion Paper and reflects the views of the authors, not the official views or policies of the Competitiveness Support Fund or its affiliated agencies and donors

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THE WHEAT- FLOUR INDUSTRY IN PAKISTAN1INTRODUCTIONThe Competitiveness Support Fund (CSF) has a mandate to assist the Government of Pakistan (GoP) in re-positioning the economy against benchmarks of competitiveness established by the World Economic Forum (WEF). According the Global Competitiveness Report (2007-2008), Pakistan ranks 92nd out of 132 countries in competitiveness as determined by a broad range of factors ranging from health and Infrastructure to macroeconomic stability and technological readiness. A full analysis of the competitive situation of Pakistan is available in CSFs recently released State of Pakistans Competitiveness Report 2008. One of the important pillars competitiveness includes is the productivity of labor. In its turn, labor productivity depends upon a number of factors including health and education. But, at a more fundamental level, and one pertinent to Pakistan, are the basic requirements for human life upon which all productivity related factors are dependent: clean water, shelter and a balanced diet. The widespread lack of these things both in terms of availability (supply) and access (acquisition via the market or through subsistence activities) could be a serious roadblock to Pakistans onward development, to which the government is committed. These three factors, often overlooked, are of such paramount importance that the shortfall of even one of them will result in a deceleration or nullification of a wide variety of developmental targets.

Paper by Geoffrey Quartermaine Bastin, Senior Advisor, Sadia Sarwar, Junior Economist and Zain Asadullah Kazmi, Management Trainee, .CSF September 2008. The views expressed here are those of the authors, not the official views or policies of the Competitiveness Support Fund or its affiliates..

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For example, Pakistan has an alarmingly high number of people with a woefully inadequate level of iodine consumption. The Micronutrients Initiative website shows the following data for Total Goiter Rate (TGR) as a percent of the population: Iran 9%, Bangladesh 18%, India 26%, and Pakistan 38%. This figure is even more shocking when we consider that it understates the prevalence of sub-clinical Iodine Deficiency Disease (IDD), which is linked to inhibited brain function leading to low performances in vocational skills and IQ tests2. Currently, the most salient threat to labor productivity and forward progress is the rapid degeneration of the wheat and flour industry, this will be the focus of the current paper. Wheat is Pakistans most important staple food and forms the foundation of the national diet. The aim of the paper is to understand in a simple way the major parameters of the wheat and flour industries in order to see whether by and large Pakistan suffers from a long-term wheat crisis or whether the current situation of rising prices and lack of physical availability is a short-term phenomenon; as well as lay the groundwork for further analysis of other important dietary items (e.g., sugar, meat, fruits and vegetables and oils/fats). The approach taken by the authors is uncomplicated and utilizes widely available information and simple computations to arrive at informative and revealing results. The outcomes have been so robust and elegant that even where statistics are said to have been manipulated by interested parties the conclusions of this document still convey tangible information on which the foundations of policy can be formed. Despite the simplicity of the approach the authors believe that the methodology used in this report will nevertheless provide useful insights into the current dysfunctional state of the wheat and flour market, and as such provide a

It could be that half the population of Pakistan suffers to some degree from IDD which is found to be directly correlated with inhibited brain function. http://www.micronutrient.org

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useful platform to begin a more serious normative and prescriptive discussion of the issues at hand. In its most basic formulation the reports argument is that if the mass of the population is short of the most important staple food flour then many or most of the other efforts to improve the competitiveness of the economy will come to naught. Pakistans current economic and political climate requires a serious discussion of the instability in the wheat market and the obvious shortages and rising prices across the nation, the spiraling escalation of which provides the newly elected government with a real incentive to change.

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EXECUTIVE BRIEFPart I: Policies and Prices The wheat policy of the GoP is aimed at increasing wheat productivity (yields) and output, as well as supporting farmer incomes. Increased wheat production has also been seen as part of an overall national food security strategy of reducing dependence on food imports. On the consumption side, the government has attempted to enhance household food security, particularly through ensuring availability of wheat flour at affordable prices and maintaining price stability through subsidies and price controls. Until recently the GoPs policy had kept prices relatively stable, however an upward trend in prices has undermined the capacity of the Central government to maintain price stability. Though part of the price increase is undoubtedly due to a national inflationary trend the surging price of wheat also reflects the fact that overall supply has not kept pace with increasing demand. Though the GoPs pricing policy maintained a low price for wheat in Pakistan, it was only recently that a significant increase in the world wheat prices and the price differential between Pakistans prices and the cost of wheat for Pakistans neighbors made the export of wheat remarkably profitable. The high cost of wheat in Afghanistan coupled with the breakdown of border security has made smuggling wheat not only profitable but easy. Yet, given the complex nature of the security situation, this report will show that even while assuming the continuation of wheat smuggling in the long term there are other more significant factors within Pakistan that contribute to the current wheat crisis, factors which the government has the power and authority to address with well considered policy implementation.

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Part II: Supply and Processing Wheat (Triticum aestivum L.) is Pakistan's largest food grain crop. Production has averaged 20 million tons in the last decade and has increased somewhat over time, mainly because of improved yields, but these are still low by world standards. Farming technology is very primitive and generally the small plots and fields on which farming is done do not permit mechanization. Over 30% (though it may be as high as 50%) of total wheat produced is stored at the farm, often at the field out in open which leads to high losses. Most other primary storage methods utilized in Pakistan are either primitive, mismanaged and/or under invested to such an extent that they also result in similarly high losses. Government intervention in the industry is ineffective and inefficient. The implementation of a procurement policy is the responsibility of the provincial governments and PASSCO (Pakistan Agricultural Storage and Supplies Corporation). The physical handling and storage by these government agencies is, as mentioned above, very inefficient and leads to unnecessary losses. A large proportion of the available grain is milled in rural areas where it has been produced and never enters the cash market. The commercial flour mills are neither optimally located close to the wheat grain supply, nor of a sufficient size to take advantage of economies of scale; and even the small scale mills that are extant are producing below their capacity due to the quota allocation and subsidy system operated by the GoP. It will be shown in the main body of the report that a wide array of market distortions such as these play a significant part in the current wheat crisis. Part III: Demand Wheat based products are a major part of the diet in Pakistan. Flour and bread (roti) plays a critical role in peoples lives. It provides upwards of 60

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percent of the protein and carbohydrate in the average Pakistani diet. Various surveys3 have measured food security according to three simple measures:

Physical access to food (availability) Economic access to food Biological utilization of food (food absorption)

Findings suggest that whereas physical availability of food (including wheat flour) is not an issue, consumers are constrained by poverty, low incomes and their inability to use the food adequately for proper nutrition. Using measurements for the (typical daily) requirements of protein and carbohydrate from cereals to calculate the wheat and flour supply/demand balance does indicates that there is a longstanding deficit in supply, but this deficit could be met easily by improving the supply chain. Moreover, according to our calculations 2007-08 has not been a particularly unusual year and indeed the supply deficit appears to be on the low side of the range. If the supply is adequate why would prices skyrocket now when they had not done so earlier? It is a major finding of this paper that food insecurity arises more from the general features of economic growth, from the mismanagement of the supply chain and the lack of access to e.g., potable water than from agricultural difficulties, although these do exist. To restate the finding in another way the problem does not lie in the inability to grow more wheat, of which Pakistan has adequate supplies and has over the course of its history demonstrated a slow but steady improvement in method, despite the small plots and limited land; rather, the current problems for wheat begin as soon as it has been harvested in the supply chain, at the mills, in the agricultural planning and the provincial government, as well as in economic factors somewhat independent of issues related to agriculture such as economic growth and income distribution. Without delving into applicable but peripheral issues such as increases in oil prices,3

E.g., Food Security Analysis 2003, World Food Programme. 2004

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insecure borders and for example monetary and fiscal policy, it will be convincingly demonstrated that the GoP and the provincial governments themselves caused the crisis.

BROAD RECOMMENDATIONS The Government of Pakistan must urgently review the structure of the wheat industry.

Intervention by federal and provincial agencies should be reduced as far as possible as consistent with a fact-based calculation of food security.

Inefficiencies in the supply and value chain must be reduced. A privatesector operated and financed storage and supply system must be built.

The subsidy-quota system in the flour milling industry must be abolished and this sector of the industry rationalized.

Physical restrictions on the movement of wheat and flour should be reduced as a first step to removing the distortions in the market.

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PART I: POLICY AND PRICES A. WHEAT POLICYWheat policies in Pakistan have varied over time; however there has always been a strong element of government intervention. Some market liberalization took place in the late 1980s with the abolition of wheat ration shops and liberalization of private wheat imports (which were subsequently disallowed). Throughout the 1990s, Pakistan was a net importer of wheat, with domestic production accounting for about 90 percent of availability. A bumper wheat harvest in early 2000 (i.e. the 1999-2000 crop year) led to a record procurement of 8.6 million tons (compared with an average of 5 million tons) and a large increase in stocks, some of which were subsequently exported (with an export subsidy). Crop shortfalls from 2001-02 through 2003-04, rising market prices, problems with government import tenders in early 2004, and low quantities of domestic procurement led the Punjab government to place restrictions on transport of wheat across district and provincial boundaries in 2004. Similar restrictions were imposed in 2007-08 in response to the current wheat-flour crisis. 1. Outline of the 2008 wheat crisis In January 2007, the GoP predicted a bumper crop of 23.5 million tons the highest ever production of wheat in Pakistans history. This estimate was driven more by political considerations than a realistic assessment of the crop, which in actuality could not have even been made at that time in the growing season. Analysis of the area and possible yield would have suggested the estimate was wildly optimistic, reflecting a 10 percent rise in production. The

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actual crop production in 2007 was at least a million tons lower than the estimates. Coincidentally, 2007 also saw the greatest shortage of world wheat stocks in 26 years. That knowledge determined GoPs decision in April 2007 to lift its four-year ban on wheat exports to take advantage of a perceived price differential. Traders exported 500,000 tons of wheat to India. The government then reinstated the export ban on May 25, 2007. If a more liberal market environment free from government intervention were adopted gross miscalculations of wheat crop would be less likely, because businessmen have less incentive to distort the figures of their own bottom lines. To make matters worse, at least 1 million tons of wheat and wheat flour (perhaps more) were smuggled into neighboring countries due to the favorable price differentials. Most smuggling is organized and carried out by influential groups. In September 2007, the government said it would import 1 million tons of wheat, stating that this action was necessary to maintain a reasonable buffer stock for the future. The export price for Pakistani wheat during the April-May export window was approximately $225-232 per ton - and for December 2007 delivery, the import price of wheat from Australia and Russia was $380-400 per ton, exclusive of transportation. If a rational and systematic process of wheat production, storage and demand were maintained then Pakistans wheat would not have been exported in the first place reducing the import bill dramatically. The total unnecessary losses from this fiasco calculated as: ((revenue from one ton of exports) (cost from one ton of imports)) x (total import tons total exports tons) = unnecessary expenditure or ($225 $400) x (1,000,000 tons 500,000 tons) = $87,500,000 in losses. But, this assumes that the revenue and the loss are a direct benefit and/or cost to the GoP alone. And in actual fact the revenue from exports totaling

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$112.5 million went to the traders, who bore none of the subsequent loss, thus the GoP took a $200 million loss for 500,000 tons of wheat so that the traders could make a risk free $112.5 million. The GoP needs to rationalize its method for estimating agricultural production, and needs to enhance regulatory procedures to increase stockpiles so that even if a crisis arises there is an adequate buffer to counter spiraling costs. The traders and mill owners need to shoulder more risks and ought to be held directly accountable by regulatory procedures to meet food security targets e.g., storage and stockpiling.

Figure 1: Soldiers guard a flour mill during the 2008 wheat crisis

2. Main elements of policy Government wheat policy in Pakistan attempts to balance the competing interests of producers and consumers. On the production side, the policy is aimed at increasing wheat productivity (yields) and output, as well as supporting farmer incomes. Increased wheat production has also been seen as part of an overall national food security strategy of reducing dependence on food imports.

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Even though there is a policy to increase yields it has been systematically nullified by massive post-harvest losses, without proper regulation of the post harvest phase there will be spiraling costs due to inefficiency and lost opportunity costs. The current policy was formulated at a time when wheat commanded a low price on the world market, thus it was necessary to support farmers incomes, by paying them more than what their crop was worth, and to encourage the production of wheat so that they could stave off poverty and continue to supply Pakistan with its staple crop. Now that wheat has become dear, the procurement price has remained below the market price, thus the costs of subsidy are shifted to the farmers and shouldered only incidentally by the GOP. If the original purpose of the wheat policy has been nullified by market conditions then it seems that the continuation of the policy ought to be reexamined in the light of new facts.

Though yields are an important part of any wheat policy, it is only the first of a long chain of regulations and procedures encompassing simple food security and ultimately value-added products e.g., biscuits.

On the consumption side, the government has attempted to enhance household food security, particularly through ensuring availability of wheat flour at affordable prices and maintaining price stability. This policy may or may not have been successful over the long term; however in the current situation clearly the policy has failed since there are food riots in various places around the country. Thus, neither the urban poor (rioters), who are seeing diminished household security, nor the rural poor (farmers), who are seeing decreasing incomes, are benefiting from the current policy. Admittedly food policy options are limited by overall fiscal constraints, as well as a desire to minimize fiscal subsidies on food. Moreover, the wheat procurement price has been seen as a major determinant of overall inflation because of its role as a wage good and an indicator of overall government price

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policy. Thus, wheat policy is to some degree constrained by inflation targets and inflation policy. 3. Instruments of policy The federal and provincial governments employ public procurement and a procurement price for intervening in domestic production and wheat farmers incomes. Provincial governments have generally set procurement targets aimed at securing enough grain for planned distributions and stock build-ups. Wheat grain is provided to the flour millers at a so-called issue price which is often lower than the private market price and indeed does not reflect the carrying (storage) charges for the wheat grain, which is an often unconsidered addition to the subsidy. The difference between the procurement price and the issue price is held to be a subsidy, although this probably does not reflect the true meaning of the word subsidy which normally reflects a fiscal amount within the tax structure. Subsidies often come in the form of financial support for producers to produce higher volumes and support their incomes, as was the case in Pakistan in the recent past, or consumption subsidies to ensure the cheap availability of an essential produce. But the GoP wishes to subsidize consumers without internalizing the costs of the subsidy, thus it is burdening the farmers with the cost of the subsidy and pressuring them with force to comply. The systemic failure to benefit anyone, be they farmers, mill owner or consumers, ought to indicate that a radical change in policy is necessary. If the government lacks the mandate or financial clout that price regulation necessitates then it ought to consider procuring and selling at the market rate. Doing this will boost its available supplies, because more people will then sell directly to the GoP; then it ought to take into account all incidental charges and sell the wheat to the mills at open market rates; finally, it should buy flour from mills at the going rate and if need be distribute the wheat at utility stores where

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the poverty stricken can obtain it by means of a voucher. This would work well to decrease profits from smuggling subsidized wheat, discourage hoarding, and in addition it would be a huge benefit to farmers whose costs of living, it must be remembered, are going up with everyone elses. The costs of doing this still need to be calculated, but generally speaking the price differential between selling wheat and buying flour are small. In addition the GoP, will be able to segment the market by sending some flour to the utility stores and selling the rest in the open market.

The GoP ought to procure and issue at the market price to minimize market distortions. Instead of manipulating prices, thus encouraging rent-seeking behavior, the GoP ought to buy flour from mill owners at the market rate. Then distribute wheat to its utility stores where the poor can purchase it with monthly food vouchers.

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Delving further into the Procurement and issue Mechanisms: Chart 1: WHEAT GRAIN; GOVERNMENT PROCUREMENT AND ISSUE PRICES.

250

200

150 $/TON Real Procurement/ support prices ($/ton) 100 Real Issue Prices ($/ton)

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019 95 6 -9 19 8 1 2 3 5 6 9 4 7 7 0 8 -9 -0 -0 -0 -0 -0 -9 -0 -0 -9 -0 -0 96 97 98 00 01 02 03 04 05 06 07 99 19 19 19 20 20 20 20 20 20 20 20 Year

Source: MinFAL, Wheat Section

Table 1: WHEAT GRAIN PROCUREMENT AND ISSUE PRICESProcurement Price (PKR/40 kg) Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 300 300 350 400 415 425 Sep-Oct 330 330 330 380

Issue Price Nov -Dec Jan-Feb 335 335 335 380 425 430 625 340 340 340 392

Mar-Apr 345 345 345 398

2007-08 625 Source: MinFAL, Wheat Section

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Table 2: WHEAT PROCUREMENT MECHANISMPer 40 kg Bag Procurement Price: Set by GoP PKR 350 Incidental Charges: Monthly Costs^ PKR 25 Actual Basis Price: Procurement + Charges Sept / Oct Nov / Dec Jan / Feb March / April Quota to Flour Mills: Sept to April 2004 Sept / Oct Nov / Dec Jan / Feb March / April Subsidy: Basis Price - Quota Sept / Oct Nov / Dec Jan / Feb March / April Loss to GoP* $0.36 PKR 625 $9 $5 PKR 8750 $125 Per Metric Ton

PKR 400 PKR 450 PKR 500 PKR 550

$5.71 $6.43 $7.14 $7.86

PKR 10,000 PKR 11,250 PKR 13,750 PKR 13,750

$142.86 $160.71 $178.57 $196.43

PKR 330 PKR 335 PKR 340 PKR 345

$4.71 $4.79 $4.85 $4.92

PKR 8250 PKR 8375 PKR 8500 PKR 8625

$117.86 $119.64 $121.43 $123.21

PKR 70 PKR 115 PKR 160 PKR 205 PKR 550

$1 $1.64 $2.29 $2.93 $7.86

PKR 1750 PKR 2875 PKR 4000 PKR 5125 PKR 13,750

$25 $41.07 $57.14 $73.21 $196.43

Open Market Price: PKR 500 Loss to Farmer** PKR 150 $7.14 $2.14 PKR 12,500 PKR 3750 $178.57 $53.57

5 Tons *** Total Loss to Average Farmer PKR 18,750 $267.85

^ A rough estimate of storage costs, losses from spoilt grain and transport costs. *Sum of all the months multiplied by the overall volume of wheat grain issued. **Open market Price minus the Procurement Price not including input costs. ***With an average of 3 ha of land and average yield of 2.5 ton/ha and an average 33.5% own consumption + losses.

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Since no detailed information is available to us about the amount of grain issued per month, then we cannot take this calculation forwards. Neither have we verified it in discussions with the GoP except through the one person in the Wheat Section of Federal MinFAL. However, if the principle of the calculation is correct, then it suggests that the so-called subsidy could be higher than individual agencies (i.e., the Food Departments of the provinces, especially Punjab) might expect. The calculation above also accounts for the reluctance of Punjab to allow grain they have purchased to move outside the province. The subsidy from the GoPunjab calculated in the above way could be very large, especially if a large proportion of the grain was issued in the later part of the year (i.e., the GoPunjab carrying storage for several months). By issuing the flour to mills situated, say, in Sindh, the GoPunjab absorbs the costs but gains nothing from value added. Whether this is a rational way of considering this subject in a country where individual province GDPs are not calculated is yet another question . Restrictions on the transport of wheat are introduced periodically to ensure that district officials of the provincial Departments of Food can meet their procurement targets and for financial reasons. Most recently there has been a panicked imposition of restrictions as provincial governments became convinced that a serious shortfall of wheat flour was occurring. There has been little action from the GoP to address the issue of these intra-national trade barriers (even though they are unconstitutional) which amounts to a very damaging precedent for the wider economy. If it were not for smuggling and non-government regulated trade on the open markets, intra-national trade barriers would have presented a significant threat to the health and livelihood of many ordinary Pakistani and this merely for the sake of attaining procurement targets that themselves have been shown to be grossly miscalculated. .

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Figure 2: Flour exports blocked at Chamnan (Balochistan-Afghan border) -Al Jazeera photo 17th January 2008

Imports of wheat, undertaken by the federal government, have been used to supplement provincial food stocks and enable sufficient wheat sales to keep domestic price levels from rising too high. The government (and private sector contractors) also exported wheat officially in the 2000-04 following record levels of procurement in 2000 and again (as we have seen) in 2007 with the disastrous results seen above. Various groups of stakeholders are affected by and often attempt to influence these policies. Farmers, particularly those with net sales, benefit from increases in procurement prices and quantities. Flour millers gain from low issue (sales) prices of wheat that are typically below open market prices. Low market prices for wheat and wheat flour benefit net consumers, who account for about 80 percent of Pakistans population. Provincial food departments make great efforts to achieve domestic procurement targets which provide most of the grain for subsequent distribution. Large-scale procurement and subsidized sales creates the possibility of substantial economic rents. Sales of grain (at the issue price) from the surplus provinces (typically Punjab) to other provincial food departments involve an implicit cross-subsidization to the receiving provinces since issue prices do not cover the full costs of procurement, storage and distribution. The provincial and federal governments are also concerned with

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minimizing fiscal subsidies and overall inflation. Finally, donors have generally pushed for reductions in food subsidies and an increased role of the private sector in wheat marketing.

In the short term, the GoP ought to pass the costs of storage and transport onto the flour mill owners, to minimize the profits from the smuggling and redirection of subsidized wheat to the open market. Secondly, it ought to raise the price at which the grain is acquired from farmers so as to support farmer incomes. In the longer term, procurement rates and targets should be eliminated and a liberal market for grain should be established to minimize the market distortions. This would discourage individuals from smuggling and dissuade the provincial governments from impressing their authority illegally upon the populace. A liberalized market would promote a more accurate wheat census because it would discourage politically motivated over-estimations of yields at the national and local government levels. On the producer side it would help to disincentivize under-reporting by farmers who can sell unreported surpluses on the open-market.

B. PRICES1. Domestic price trends The Chart shows real wheat and wheat flour prices from 1996 to the first quarter of 2008. It will be seen that the trend is constantly upwards with minor fluctuations around the trend line indicating that GoP policy at least has kept prices relatively stable (except recently). The upward trend in prices also reflects increasing demand and the fact that overall supply has probably not kept pace

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with demand at least in the cash part of the wheat economy. Increasing wheat prices should in principle have increased farm incomes and encouraged efficiency and expansion of the industry. But, it is possible that government involvement in the wheat economy (especially in the area of large wheat related infrastructure) is discouraging the private upgradation of the market. Indeed yields appear to have increased with prices suggesting a conventional farm level response. That said, input costs have increased in this same period. There is no available data (as yet we will be researching this aspect) on farm gross margins, but it is possible that the sluggish farm-level response to better prices indicates that the full price increase has not reached the farm. Chart 2: PRICES OF WHEAT AND FLOURReal Wheat and Flour Prices (prices at the mill)700 600 500 400 300 200 100 0M ar -0 8 19 96 19 98 20 00 20 02 20 04 20 06

Rupees/40kg

Wheat Grain Flour (Atta)

Source: MinFAL, 2008

In the case of wheat flour, the price data shows the very close relationship between the raw material and the product of milling. The relationship is as expected averaging a flour premium over wheat of 13 percent in 1996-2007. With the subsidies and possibilities of selling subsidized flour at a full market price this premium would permit flour millers to make a good business. However, the premium fell in 2007 to 8 percent and then to 4 percent in the first quarter of 2008. Part of the reason for the low premium is that mills are working at 22


significantly under capacity, not least because they often find it hard to obtain wheat for milling. At this low premium of flour over wheat there is no possibility that flour millers can mill profitably and sell to the local market and indeed many mills have closed. The mills that have stayed in business can only do so because they export (illegally) to neighboring countries.2. Trade

If Pakistan applied a free trade regime to the wheat industry, domestic price levels would be determined by the international price adjusted for tariffs, transport and marketing costs (the import parity price). However, GoP intervention in the market has severely distorted the prices that apply. In the 1990s Pakistans domestic wheat prices were below import parity price levels because subsidized sales of government commercial imports added to domestic supplies and reduced market prices. After self-sufficiency was achieved in 2000 with a consequent rise in stocks, prices continued to remain below import parity. With the relatively poor harvests in 2004 and 2005, however, domestic prices rose substantially and remained at about 18 percent above import parity levels in 2004-05. This situation was dramatically reversed in 2007 with the rise in world prices and especially strong price incentives for exports arising in India and Afghanistan; this has lead to a dramatic increase in the profits from smuggling of wheat.

If trade were permitted with no GoP intervention, in times of shortage, private sector imports would easily supply the shortfall; in times of surplus relative to neighboring markets, Pakistan is well-placed to export either by sea or road, In principle, Pakistan (and especially Punjab) can and should see itself as the primary grain supplier for at least a regional market and manage the possibility of risk of crop failure or a reduced harvest with positions taken in the international market.

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PART I: SUPPLY AND PROCESSINGA. THE WHEAT GRAIN INDUSTRY IN PAKISTAN

Wheat (Triticum aestivum L.) is Pakistan's largest food grain crop, and accounts for a large proportion of the total area under cultivation (about 40%). Probably 80% of farmers in Pakistan cultivate wheat. The country ranks within the top-10 (about seventh) of the worlds wheat producers with the majority of wheat grown in the Punjab. This is the best agricultural land in Pakistan and the location of the worlds largest irrigation system. In many respects it would be difficult to find better growing conditions. That said, individual plots are small probably on average about 2-3 hectares and the type of cultivation in the main growing area has been described as wheat gardening. The small plot sizes do not permit any degree of cohesion in the industry or the use of any mechanization.Chart 3: MAIN GROWING AREA FOR WHEAT

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Year 2000-07 Average

Table 3: PRODUCTION BY PROVINCE Punjab Sindh NWFP Balochistan 16,060 2,409 1,003 602 (80%) (12%) (5%) (3%)4

Pakistan 20,075 (100%)

Source: Agriculture Statistics of Pakistan

Wheat production has increased somewhat over the last decade due mainly to improved yields which have trended upwards; area under production has been more volatile and not increased at the same rate as yields. The reason for the drop in area under production in the early part of this decade is because of drought; yields of course remained high because the land area in production during this period was irrigated. Production (based on official statistics) averages about 20 million tons of grain. There have been improvements in critical factors such as better seed and more fertilizer. That said, most wheat production is in the irrigated production area (see map) and so remains high cost relative to yields that average about 2.5 tons per hectare (world average 4 tons per ha.) for irrigated wheat, 1.5 tons for rain-fed wheat.Chart 4: WHEAT AREA AND YIELDS*PAKISTAN WHEAT CULTIVATION8,600 8,500 Area ('000 hectares) 8,400 8,300 8,200 8,100 8,000 7,900 7,80019 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07

3.00 2.50 2.00 1.50 1.00 0.50 Yield (Tons/Ha.)

Area (Million Ha.) Yeild (ton/hec)

Year

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Note: There are minor differences in the volumes reported owing to different data sources. Unfortunately there is no consistency in the statistical data in Pakistan. However the differences are small and make little difference to the overall outcome from a policy viewpoint. * Source MinFal

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Table 4: MAJOR CROP OUTPUT (000 tons)Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Average

Wheat Rice

Sugarcane 41,996 53,104 55,191 46,333 43,606 48,042 52,056 53,419 47,244 44,312 48,530

Cotton 1,594 1,562 1,495 1,912 1,826 1,805 1,737 1,709 2,426 2,122 1,819

16,651 18,694 17,858 21,079 19,024 18,226 19,183 19,500 21,612 21,700 19,353

4,305 4,333 4,674 5,156 4,803 3,882 4,478 4,848 5,025 5,547 4,705

Source: Economic Survey of Pakistan 2005-06

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Table 5: PROPORTIONS OF MAJOR CROPS IN TOTAL AGRICULTURAL VALUE ADDEDCROP Commodity crops Rice Wheat Subtotal Industrial crops Sugarcane Cotton Subtotal Other crops TOTAL CROP VALUE-ADDED 1999-00 % 2005-06 %

15.40 41.30 56.70 11.00 24.00 35.00 8.30

17.23 38.34 55.57 9.66 24.37 34.03 10.40

100.00

100.00

Source: Economic Survey of Pakistan, 2005-06

B. WHEAT GRAIN COSTS OF PRODUCTION AND GROSS MARGINS

As far as we can determine there is no consistent collection of data related to the costs of producing wheat. In this case we have prepared our own estimates of these costs and from these have calculated a Gross Margin, it is important to emphasize that these numbers are a rough estimate although they seem to reflect the real situation i.e., that margins are quite low:

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Table 6: WHEAT COSTS AND MARGINS

Area Yield

hectare Rainfed Irrigated

1 1.2 2.5 tons tons PKR/40 kgs PKR/40 kgs Rainfed 18,750 272 22,200 322 Rainfed Unit input 1 10 2.4 1.2 2.4 Irrigated Unit input 1 20 2.4 2.4 4.8 2.4 2.4 2.4

Price

GOP Private

625 740

15,625 18,500

PKR/ton PKR/ton

226 268

USD/ton USD/ton Irrigated 39,063 566 46,250 670

RevenueGovt Private PKR USD PKR USD PKR/per ha.

CostsLand Labour Seed Fertilizer

Unit cost 69 950 3,230 620

Cost amount 690 2,280 3,876 1,488

Unit cost 100 950 3,230 620 2,000 1,535 975

Cost amount 2,000 2,280 7,752 2,976 4,800 3,684 2,340 25,832 374

Ha. Persons Bags

DAP Urea Irrigation Fee Fuel Litre Harvest Fee TOTAL COST PER HA.

2.4 PKR USD

600

1,440 9,774 142

Government margin

PKR USD PKR USD PKR USD

8,976 130 12,426 180 11,564 168

13,231 192 20,418 296 18,621 270

Private margin

Combined margin

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Competitiveness Support Fund Discussion Paper on the Wheat-Flour Industry in PakistanSource: Authors calculations based on field enquiries Notes on the Table: Seed Fertilizer Average price /50kg bag = PKR 950 Requirement per acre = 1 bag For P content: DAP PKR 3,230/50 kg bag For N content: Urea PKR 620/50 kg bag ! Bag DAP at sowing/acre 2 bags Urea (1 sowing, 1 growing) Tube well bill 2.000/acre calculated from 1 tubewell per 60acre farm average 20,000 PKR/farm PKR 307 per cultivation/acre Total cost cultivation per acre at 5 cultivations/acre = 1535 Includes threshing = 975/acre in Punjab irrigated area

Irrigation Fuel

Harvest

Combined margin is 50% kept for on-farm use equivalent to private sale 25% sold to GOP, 25% sold to private traders

We have calculated two sets of costs and margins, one for the rain fed area -- low cost-low yield -- and one for the irrigated area -- high cost-high(er) yield. In fact, yields in both areas are assumed to be low since average yields in Pakistan are inferior by world standards, the reasons for this are not within the scope of this report but is a worthy subject for further investigation. It should be the case that with irrigated wheat using these inputs that yields would be higher, possibly closer to 4 tons/ha. However, the official data suggests otherwise. Rain fed wheat uses smaller amounts of all inputs and returns a gross margin (in our model) of $168/ha. Irrigated wheat uses fertilizer in relatively large amounts and also incurs costs of water (though to what extent these are actually paid if the water is gravity-fed from the canal is not known; tube well water costs have to be paid. The margin turns out to be $270/ha.We have used a combined price to calculate these figures. The assumptions we have used here are that the farmer keeps half the crop for on-farm and family use. We have assumed an opportunity cost of this wheat to be the same as if it was sold to the private trade (note: we are using

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current prices in the calculation). The remaining half of the crop we assume to be sold half to the private trade at a higher price and half to the government procurers (see below) at a lower, so-called procurement price). The mechanics of GoP procurement are discussed in detail below. The combined result gives us the farm revenue per hectare5. There are two important conclusions to be derived from this analysis:1. Production costs per hectare are high, especially in the irrigated area

where water costs are included. We have compared these costs with data from neighboring countries (and as a benchmark: the USA) and these data are presented in the next table.

Table 7: COMPARATIVE COSTS OF WHEAT PRODUCTION (US$/HA.)*USA Uzbekistan Pakistan Turkey Pakistan 475 315 374 240 142 average 2000-06, all winter wheat irrigated GOU, 2005 crop irrigated Authors calculation rainfed Press reports rainfed Authors calculation

2. The return on wheat farming is very small. The conclusion to be

derived is that for an average small farmer with perhaps 2 hectares of land. Two hectares returns a gross margin of $540 of which half is received in cash (with the remaining wheat stored on farm for family use). This cash income of $270 (PKR 18,630) represents a daily income of about 74 cents/day, well below theWe understand very well that these are rough and ready calculations and that the assumptions are not based on any survey data. Nevertheless we think that the calculations capture the essential elements of farm production, revenues and margins. At the least this is more than is available from any official source.5

* Note: that Uzbekistans costs understate water charges; it is probable that Uzbek wheat costsare in fact higher than in Pakistan if water charges are included. Note that land costs are NOT included in these calculations.

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poverty line. At this level of return, there seems no cash incentive at all to cultivate wheat; indeed the industry can be considered as essentially subsistence farming with some related secondary cash income rather than commercial farming of a commodity cash crop. If this is a correct picture of the majority of wheat farmers (and we test our conclusion), then the approach to agricultural development has to be very different from countries where wheat is grown entirely commercially. Increasing cash in hand for farmers by increasing or eliminating the procurement rate. This will not only improve the lives of the farmers but could help alleviate the mass migration of labor to the cities, many of whom end up as the urban poor. The next three essential components would be: 1.Understanding why yields are low. 2.Decreasing costs by centralization rationalization of wheat infrastructure. and

3.Encouraging specialization and cash crops, to move away from subsistence farmingC. WHEAT GRAIN LOGISTICS 1. Harvesting, threshing and primary transport

Methods and timing of harvesting are important factors to total crop yield. A major proportion (70 percent) of the wheat crop in Pakistan (like the rest of Asia) is harvested manually using sickles. Manually harvested wheat crop is tied into small bundles and stacked in bunches of 10 - 15 bundles, which are left in the field for one to three days to dry.

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Figure 3: Manually harvesting wheat crop

Figure 4: Sheaved wheat before threshing

Threshing is usually undertaken in the field where the sheaves have been left. Machines are generally not used because of the associated cost. However, these costs are not far different from manual labor. The main reason machines

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are not used is that it is said that local threshing machines destroy the outer husk of the grain which is used for animal feed. The resulting grain is left in the same field covered by a tarpaulin. Most wheat is manually loaded and unloaded from wagons, trucks, railroad cars, and barges between farm and mill. In some situations, bagged wheat may be loaded on and off vehicles ten times manually before it is milled.

The GoP ought to make widely available (possibly subsidize) an improved threshing technology at a rate which is roughly akin to that of manual labor. Thus, time saved by laborers can be used in other cash generating or cost saving activities. The various steps in the supply chain ought to be minimized and centralized to the greatest extent possible, so that spoilage of grain and supply chain inefficiencies can be reduced.

Figure 5: Transportation of Wheat

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Figure 6: Field threshing in Punjab, note the moveable thresher

2. Primary Storage

It is estimated that over 50 percent of total wheat produced In Pakistan is stored at the farm, often in the field in the open. Smaller farms generally keep most of their grain for consumption. It is estimated that the quantity of wheat entering commercial channels from farms below 4.5 ha in size is negligible6. Overall bout 30 percent of wheat production is retained for own-consumption7. These facts further illustrate the point that much of wheat farming is essentially subsistence.

Pakistan Agricultural Research Council, Umar Baloch Wheat Markets and Price Stabilisation in Pakistan: An Analysis of Policy Options Dorosh, Paul and Salam, Abdul Pakistan Institute of Development Economics 2006 http://mpra.ub.uni-muenchen.de/2244/1/MPRA_paper_2244.pdf7

6

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The major food grains are usually stored at the farm in specially constructed mud bins, protected by a cover, inside the house or in the open courtyard. Wheat may also be stored as a heap covered by straw, mud and dung plastered, loose in a room, or in bags, metal bins, baskets and pots. There are significant losses due to insects, moulds, birds and rats. Wheat grain is often stored for more than 5 months with losses estimates at 3.5 percent8. More than half of farm households regard insect infestation as a major problem. Losses in public sector managed storage facilities may be higher.D. GOVERNMENT PROCUREMENT AND STORAGE 1. Procurement

The government has been involved in wheat grain procurement since Independence9. The national procurement price and procurement quantity targets are set at the federal level, in consultation with provincial governments, though the implementation of procurement policy is the responsibility of provincial governments and PASSCO (Pakistan Agricultural Storage and Supplies Corporation). Provincial governments, particularly the government of Punjab, intervene heavily in wheat markets. As of 2008 there are 375 purchase centers in Punjab. A four-member committee comprising an MPA (member of provincial assembly) of the area, a district government official, a farmer and official of the procurement agency supervises the procurement drive and growers are paid a guaranteed minimum price. Currently the Federal Government has fixed a target of 3 million tons of wheat procurement for Punjab from a total requirement of 5 million tons (60 percent). In some years the procurement from Punjab has been as much as 90 percent of the total. The procurement agencies distribute jute gunny sacks and tarpaulins to the farmers to assist the procurement process.8

Baloch, U. K. et. al . 1994, Loss Assessment and Loss Prevention in Wheat Storage ... in Pakistan. in Stored Product Protection ed. Ed Highley, CAB. International. Pp 906-10 9 Wheat Markets and Price Stabilisation in Pakistan: An Analysis of Policy Options, op cit.

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2. Public storage

Grain storage facilities in the country are mostly horizontal sheds called house type godowns. There are also binishells (temporary emergency stores about 70 percent of capacity), hexagonal bins and a few silos. There are probably no modern storage systems in the public sector and consequently losses in public sector godowns are due to inadequate covered storage space as well as shortage of trained manpower to manage proper procurement, warehousing and the pest control operations. Basic quality parameters affecting storage such as moisture content of grains, segregation of lots according to the age of the stocks and biological cleanliness of the warehouse are not followed. The result is that serious losses take place quite often. Taking into account deterioration of the grain and inefficient harvesting (by hand) a conservative immediate post-harvest loss would be about 5 percent. A transportation mechanism is needed so that when the wheat is cut and threshed it can be delivered by truck to a central location. A communication mechanism is needed so that the GoP is in contact with the farming communities so that as soon as the wheat is ready the government can pick it up. Modern central silos staffed by trained employees are needed to minimize losses. Instead of procurement requirements, contracts with communities of farmers ought to be signed with which the GoP guarantees that a certain percentage or amount of grain will be bought at the expected future open market price. If the community wishes to sell more grain than it was contracted for it could sell it to the GoP at the prevailing market rate at the time of harvesting. 36


E. THE FLOUR MILLING INDUSTRY

It must be repeatedly stated that wheat grain in and of itself is of no use. This statement may be surprising for the non-agribusiness specialist. Wheat grain is analogous to crude petroleum oil; a barrel of crude must be changed into useable elements before it achieves a real value to the consumer. Similarly, wheat grain must be milled into flour, which itself is an intermediate product to be made into bread, cakes and other consumable items. Of course wheat grain can be sold outside Pakistan just as crude oil is exported, however in this case the value-added by milling is transferred to other economies. In principle, agricultural raw materials should be processed close to where they are grown. The reason for this is that the value to weight ratio alters dramatically as one progresses along the value chain a ton of wheat costs about (2008 prices!) about $214/ton10, a ton of flour costs $223 and a ton of cookies or biscuits has a cost about $2,000/ton (which includes the cost of sugar, other additives, packaging and manufacturing and marketing overhead). The point is obvious. Pakistan is not to be congratulated when it exports wheat or indeed flour; for every ton of flour exported the country loses against the value added elsewhere. The wheat flour produced in Pakistan is known as Atta. This is the Hindi word for wheat flour commonly used in South Asian cooking. It is a whole wheat flour made from hard wheat. Hard wheats have a high protein content, so doughs made out of Atta are strong and can be rolled out very thin as in chapati and, roti.

10

March 2008 ex-farm price

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The composition of Atta is shown below: Table 8: THE COMPOSITION OF ATTA Energy Protein Fat Carbohydrates Moisture content Others (fibres, etc)

340 kcal 12 g 2g 70 g 12 g 5g

Traditionally Atta is made by stone grinding, a process that imparts a characteristic aroma and taste to the bread. The high bran content of Atta makes it a fiber-rich food and a healthy and essential part of the diet. These technical features are important to note by policy-makers. Pakistani hard wheat is not easily replaced by any wheat from just any origin, and neither is the flour11. The number of mini flour mills grinding atta at capacity of less than 5 tons /day is estimated to be 8,000 or more. It is said that most consumers prefer to use their own wheat after getting it milled individually. Ninety percent of the mini mills are located in rural areas. As for small and medium flour mills there maybe 700 or more with a capacity of 5 20 tons/ day .

Pakistani wheat cultivars developed locally are similar to Hard Red Winter Wheat hard, brownish, mellow high protein wheat used for bread, hard baked goods and as an adjunct in other flours to increase protein in pastry flour for pie crusts. Atta from Pakistani wheat has a unique taste and consistency; flour from a different grain source will not produce roti to the required taste.

11

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Figure 7: Basic wheat grinding in the Tirah Valley near Afghanistan Photo BBC

Figure 8: Small-scale (less than 1 ton/day) commercial wheat mill

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The fewer large-scale mills have capacitities of perhaps 200 tons/day (also quite small by US or European standards). The companies that manage these mills are located close to major cities or towns. There are a total of 950 commercial flour mills in Pakistan with a total grinding capacity four times the wheat flour requirement of the country12. The location of these mills is puzzling. There are 80 mills in Karachi, quite some way from the major growing areas (again, the weight/value ratio suggests that the shorter distance the raw material is transported, the lower the cost of production)13. There are 20 mills in Islamabad, a very significant distance from the growing areas. The location of the Karachi mills may be explained by the fact that for much of the recent past, Pakistan has been an importer of wheat, in which case a location near the Karachi port might make sense. The Islamabad location remains a mystery. All these mills operate at between 35 and 50 percent of their capacity which by normal standards means that their production would not be financially viable. There are major fiscal subsidies and economic rents involved in the sales of wheat to flour mills at below-market rates. Wheat issue prices (the price of wheat sales to flour mills) do not cover the full cost of procurement (domestic or imported), storage and handling. Provincial food subsidies in 2002-03 totaled 12 percent more than total Public Sector Development Programme budget for the Health Division. These rents appear to accrue mainly to wheat millers who receive government wheat and perhaps to those involved in these transfers. Although there may be a stipulated sales price of flour (i.e., a price that flour millers should sell to consumers to reflect the subsidized input price), there is no effective enforcement mechanism. Since wheat flour produced from government wheat isAccording to the Chairman, All-Pakistan Flour Mills Association Sheikh Mohammad Shabbir (Dawn newspaper, September 2007) 13 Mumbai, with population almost equal to Karachi if not more, has only 22 flour mills. Compared to Karachi, Mumbai is closer to the wheat growing areas of Maharashtra than Karachi is to Punjab..12

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not distinguishable from wheat flour produced from market wheat, their prices are the same. Profits from sales of mills using government issued wheat are thus substantial despite the low capacity utilization, and there are many wheat mills that operate only in the November-April period and mill only government-supplied wheat. The fact that mills are far below their profitable output yet are still extant all over the country is a direct indication that they are collecting sizeable economic rents, by selling subsidized wheat on the open market or smuggling wheat out of the country to sell at an even higher profit. The blame for this rampant corruption does not lie, in this case, with the rent-seekers but with the GoP which for unexplainable reasons refuses to enforce the final mechanism to guarantee that wheat be subsidized for the common consumer; yet it is willing to allow the closure of provincial borders and contribute to the wholesale degeneration of farmers household incomes to get the wheat to the mills. And the mill owners, upon receiving the wheat sell to whomever they wish at the highest price they can get for it often across international borders.

Rather than establishing complicated, and most likely ineffective, procedures to regulate mill owners, the best solution is to eliminate the possibility of collecting economic rents by abolishing subsides to mill owners completely.

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Figure 9: Wheat flour loading courtesy of Suppliers International

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PART III: DEMAND A. CONSUMPTION

Wheat based products are a major part of the diet in Pakistan. A typical meal would consist of some lentil (pulse)-based daal, meat on special occasions, bread (roti) and tea or a soft drink. The upper and middle-classes eat quite differently, but the majority of Pakistanis eat few vegetables, only a little fruit and seek energy from carbohydrate-rich foods. Roti is an essential item on the table to be baked fresh and eaten hot.

Figure 10: Pakistani roti

1. Perspectives on the demand for food in Pakistan

In 2007 CSF conducted a major study of the food industry in Pakistan14. At that time there was no suggestion that Pakistan faced a food crisis. Indeed the title of the study shows that the concern of all the stakeholders was about quality, standards and exports, rather than a serious concern that Pakistanis could not access enough food.

Policy Analysis on the Competitive Advantage of the Food Processing Sector in Pakistan; Focus on Quality, Safety and Standards April 2007

14

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This perspective contrasted strongly with a number of official views. According to the UN Statement of Pakistans Food Security (2000), about 42 million people in Pakistan lacked adequate income to purchase the food they need for a healthy life. Food products constituted 48 percent of household consumption expenditure (39 and 54 percent in urban and rural areas respectively) in the fiscal year (FY) 2002. In the Pakistani diet cereals remain the main staple food providing over 60 percent of total energy. Compared to other Asian countries, the level of milk consumption is high whereas the consumption of fruits and vegetables, fish and meat remains very low15. The consumption of fruit and fresh vegetables, which are highly dependent on local seasonal availability, is also limited by the lack of organized marketing facilities throughout the country. Fluctuations in the availability of these important foods are likely to be one of the factors responsible for the micronutrient deficiency disorders observed in Pakistan and referred to earlier. People in Pakistan suffer from four types of deficiencies: zinc, iron, vitamin A and iodine. In 2002 it was found that 12.5 percent of women were malnourished, with the figure jumping to 16.1 percent for lactating mothers; 6.5 percent of school children aged six to 12 years were found to have palpable or visible goitre, with the percentage rising to 21.2 in the case of mothers; while 22.9 percent of school children and 36.5 percent of mothers were found to be severely iodine-deficient16. An estimated 38 percent of children between the ages of six months and five years reported underweight, and another 36.8 percent stunted, A similar view is expressed by the World Food Programme in Pakistan which published a document entitled Food Insecurity in Pakistan 2003. This document reported the results of a food security analysis (FSA) conducted from June 2003

http://www.fao.org/ag/agn/nutrition/pak-e.stm - CSF has undertaken a study of the meat market that confirms this findingPakistan Institute of Development Economics (PIDE), conducted the National Nutrition Survey 2001-2002 on behalf of the Planning Commission of Pakistan.16

15

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to June 2004. It analyzed data on the basis of three determinants of food security, notably:

Physical access to food (availability) Economic access to food Biological utilization of food (food absorption)

With regard to availability of food, WFP found that 62 percent of surveyed districts were in deficit. In terms of economic access to food, women and landless labor and some small farmers were found at risk. Low incomes in 80 percent of the districts placed people at risk. Finally, 38 percent of those surveyed were found not to utilize food properly with a major contributory factor being a lack of access to potable water. It is very hard to ignore this survey evidence. But it does conflict with anecdotal evidence and reports of various projects and other observers. Punjab is after all one of the worlds richest agricultural areas. Equally, food prices (even if rising) are relatively low compared with other comparable countries (e.g., flour is more expensive in India and Afghanistan). Furthermore, visual evidence suggests that food is not physically treated as if it was in short supply. It is true that there are localized food shortages, and in the case of flour there have indeed been riots about the availability of the commodity. However as a rule it seems hard to believe that Pakistan has these high levels of reported food insecurity when 40 percent of the apple crop is either thrown away or given to animals. Here is another current press statement by the WFP17:Sahib Haq of World Food Programme (WFP), Islamabad urged the policy makers to take concrete steps to avoid the looming crisis as the current situation was heading from bad to worse in the near future.

17

Daily Times, Tuesday, May 06, 2008

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Competitiveness Support Fund Discussion Paper on the Wheat-Flour Industry in Pakistan He lamented that the 50 percent population of the country has become food insecure and was talking [sic] less calories to the recognized average human need adding the out of those 50 percent population, 20 percent bottom line people were the greater suffers and were miserably struggling to meet their basic food needs even by compromising on their non-food expenses.

He said that it was not the massive population but their increased consumption habits and diversification of foods in addition to international energy crisis and our dependent economy behind the crisis. He urged formalizing the trade with Afghanistan as half of our wheat was being exported to Afghanistan through formal and informal means. He identified several lacunas in domestic policy making system and role of the government primarily the previous one for not realizing the potential of the crisis coupled with poor decisions including the management failure in the worse crisis of 2007 when even international oil prices were not so high, support prices at wrong time which only benefited the poor at the cost of consumer, unavailability of fresh seeds and finally the export of rice which directly increased the need of wheat.

Leaving aside the somewhat odd thought (and odd English!) that it is apparently increased consumption habits that have led to a food crisis (presumably if food consumption has increased, then the means to produce the food has been there, so barring a crop collapse which there was not why should the situation be very different from last year?), it is clear that WFP believes that about 80 million people are food insecure however that is defined. If so then it is indeed a monumental crisis and one that the GoP should be working night and day to correct. The fact that broadly speaking the GoP agencies are more concerned about food exports (hence the struggle e.g., to get orchards WorldGap quality certified) indicates that this is hardly the case.

It is important to understand that the physical availability of food is not the issue; rather, other factors seem to be at play. Intelligent policy would thus concentrate not on increasing the food output but using the food Pakistan has better.

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2. Demographics

Demographics are the key to understanding the food industry in any country. The absolute size of the population, officially about 160 million persons (some have estimated as much as 200 million), is merely the starting point of the analysis. The following table is taken from the Official Census of 1998 which was the last time a full official census was conducted in Pakistan18. Nevertheless, for want of more up-to-date data this Study uses those that are available. The data show that the major population centers were Punjab (56 percent) and Sindh (23 percent). The population of Sindh is mainly from urbanized Karachi. Other provinces have smaller populations and are of course much poorer. In fact the population of Pakistan (as might be expected) is highly concentrated down the flow of the Indus river system and the related road network that follows the river. This makes for an easily served market. There should be limited concern that a food crisis arises simply because of the physical difficulty of reaching consumers. Of course this does not apply to other areas of the country (e.g., remote areas of the north), but as far as the majority of the population is concerned the transportation infrastructure for food looks to be sufficient.

18

The 1998 Census was the last full census conducted in Pakistan.

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Table 9: MAIN DEMOGRAPHIC INDICATORS FOR PAKISTAN (1998 CENSUS)Indicators Area (Sq. K.Ms) Population (in thousand) Male (percentage) Female (percentage) Urban Proportion Population Density (Person per Sq. K.M.) Sex Ratio (Male Per 100 Female) Average Annual Growth Rate(1981-1998) Population Under 15 (%) Population 15 - 64 Years (%) Population 65 & Above (%) Age Dependency ratio Literacy Ratio (10+) Male Female Enrollment Ratio (5-24) Male Female Economically Active Population (%) Labor Force Participation Rate (10+) Un-employment Rate Disabled Population (%) Pakistan 796096 132352 52.03 47.97 32.50 166.3 108.50 2.69 43.40 53.09 3.50 88.34 43.92 54.81 32.02 35.98 41.19 30.35 22.24 31.98 19.68 2.54 NWFP* 74521 17744 51.22 48.78 16.87 238.10 105.02 2.82 47.20 49.79 3.01 100.83 35.41 51.39 18.82 31.46 40.99 21.30 19.41 29.09 26.83 2.12 FATA#

Punjab 205345 73621 51.74 48.26 31.27 358.52 107.23 2.64 42.52 53.46 4.02 87.07 46.56 57.20 35.10 39.38 43.83 34.63 22.55 31.98 19.10 2.48

Sindh 140914 30440 52.88 47.12 48.75 216.02 112.24 2.80 42.76 54.47 2.77 83.58 47.29 54.50 34.78 32.78 37.35 27.70 22.75 32.73 14.43 3.05

Balochistan 347190 6566 53.4 46.6 23.90 18.9 114.60 2.47 46.67 50.81 2.52 96.79 24.83 34.03 14.09 23.53 29.49 60.40 24.05 36.45 33.48 2.23

Islamabad 906 805 53.93 46.07 65.70 880.8 117.00 5.19 37.90 59.40 2.70 68.40 72.40 80.64 62.39 57.50 57.70 57.30 23.00 30.68 15.70 1.05

27220 3176 52.01 47.99 2.70 116.7 108.40 2.19 25.90 24.30 1.80 114.00 17.42 29.51 3.00

Source: Federal Bureau of Statistics, Official Census 1998

The urban population in 1998 was relatively small (under 33%) and is concentrated in a few large cities. Allowing for population growth we estimate an urban population of about 70 million persons. This, therefore, is the base market for processed rather than fresh food, including manufactured flour and bread. Turning now to the question of incomes, since the demand for different foods is highly responsive to increases in incomes (positively income-elastic). According to the World Bank estimates for 2006 per capita income came to

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US$72019. This represents a doubling in a decade, which is no mean achievement. Overall rising incomes, at least in urban areas, suggest that the demand for food (in particular processed food) will have strengthened as the WFP claims. Much of this might comes from a young, urbanized population a large proportion of which works in laboring and other manual jobs that require availability of cheap, carbohydrate-rich energy food again strengthening the demand for flour-based products. Research by the International Food Policy Research Institute (IFPRI) suggests that the direct, immediate effects of agricultural growth in Pakistan have gone mainly to those households that own substantial land: the rich20. The question then becomes one about quantifying the rich segment of the population and what that means for food demand. Meausured by purchsing power, the State Bank of Pakistan estimates that the country has a 30 million strong middle class enjoying per capita annual incomes of $8000-$10,000 or an average of $24.66 per day. Given that the calculation is adjusted for PPP it is usefull to readjust them in our onward calculations. Using the IMFs PPP calculations to readjust these numbers to nominal amounts the Middle Class in Pakistan have incomes between $2500 --$3125 about $7.71 per day accounting for around ( $2813 x 30 million) $84.4 billion dollars in yearly earnings. Assuming a population of 165 million and a GDP of $155 billion we conclude that 18% of the population is consuming 54% of the GDP. Taking into consideration that this does not account for Pakistans wealthy ruling class who hold an increaseingly large share of the economic pie these numbers ought not be applauded. To account for this it is either that the size of the middle class is wildly inaccurate or, assuming the State Bank is correct, the income disparity is truly deplorable. Middle class consumers are a boon for any countrys economy, but they are not an adequate excuse for bypassing broad

Pakistan Country Overview 2006, the World Bank Sources of Income Inequality and Poverty in Rural Pakistan, Research Report 102 by Richard H. Adams, Jr. and Jane J. 199520

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based economic reform, it would seem then that the great majority of Pakistanis, who live rural lifestyles, are living at a subsistence or close to subsistence levels.3. Poverty

It is estimated21 that about 32% of Pakistan's population is below the food poverty line rising from a level of 26% in 1988 (GoP, 2002), and about 44% were below the poverty line on the human poverty index (UNDP, 2002)22. The implication here is that a significant proportion of Pakistan's population does not have adequate levels of food, access to basic services and opportunities and hence are particularly vulnerable to economic, environmental and political shocks. Differences in income per capita across regions have persisted or widened as have gender gaps in education and health. Once again there are significant differences between rural and urban areas. As may be expected, the urban areas have a lower incidence of poverty than in the countryside. From 1993 to 1999 the incidence of poverty is estimated (by ADB) to have increased by 7 percentage points, when at the same time agricultural production was supposed to have increased. Thus increase in agricultural output has apparently not translated into higher rural incomes, perhaps because of a failure to add value to raw materials or because of failures in a marketing system that does not net back value added to the farmer.4. Summary of overall consumption patterns

Clearly there is enough quantified evidence based on health and nutrition surveys to suggest that Pakistan suffers from difficulties related to the ability to access and use food correctly. To use WFP terminology, access to food (at least processed food) is restricted because of the low incomes of a large proportion of the population and because of an inability by people to use the available food21 22

Asian Development Bank work on poverty by Ms Emma Hooper Other sources show lower figures for poverty. The fact is that the basic population data are uncertain and this makes calculations very difficult.

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correctly (perhaps because of factors like lack of potable water). There does not appear to be a supply problem or lack of physical availability of food, The evidence from the retail sector, including prices and the way food is treated and stored is that for some reason the Pakistani consumer does not value food in the same way that other consumers value it in other Asian countries. There appears to be a lack of understanding or demand for quality beyond a relatively small number of middle-class and rich persons who by no means represent the population as a whole. So much food is wasted that one must conclude that the value placed on food in Pakistan is very low. These conclusions appear paradoxical, but at present we have no other research that can reconcile the two points of view. The overall conclusion for Pakistan seems to be that there is indeed an underlying, chronic food or nutritional problem, but one more related to overall economic growth (poverty and inadequate incomes), to education and the supply of external aspects such as water, access to markets, and proper distribution systems. As we have seen from a consideration of the wheat policy, it appears that GoP intervention itself can make matters worse rather than better. And that ultimately even if the GoP had an effective policy to lower the cost of food, if rural incomes decrease as the rural population increases no amount of intervention will benefit the silent poor majority. The short term issue then is reversing a culture of waste. Merely upgrading the supply chains for agricultural produce would go a long way to reducing the future cost of food independent of input prices. The long term issue for Pakistani agriculture and development is ensuring food is affordable not only on the supply side but also on the demand side by decreasing rural poverty.

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B. CONSUMPTION OF WHEAT FLOUR

We have used this overall view of food consumption to color our approach in considering the demand for wheat flour. As a first effort to consider the demand for flour, we adopted a simple nutritionists approach based on what would be the protein and carbohydrate requirement of a given number of persons to be supplied from cereals. We have assumed that wheat is the only available cereal, whereas of course there are other sources of carbohydrate including rice and potato. The results are presented below.Table 10: CALCULATION OF DEMAND FOR CEREAL-BASED PROTEIN AND CARBOHYDRATE

Year 2001 2002 2003 2004 2005 2006

Population 144,410,000 142,860,000 145,960,000 149,030,000 150,470,000 153,960,000

Protein/cap/ annum (kgs) 16 16 16 16 16 16

Requirement protein per annum (tons) 2,310,560 2,285,760 2,335,360 2,384,480 2,407,520 2,463,360

Carb/ cap/ annum (kgs) 47 47 47 47 47 47

Requirement carb/ annum (tons) 6,787,270 6,714,420 6,860,120 7,004,410 7,072,090 7,236,120

TOTAL tons requirement protein and carbs 9,097,830 9,000,180 9,195,480 9,388,890 9,479,610 9,699,480

2007 160,000,000

16

2,560,000

47

7,520,000

10,080,000

The calculation uses the official population estimates for 160 million persons for 2007, a possible understatement of the actual population but one we must use as a basis in the absence of other information. We then calculate using Household Survey data for annual per capita protein and carbohydrate consumption the actual volumes that are required for a population of this size. The total requirement is 10.2 million tons of proteins and carbohydrates. It should be remembered that this is for protein and carbs from wheat flour in particular; it

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is not the amount of wheat that is required to fulfill this requirement. We come to that side of the equation in the next section.1. Wheat requirement to satisfy demand.

We repeat that wheat must pass through a supply chain that adds value and transforms it into a useable commodity. The calculation to be performed is aimed at understanding that entire chain (including elements of external supply or losses from the chain either as exports or wastage). The results show what wheat is actually available (a) for processing and (b) for human consumption.

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Table 11: CALCULATION OF SUPPLY OF WHEAT GRAINFarm usage (seed, fodder) 15% 2,853,124 2,734,079 2,877,779 2,924,485 3,242,068 3,192,077 Postharvest loss 20% 3,233,540 3,098,623 3,261,483 3,314,417 3,674,344 3,617,687 3,998,381

Year 2001 2002 2003 2004 2005 2006

Area (ha.) 8,181,000 8,058,000 8,034,000 8,216,000 8,358,000 8,448,000

Yield (ton/ha) 2.33 2.26 2.39 2.37 2.59 2.52

Output (tons) 19,020,825 18,227,196 19,185,192 19,496,568 21,613,788 21,280,512

Farm offtake 16,167,701 15,493,117 16,307,413 16,572,083 18,371,720 18,088,435

Domestic Supply 12,934,161 12,394,494 13,045,930 13,257,666 14,697,376 14,470,748 15,993,522

Imports 83,160 267,380 149,485 109,589 426,606 819,753

Official Exports

"Black" Exports 1,940,124

TOTAL SUPPLY 11,077,197 10,154,051 10,098,174 11,335,748 12,919,376 13,119,889

648,649 1,140,351 42,857

1,859,174 1,956,890 1,988,650 2,204,606 2,170,612 2,399,028

2007 8,494,000 2.77 23,519,886 3,527,983 19,991,903 Source Official GOP statistics and authors estimates Note: Black exports are estimated at 15% of Domestic Supply.

13,594,494

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The table uses official figures for area and yield. While the area figures may be suspect, we consider the yield figures reliable. They are an average of very low rainfed wheat and irrigated wheat production. The losses through the system have been explained in the main text above. We consider this a basic calculation that can be made more sophisticated as we expand our understanding of the industry. The calculation indicates that in 2007 a claimed bumper crop year produced 23.5 million tons of wheat at the field level. This amount is well above what the conventional wisdom in Pakistan considers necessary to meet demand. However, losses through the system (which we have assumed are the same every year) together with a much higher level of exports of wheat produced a grain availability of 13.6 million tons. This volume is close to amounts available for 2006 and 2005 when there was no indication of a wheat crisis.Table 12: CALCULATION OF WHEAT FLOUR PRODUCTIONCombined protein and carb supply in flour (tons) 7,766,223 7,119,005 7,079,831 7,947,493 9,057,774 9,198,354

Year 2001 2002 2003 2004 2005 2006 2007

Wheat grain (tons) 11,077,197 10,154,051 10,098,174 11,335,748 12,919,376 13,119,889

Process loss 5% 553,860 507,703 504,909 566,787 645,969 655,994

Flour output (tons) 10,523,337 9,646,348 9,593,265 10,768,961 12,273,407 12,463,895

Distribution chain loss 10% 1,052,334 964,635 959,327 1,076,896 1,227,341 1,246,389

TOTAL FLOUR (tons) 9,471,003 8,681,713 8,633,938 9,692,065 11,046,066 11,217,506

Flour Protein basis (tons) 1,136,520 1,041,806 1,036,073 1,163,048 1,325,528 1,346,101 1,394,795

Carb basis (tons) 6,629,702 6,077,199 6,043,757 6,784,445 7,732,246 7,852,254 8,136,304

13,594,494 679,725 12,914,769 1,291,477 11,623,292 Source Official GOP statistics and authors estimates

9,531,099

The above table shows the wheat grain transformed into flour. 13.6 million tons becomes 11.6 million tons of flour. It is well to note that we have been optimistic with our wastage and conversion coefficients. In the UK, the conversion of wheat grain to flour is 80 percent; here we have used a 95 percent conversion rate note also that we have not distinguished between the proportion of wheat grain that remains and is milled in the rural sector using very primitive

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equipment. The next stage of the calculation converts the available flour 11.6 million tons to a basis of protein and carbohydrate. This provides a combined protein/carbohydrate supply of 9.5 million tons.2. Balance of Supply and Demand.

There is now a simple basis for understanding the supply and demand for wheat grain and wheat flour in Pakistan, We do not consider this more than a very simple, perhaps over-simple, way of looking at this problem, but it gets us a step closer to considering the industry on an objective basis and allows us a clearer look at the real issues.Table 13: WHEAT FLOUR SUPPLY- DEMAND BALANCEProtein and Carb supply (as flour, tons) 7,766,223 7,119,005 7,079,831 7,947,493 9,057,774 9,198,354 9,531,099

Year 2001 2002 2003 2004 2005 2006 2007

Requirement protein and carbohydrate (tons) 9,097,830 9,000,180 9,195,480 9,388,890 9,479,610 9,699,480

SURPLUS/DEFICIT (tons) (1,331,607) (1,881,175) (2,115,649) (1,441,397) (421,836) (501,126)

10,080,000

(548,901)

The calculation takes the amount of available protein and carbohydrate from wheat flour and measures it against the demand for cereal-based protein and carbohydrate. Assuming that the entire supply is only from wheat the result is that there is a deficit. This varies over a range of 2.2 million tons in 2003 to 553,000 tons in 2005. It is clear that 2007 is towards the low side of that range previous years where there may have been a larger deficit were not considered to be crisis years, The point about this admittedly crude calculation is this: if wheat were the only source of protein and carbohydrate available from staple crops, then 56


Pakistan would indeed have a problem of physical supply. That said, the problem would not be insuperable because the grain required to meet the deficit could be acquired on the international market, and indeed Pakistan has been an importer in low harvest years. However, there are other sources of staple crops, especially rice and potato and other protein sources, notably livestock and pulses, and even though previous deficits had been greater, there was not at that time a comparable wheat crisis as we see today. Another extraordinary feature of the data are the high losses sustained through the post-farm and post-harvest supply chain, The system itself is unnecessarily inefficient in a large grain growing area that is well-served with roads and rail, In essence the storage infrastructure is poor, but it is the human management aspect of the supply chain which is surely its weakest link. The other outstanding feature is the role played by the so-called black exports. If these exports were not made, then even with the supply chain inefficiencies, Pakistan would have no deficit.PART IV: CONCLUSIONS AND RECCOMENDATIONS

The purpose of this study was to take a broad and parsimonious approach to the wheat industry in Pakistan as a whole. To that end we have avoided statistics that may be subject to debate and instead derived robust conclusions from generally accepted quantities. Even when we have had reason to doubt the veracity of the statistics used the results were still convincing. In conclusion, a few salient features come to the fore that because of their importance are w

Discussion Paper on the Wheat-Flour Industry in Pakistan

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