Economic policies can have a major impact on the demand-supply dynamics of any commodity. Usually, setting price floors or minimum support prices can result in creating price distortions. This has been the case for two of Pakistan's major crops: wheat and sugar-cane.

Both crops have had minimum support prices in place over the years which have led to excess supply resulting in a supply glut. This issue has been flagged in this space before (See “Sugary priorities" published August 24, 2017) while more recently the State Bank of Pakistan has also highlighted it in its recent quarterly report.

Going forward, the SBP expects another surplus wheat crop which it attributes to high domestic support prices. It notes “On one hand, this policy has kept wheat profitability intact, thereby encouraging growers to invest in fertilizer, seeds and pesticides; on the other hand, back-to-back bumper crops in the last four years have resulted in a build-up of stockpile."

Similar dynamics have also been in play when it comes to sugar-cane production. During the last crushing season, the provincial governments of Punjab, Sindh and KPK have maintained the minimum support price (MSP) announced in FY15. The MSP for Punjab and Sindh is Rs180 per 40 Kg ($43.3/ton), and for Sindh Rs182 per 40 Kg ($44/ton). But according to the SBP's report there was a lengthened standoff between sugar mills and growers over procurement prices which continued well into the Rabi season. This also caused delayed harvesting of sugarcane crops which in turn declined the area under cultivation for wheat.

The extent of the supply glut can be ascertained by the sugar mills' warning of not being able to pay more than Rs120/40 kg for the purchase of sugar cane in the upcoming season. According to the Pakistan Sugar Mills Association (PSMA), mills would still have 55 percent surplus stock available even after fulfilling the annual domestic demand of sugar.

Then there is also the matter of export subsidies. Both sugarcane and wheat fetch considerably lower prices in the international market as compared to domestic ones. According to the SBP, the export subsidy has not helped offload stocks due to this higher price differential.

Therefore, as the central bank rightly points out, policymakers need to rationalise support pricing policies while also accommodating grower interests. Not only will this lessen the burden on limited fiscal resources but domestic crop will also be able to be more competitive in global trade.

Copyright Business Recorder, 2018