Sunday, 23 November 2014

Crutches for inefficient flour mills

WITH over one million tonnes of wheat imports easing the supply situation in Sindh, the federal government woke up belatedly to slap an import duty.
However, as earlier feared the Punjab Food Department is in a quandary.; it is now planning to deal with a carry-over of 1.5m tonnes to next season. This huge quantity would not only occupy two-thirds of its indoor storage, but also have a huge financial and administrative cost.
Apart from the more than expected imports, the department is also making the situation worse for itself through wheat release policy hiccups. It is sticking to a quota system — 30 bags per unit per day — despite having over 3.6m tonnes of stocks, which it, no way, can release before the arrival of fresh crop in May. Around 1.5m tonnes wheat lying with Pakistan Agriculture Services and Storage Corporation (Passco) is over and above Punjab’s stocks. The quota system, which Punjab is sticking to, is designed for shortages or precariously balanced stocks; certainly not in case of trade surpluses when it can bring the price down and reduce its strategic stocks as much as it needs.
In the end of October, the department started releasing wheat to the mills at the rate of 25 bags per grinding unit per day. As releases were very slower than expected, it liberalised releases and told millers to purchase as much commodity as they wanted to. However, within days, as pressure from the millers’ association grew, it fell back to quota system — a third policy decision in as many weeks.

Many inefficient flour mills survive on selling their wheat quota to efficient and successful millers. They make huge money out of it


Another dimension of the wheat quota system is sustaining grossly 300pc over-installed milling industry, including sick and inefficient units. Many inefficient flour mills survive on selling their quotas to efficient and successful millers. They make huge money out of it. Last year, when, for the first time, the difference between officially released wheat price and market rates swelled to over Rs200 per 40Kg, these millers made windfalls out of their allotted quotas. That is why the Pakistan Flour Mills Association (PFMA) always favours quota system .It must here be conceded that millers in Punjab have also a market in wheat deficit wheat provinces.
But for how long the Food Department and the provincial government can support the milling industry at the cost of poor consumers? These millers sell their quotas to make money, which, in turn, generates food inflation. Many mills simply do not operate but survive, some say thrive, on selling quotas and rigging the market. If the Food Department yields to the PFMA pressure, it would not only be financing inefficient units but also carry-over huge stocks next year. If it liberalises releases, it would only see a majority of mills sinking or facing closure. It is stuck between proverbial hard rock and deep blue sea.
The Punjab government needs to deal with the problem through a policy decision. The mushroom growth of flour mills came in the wake of courts upholding equal quota to each mill, regardless of its capacity and later dampened the official attempt to reduce mill numbers through administrative measures when it legally protected right to business for everyone.
More investors saw opportunities in those judgments and as a strategy kept adding to the already over-installed industry. At present, Lahore has close to 100 mills, where according to the industry,, only 10 are needed. Even small and wheat deficit city like Rawalpindi has 120 mills. And the Punjab government has to underwrite inefficiencies that encourages rent-seeking.
One option for the Punjab Government is to get out of flour pricing business. It should only procure strategic reserves and sell them during the stress period of shortages. It should let the market mechanism determine the price and this may actually bring the price down. But such a big decision, if it has to come, can only be taken at the highest political level.
Published in Dawn, Economic & Business

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