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Discussion Paper


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 Contents


EXECUTIVE BRIEF/////////////////////////./7
Part I: Policies and Prices///////////////////....7
Part II: Supply and Processing/////////////////...8
Part III: Demand////////////////////////..9


PART I: POLICIES AND PRICES///////////////////...11

A. WHEAT POLICY//////////////////////..11
1. Outline of the 2008 wheat crisis///./////////11
2. Main elements of policy///////////////...13
3. Instruments of policy////////////////....15
B. PRICES/////////////////////////../21
1. Domestic Price Trends///////////////./21
2. Trade///////////////////////../23

PART II: SUPPLY AND PROCESSING/////////////////.24

C. WHEAT GRAIN LOGISTICS/////////////////..31
1. Harvesting, threshing and primary transport//////..31
2. Primary storage////////////////////34
1. Procurement/////////////////////..35
2. Public Storage///////////////////../36
E. FLOUR MILLING INDUSTRY////////////////./37

PART III: DEMAND//////////////////////////43

A. CONSUMPTION//////////////////////...43
1. Perspective on the demand for food in Pakistan////..43
2. Demographics////////////////////.47
3. Poverty///////////////////////..50
4. Summary of overall consumption patterns///////.50
1. Wheat requirement to satisfy demand/////////.53
2. Balance of supply and demand////////////..56


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

List of Tables

Table 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 11: CALCULATION OF SUPPLY OF WHEAT GRAIN .................................
Table 13: WHEAT FLOUR SUPPLY- DEMAND BALANCE ...................................

List of Charts


Chart 2: PRICES OF WHEAT AND FLOUR...........................................................
Chart 3: MAIN GROWING AREA FOR WHEAT ...................................................
Chart 4: WHEAT AREAS AND YIELDS .................................................................

List of Figures

Figure 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

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



The 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 CSF’s recently released “State of Pakistan’s
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 Pakistan’s 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..

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

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 Pakistan’s 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

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.

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

useful platform to begin a more serious normative and prescriptive discussion of

the issues at hand. In its most basic formulation the report’s 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.

Pakistan’s 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.

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


Part 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 GoP’s 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 GoP’s 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 Pakistan’s prices and the cost of wheat for
Pakistan’s 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.

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

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 people’s lives. It provides upwards of 60

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Discussion Paper on the Wheat-Flour Industry in Pakistan

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,

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

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

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.


• 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 private-

sector 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.

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



Wheat 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

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 Pakistan’s 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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Discussion Paper on the Wheat-Flour Industry in Pakistan

actual crop production in 2007 was at least a million tons lower than the

Coincidentally, 2007 also saw the greatest shortage of world wheat stocks
in 26 years. That knowledge determined GoP’s 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

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 Pakistan’s 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

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

$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 it’s 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.

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

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 farmer’s
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

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

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

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

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 else’s. 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

• 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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Discussion Paper on the Wheat-Flour Industry in Pakistan

Delving further into the Procurement and issue Mechanisms:






Real Procurement/ support prices


100 Real Issue Prices ($/ton)


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

Source: MinFAL, Wheat Section


Price (PKR/40
kg) Issue Price
Year Sep-Oct Nov -Dec Jan-Feb Mar-Apr

2001-02 300 330 335 340 345

2002-03 300 330 335 340 345
2003-04 350 330 335 340 345
2004-05 400 380 380 392 398
2005-06 415 425
2006-07 425 430
2007-08 625 625
Source: MinFAL, Wheat Section

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Discussion Paper on the Wheat-Flour Industry in Pakistan


Per 40 kg Bag Per Metric Ton

Procurement Price:
Set by GoP
PKR 350 $5 PKR 8750 $125

Incidental Charges:
Monthly Costs^
PKR 25 $0.36 PKR 625 $9

Actual Basis Price:

Procurement + Charges
Sept / Oct PKR 400 $5.71 PKR 10,000 $142.86
Nov / Dec PKR 450 $6.43 PKR 11,250 $160.71
Jan / Feb PKR 500 $7.14 PKR 13,750 $178.57
March / April PKR 550 $7.86 PKR 13,750 $196.43

Quota to Flour Mills:

Sept to April 2004
Sept / Oct PKR 330 $4.71 PKR 8250 $117.86
Nov / Dec PKR 335 $4.79 PKR 8375 $119.64
Jan / Feb PKR 340 $4.85 PKR 8500 $121.43
March / April PKR 345 $4.92 PKR 8625 $123.21

Basis Price - Quota
Sept / Oct PKR 70 $1 PKR 1750 $25
Nov / Dec PKR 115 $1.64 PKR 2875 $41.07
Jan / Feb PKR 160 $2.29 PKR 4000 $57.14
March / April PKR 205 $2.93 PKR 5125 $73.21

Loss to GoP* PKR 550 $7.86 PKR 13,750 $196.43

Open Market Price:

PKR 500 $7.14 PKR 12,500 $178.57

Loss to Farmer** PKR 150 $2.14 PKR 3750 $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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Discussion Paper on the Wheat-Flour Industry in Pakistan

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

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.

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

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 Pakistan’s 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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Discussion Paper on the Wheat-Flour Industry in Pakistan

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

• 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

• 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


1. 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

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

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.


Real Wheat and Flour Prices

(prices at the mill)


400 Wheat Grain
300 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

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

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 Pakistan’s 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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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 world’s wheat producers with the majority of
wheat grown in the Punjab. This is the best agricultural land in Pakistan and the
location of the world’s 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


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Year Punjab Sindh NWFP Balochistan Pakistan
2000-07 16,060 2,409 1,003 602 20,075
Average (80%) (12%) (5%) (3%) (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.



8,600 3.00
Area ('000 hectares)

Yield (Tons/Ha.)

Area (Million Ha.)
8,200 1.50
Yeild (ton/hec)
7,800 -


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 Wheat Rice Sugarcane Cotton

1996-97 16,651 4,305 41,996 1,594

1997-98 18,694 4,333 53,104 1,562
1998-99 17,858 4,674 55,191 1,495
1999-00 21,079 5,156 46,333 1,912
2000-01 19,024 4,803 43,606 1,826
2001-02 18,226 3,882 48,042 1,805
2002-03 19,183 4,478 52,056 1,737
2003-04 19,500 4,848 53,419 1,709
2004-05 21,612 5,025 47,244 2,426
2005-06 21,700 5,547 44,312 2,122
Average 19,353 4,705 48,530 1,819

Source: Economic Survey of Pakistan 2005-06

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CROP 1999-00 2005-06

% %
Rice 15.40 17.23
Wheat 41.30 38.34
total 56.70 55.57
Industrial crops
Sugarcane 11.00 9.66
Cotton 24.00 24.37
total 35.00 34.03
Other crops 8.30 10.40

VALUE-ADDED 100.00 100.00

Source: Economic Survey of Pakistan, 2005-06


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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Area hectare 1

Yield Rainfed 1.2 tons

Irrigated 2.5 tons

Price GOP 625 kgs 15,625 PKR/ton 226 USD/ton
Private 740 kgs 18,500 PKR/ton 268 USD/ton

Revenue Rainfed Irrigated

Govt PKR 18,750 39,063
USD 272 566
Private PKR 22,200 46,250
USD 322 670

Costs PKR/per ha. Rainfed Irrigated

Unit Unit Unit Cost
input Unit cost Cost amount input cost amount
Land Ha. 1 1
Labour Persons 10 69 690 20 100 2,000

Seed Bags 2.4 950 2,280 2.4 950 2,280

DAP 1.2 3,230 3,876 2.4 3,230 7,752
Urea 2.4 620 1,488 4.8 620 2,976
Irrigation Fee 2.4 2,000 4,800
Fuel Litre 2.4 1,535 3,684
Harvest Fee 2.4 600 1,440 2.4 975 2,340
HA. PKR 9,774 25,832
USD 142 374

margin PKR 8,976 13,231
USD 130 192

Private margin PKR 12,426 20,418

USD 180 296

Combined margin PKR 11,564 18,621

USD 168 270

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Source: Author’s calculations based on field enquiries

on the
Average price /50kg bag = PKR
Seed 950
Requirement per acre = 1 bag
Fertilizer 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)
Irrigation Tube well bill 2.000/acre calculated from 1 tubewell per 60acre farm
average 20,000 PKR/farm
Fuel PKR 307 per cultivation/acre
Total cost cultivation per acre at 5 cultivations/acre
= 1535
Harvest Includes threshing = 975/acre in Punjab irrigated area

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.


USA 475 average 2000-06, all winter wheat

Uzbekistan 315 irrigated GOU, 2005 crop
Pakistan 374 irrigated Authors’ calculation
Turkey 240 rainfed Press reports
Pakistan 142 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 the

We 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.

* Note: that Uzbekistan’s costs understate water charges; it is probable that Uzbek wheat costs
are 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 and

rationalization of wheat infrastructure.

3.Encouraging specialization and cash crops, to move

away from subsistence farming


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

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

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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.


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

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.
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
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

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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.

March 2008 ex-farm price

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The composition of Atta is shown below:


Energy 340 kcal
Protein 12 g
Fat 2g
Carbohydrates 70 g
Moisture content 12 g
Others (fibres, etc) 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

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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 is

According to the Chairman, All-Pakistan Flour Mills Association Sheikh Mohammad Shabbir
(“Dawn” newspaper, September 2007)
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

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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

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Figure 9: Wheat flour loading – courtesy of Suppliers International

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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

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This perspective contrasted strongly with a number of official views.

According to the UN Statement of Pakistan’s 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

15 - CSF has undertaken a study of the meat market
that confirms this finding
Pakistan Institute of Development Economics (PIDE), conducted the National Nutrition Survey 2001-2002 on behalf of the
Planning Commission of Pakistan.

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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 world’s 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.

Daily Times, Tuesday, May 06, 2008

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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

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

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

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Indicators Pakistan NWFP* FATA Punjab Sindh Balochistan Islamabad
Area (Sq. K.Ms) 796096 74521 27220 205345 140914 347190 906
Population (in thousand) 132352 17744 3176 73621 30440 6566 805
Male (percentage) 52.03 51.22 52.01 51.74 52.88 53.4 53.93
Female (percentage) 47.97 48.78 47.99 48.26 47.12 46.6 46.07
Urban Proportion 32.50 16.87 2.70 31.27 48.75 23.90 65.70
Population Density
166.3 238.10 116.7 358.52 216.02 18.9 880.8
(Person per Sq. K.M.)
Sex Ratio
108.50 105.02 108.40 107.23 112.24 114.60 117.00
(Male Per 100 Female)
Average Annual Growth
2.69 2.82 2.19 2.64 2.80 2.47 5.19
Population Under 15 (%) 43.40 47.20 25.90 42.52 42.76 46.67 37.90
Population 15 - 64 Years (%) 53.09 49.79 24.30 53.46 54.47 50.81 59.40
Population 65 & Above (%) 3.50 3.01 1.80 4.02 2.77 2.52 2.70
Age Dependency ratio 88.34 100.83 114.00 87.07 83.58 96.79 68.40
Literacy Ratio (10+) 43.92 35.41 17.42 46.56 47.29 24.83 72.40
Male 54.81 51.39 29.51 57.20 54.50 34.03 80.64
Female 32.02 18.82 3.00 35.10 34.78 14.09 62.39
Enrollment Ratio (5-24) 35.98 31.46 - 39.38 32.78 23.53 57.50
Male 41.19 40.99 - 43.83 37.35 29.49 57.70
Female 30.35 21.30 - 34.63 27.70 60.40 57.30
Economically Active
22.24 19.41 - 22.55 22.75 24.05 23.00
Population (%)
Labor Force Participation
31.98 29.09 - 31.98 32.73 36.45 30.68
Rate (10+)
Un-employment Rate 19.68 26.83 - 19.10 14.43 33.48 15.70
Disabled Population (%) 2.54 2.12 - 2.48 3.05 2.23 1.05

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 IMF’s 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 Pakistan’s 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
country’s 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. 1995

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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 food

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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Discussion Paper on the Wheat-Flour Industry in Pakistan

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

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Discussion Paper on the Wheat-Flour Industry in Pakistan


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 nutritionist’s 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.



Requirement Carb/ TOTAL tons

Protein/cap/ protein per cap/ Requirement requirement
annum annum annum carb/ annum protein and
Year Population (kgs) (tons) (kgs) (tons) carbs
2001 144,410,000 16 2,310,560 47 6,787,270 9,097,830
2002 142,860,000 16 2,285,760 47 6,714,420 9,000,180
2003 145,960,000 16 2,335,360 47 6,860,120 9,195,480
2004 149,030,000 16 2,384,480 47 7,004,410 9,388,890
2005 150,470,000 16 2,407,520 47 7,072,090 9,479,610
2006 153,960,000 16 2,463,360 47 7,236,120 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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Farm usage Post-

Area Yield Output (seed, Farm off- harvest Domestic Official "Black" TOTAL
Year (ha.) (ton/ha) (tons) fodder) 15% take loss 20% Supply Imports Exports Exports SUPPLY

2001 8,181,000 2.33 19,020,825 2,853,124 16,167,701 3,233,540 12,934,161 83,160 1,940,124 11,077,197

2002 8,058,000 2.26 18,227,196 2,734,079 15,493,117 3,098,623 12,394,494 267,380 648,649 1,859,174 10,154,051

2003 8,034,000 2.39 19,185,192 2,877,779 16,307,413 3,261,483 13,045,930 149,485 1,140,351 1,956,890 10,098,174

2004 8,216,000 2.37 19,496,568 2,924,485 16,572,083 3,314,417 13,257,666 109,589 42,857 1,988,650 11,335,748

2005 8,358,000 2.59 21,613,788 3,242,068 18,371,720 3,674,344 14,697,376 426,606 2,204,606 12,919,376

2006 8,448,000 2.52 21,280,512 3,192,077 18,088,435 3,617,687 14,470,748 819,753 2,170,612 13,119,889
2007 8,494,000 2.77 23,519,886 3,527,983 19,991,903 3,998,381 15,993,522 2,399,028 13,594,494
Source” Official GOP statistics and authors estimates

Note: “Black exports” are estimated at 15% of Domestic Supply.

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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.


Wheat Flour Distribution TOTAL Flour protein and
grain Process output chain loss FLOUR Protein Carb basis carb supply
Year (tons) loss 5% (tons) 10% (tons) basis (tons) (tons) in flour (tons)
2001 11,077,197 553,860 10,523,337 1,052,334 9,471,003 1,136,520 6,629,702 7,766,223
2002 10,154,051 507,703 9,646,348 964,635 8,681,713 1,041,806 6,077,199 7,119,005
2003 10,098,174 504,909 9,593,265 959,327 8,633,938 1,036,073 6,043,757 7,079,831
2004 11,335,748 566,787 10,768,961 1,076,896 9,692,065 1,163,048 6,784,445 7,947,493
2005 12,919,376 645,969 12,273,407 1,227,341 11,046,066 1,325,528 7,732,246 9,057,774
2006 13,119,889 655,994 12,463,895 1,246,389 11,217,506 1,346,101 7,852,254 9,198,354
2007 13,594,494 679,725 12,914,769 1,291,477 11,623,292 1,394,795 8,136,304 9,531,099
Source” Official GOP statistics and authors estimates

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.


and Carb Requirement
supply (as protein and
flour, carbohydrate SURPLUS/DEFICIT
Year tons) (tons) (tons)
2001 7,766,223 9,097,830 (1,331,607)
2002 7,119,005 9,000,180 (1,881,175)
2003 7,079,831 9,195,480 (2,115,649)
2004 7,947,493 9,388,890 (1,441,397)
2005 9,057,774 9,479,610 (421,836)
2006 9,198,354 9,699,480 (501,126)
2007 9,531,099 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

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Discussion Paper on the Wheat-Flour Industry in Pakistan

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.


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 worth mentioning again. Firstly, there is the issue of the sheer
size of losses in the government run supply chain; secondly, that the GoP has
contributed to a significant depression in farmers incomes for the sake of a food
security policy that is not working; and finally, that the more significant long term
issues are not in the supply but in the demand side of the equation where

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Discussion Paper on the Wheat-Flour Industry in Pakistan

inequalities in opportunity are making food more dear for the very people who
produce it.

Without even addressing factors that determine the overall supply of

wheat, such as improved seeds and farming techniques; reconstituting the
supply chain alone would amount to a second “green revolution” in Pakistan.
Even whilst assuming a very low process loss when wheat is turned into flour,
our estimates show that 45%-50% of wheat that has been harvested is wasted,
spoilt, smuggled, or never even enters the cash economy. If that wasted wheat
were exported meaning 9 million tons at $400 dollars a ton then the total loss to
the economy would amount to $3.6 billion or %2.3 of GDP.

• The supply chain must be upgraded immediately; the future

of Pakistan’s agricultural sector is itself at stake.

The “food security” mechanism only works when the government is paying
more for wheat than the open market. This way the government would
encourage the production of more wheat, have the ability to supply large
amounts of it to urban centers, and support farmers’ incomes. In the present
circumstance the government is procuring the wheat at lower prices than what
the open market dictates. This discourages the growing of wheat, reduces the
supplies it has at its disposal for urban centers, and depresses farmer incomes.

• The wheat economy must be liberalized and rationalized. If it

is necessary to provide food for the poverty stricken the
government should do so directly with food vouchers.

The production of more food alone will not help Pakistan’s destitute, nor will it
increase food security. If the rural population, the majority of the country, does
not see growth in their disposable incomes then food security will never be
achieved. In a global economy prices of commodities are greatly influenced by
the international market. The global economy has been growing at a rapid pace

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Discussion Paper on the Wheat-Flour Industry in Pakistan

with India and China (both neighbors of Pakistan) seeing upwards of %12 annual
growth in their GDPs. As a result factor inputs e.g. fertilizer, seed and water will
tend to cost more and ultimately the result will be a steady upward trend in
commodity prices. If Pakistan’s population does not see more broad based
patterns of economic growth basic food items will become less affordable for
more people. Demand side issues include a wide variety of problems involving
many factors that may not have a direct correlation to agriculture, yet if these
issues are not addressed the impact it will have on food security for common
Pakistanis will be immense, this current wheat “crisis” is only an intimation of
what may, in future, be the most important challenge to Pakistan’s sovereignty.

• The GoP needs to implement a clear long term policy

dealing with broad based growth. The current city-centric
approach is not sustainable and only contributes to the mass
migration of the destitute from rural villages to cities where
migrants often end up as the urban poor.

Geoffrey Quartermaine Bastin, Sadia Sarwar and Zain Asadullah Kazmi

September 2008
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