This year Pakistan is anticipated to face a shortfall of wheat. The estimated shortfall of will require the country to import 2.5 million tons of staple food grain. This will cost the country US$1.3 billion, besides handling charges to be paid in local currency. The need to import wheat has once again highlighted the importance of attaining self-sufficiency in the production of wheat, introducing efficient storage facilities and trading system. In this article an effort has been made to explore ways to overcome the shortages and contain outflow of precious foreign exchange.
Wheat is an agricultural commodity and its production is dependent on a number of factors. This year the crop size is relatively below the target. Therefore, to avoid any price volatility the Government has to import wheat.
Pakistan doesn’t have modern grain storage silos and a large quantity is stored in flat-bed warehouses. It is estimated that around 20% of the produce goes stale before reaching the market. If this quantity is saved from going stale, there may not be a need to import wheat. On the contrary, country may also earn foreign exchange by exporting the saved quantity.
The Government of Pakistan has introduced warehouse receipt financing system in collaboration with commercial banks. The accredited warehouses have started issuing receipt electronically. The encouraging news is that local warehouses have issued receipts worth one billion rupees. The landmark achievement is that out of these financing has been obtained up to 80% of the total amount of receipts issued.
The strength of electronically issued warehouse receipts hinges upon making agricultural output, eligible good quality collateral, for availing financial credit, particularly benefiting the small farmers who find it difficult to approach banks for credit to do non availability of basic collateral requirement of banks. This system has the capability of transforming the agriculture sector in the following manner:
(a) The System will be utilized by banks to extend financing, as it has enabled banks / lenders to create a charge on the commodity balances through the depository; the charged collateral is then immobilized in the warehouse till the lien is lifted.
(b) Real time access to the location and quantity of the commodity and providing a comfort that the commodity of a stated type, quality and quantity through the Warehouse Receipt system does exist duly charged to it for its financing /credit flow.
(c) The revenue streams will be generated by enabling financial institutions to lower their spreads due to the lower risk attached to individual deals, and therefore necessitating less set-aside from the financiers. This will liberate more capital for the banks, and enable them to increase their business volume, contributing therewith to the global growth of Pakistan’s economy.
(d) Markets transparency is another crucial element that comes along the proposed scheme. Through the development of secondary market, all players will be able to know and act on the National Spot Prices. In the future, and with the development of complex derivative products, actors will likely use future pricing, options management and other technical trading tools.
The other element is to separate the physical handling of commodities from their financial and accounting aspects. Banks / lenders could rest assured that a responsible entity is taking care of the physical aspects of the commodity while they need to look after only the financial and accounting aspects. This approach elevates commodities to the same plane as bonds, currencies or stocks and securities and then could be dealt with as such.
When farmer receives EWR, he gets two options: 1) obtain cash by using the produce as collateral or 2) sell it to those interested in acquiring physical delivery of the produces. The trading of EWR can be done at technology driven trading platform of Pakistan Mercantile Exchange (PMEX), the only multi commodity futures exchange operating in the country.
State Bank of Pakistan, like central banks of other developing countries, is introducing schemes to increase access of small farmers to the formal credit channels, to save them from exploitation by informal money lenders.
The SBP recently launched the electronic warehouse receipt (EWR) system for maize crop in Kasur district, almost a year after the scheme was introduced for paddy crop in Hafizabad.
The EWR enables the depositor, whether a producer or dealer, of an agriculture commodity to use it as collateral for obtaining bank loans or trade it at the local commodity exchange.
This will reduce the pressure on farmers to sell their produce immediately after harvests when prices are normally low. This will ensure a better return to farmers and also help stabilize market prices. The biggest advantage will be reduction in post-harvest losses.
This will not only reduce the pressure on farmers to sell their produce in panic immediately after harvests, but also allow the agriculture commodities to be used as collateral for bank loans
However, the insufficient number of accredited warehouses complying with the preservation norms, lack of awareness among farmers and their limited business skills, and little incentives for buyers to purchase commodities from the warehouses are identified as some of the stumbling blocks in making this system a norm.
The EWR system can only be beneficial for the community if it includes developing adequate infrastructure, comprising of warehouses and logistics facilities.
According to the inform sources there is an acute shortage of accredited warehouses and logistic facilities. The experts demand incentivizing construction of infrastructure so that investors are attracted to invest more and more in the sector.
Ironically, the purchase of the biggest crop, wheat, is done by the government, which uses its own/rented warehouses which are not suitable for the storage of staple food grain.
It is also necessary to remind that besides wheat, large quantities of rice and maize are produced in the country. This offers round the year demand for modern warehouses, particularly grain storage silos.