Pakistan Agribusiness Report Q3 2009

For many of Pakistan's major crops, the 2009 harvest is well underway. The results look to be mixed. The rice crop will be a record high, but sugarcane production is well down on 2008. Cotton and wheat production, while likely to be up year-on-year, will both fall well short of the government's ambitious targets.

With the harvests being brought in, the government's oversight of the sector is, as usual, coming under scrutiny. Last year, in the midst of rapid food price inflation both domestically and worldwide, the government made increasing agricultural production one of its key aims. To do this, it has increased the support prices for key crops such as rice, wheat and sugarcane. These moves have had mixed results.

The high world price of rice last year encouraged farmers in Pakistan to increase the area sown to the crop. The area planted to rice rose an estimated 16% on the previous year's level. At the end of last year, with a bumper harvest on the way and world prices well down, the government agreed to return to intervention in the rice market after having been absent since the start of the decade. The prices set for government procurement held up the market price and made Pakistani exports less competitive. In January 2009, rice exports were down 50% year-on-year (y-o-y). The slow exports have led to a large build up of stocks and with procurement now all but over, the rice price has begun to fall sharply. While this is good news for exporters, it will leave a large number of farmers out of pocket.

In 2008, a bumper crop of sugarcane was grown. The abundant supplies, however, allowed traders and millers to use various means to pay less than the government mandated price for cane. Disappointed farmers drastically cut the area planted to sugarcane, with rice a key beneficiary. This year, millers are suffering from a shortage of cane and another sugar crisis could be on the way if the government is unable to source enough sugar on the world markets in a timely manner.

There is a risk that a similar effect could be seen with rice next year if farmers feel they have not got a fair deal for their crop. At present we are forecasting only a small fall in rice production in 2010, but will be closely watching the start of the planting season.

Wheat is Pakistan's key food staple and the government's hopes for stabilising the country's food prices have been resting on a bumper harvest. As we have forecast all along, the government's 2009 production target of 25mn tonnes now looks sure to be missed. Initial estimates suggest a crop of around 23.3mn.

This is more than a 10% increase on the previous year's crop and we expect it to be enough to meet domestic demand. However, we do not see food prices coming down any time soon. The increased support price for wheat, introduced to help reach the government's production target, has meant retail prices for flour have had to be increased, putting further woe on Pakistan's already hard-pressed consumers.