VZCZCXYZ0000
RR RUEHWEB

DE RUEHIL #4254/01 2750822
ZNR UUUUU ZZH
R 020822Z OCT 07
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 2209
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 4112
RUEHNE/AMEMBASSY NEW DELHI 1885
RUEHDO/AMEMBASSY DOHA 1446

UNCLAS ISLAMABAD 004254 
 
SIPDIS 
 
STATE FOR SCA/PB, EB/TPP 
USDA FOR FAS/OCRA/SHATZ/RADLER, OGA/CHAUDHRY/ROCKE, OFSO/DEVER 
USAID FOR ANE MWARD 
COMMERCE FOR ANESA/OSA 
DOHA FOR FCS/PEASLEE 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ETRD ECON EAGR PREL PK
 
SUBJECT:  PAKISTAN'S WHEAT SHORTAGE AND FOOD INFLATION ADD TO 
RAMADAN WORRIES 
 
¶1.  SUMMARY:  During this year's holy month of Ramadan, the average 
Pakistani is more concerned about finding a bag of flour than who 
will win the upcoming elections.  A combination of overly optimistic 
production estimates, increased domestic consumption, a temporary 
lifting of the export ban, and rising food inflation have produced a 
demand for wheat imports despite 2006 carryover wheat stocks of over 
four million tons. 
 
¶2.  Over the first week of Ramadan, wheat flour was selling at 
nearly twice pre-Ramadan levels - if bags of flour could be found at 
all.  Accusations of hoarding abound.  The price of all food items 
has risen 40 percent since the start of the holy days.  The GOP's 
announcement on September 15 that they will allow the import of one 
million tons of wheat somewhat calmed the markets as overall price 
inflation has begun to ease.  In addition to the desire for food 
prices to return to normal, Pakistanis have two questions.  Where is 
the wheat and will hoarders be punished for their actions?  END 
SUMMARY. 
 
INFLATED CROP ESTIMATE STARTED THE TROUBLE 
------------------------------------------ 
 
¶3.  The GOP continues to maintain its estimate of a 2007 bumper 
wheat crop of 23.5 million tons, despite average yearly production 
of about 21.5 million tons.  Analysts questioned the official 
estimate throughout the growing season since the wheat planted area 
increased by only one percent over the previous crop year, while the 
official estimate reflected an incredible 10 percent rise in 
production.  Growing conditions were indeed favorable, but most 
believe the crop is at least one million tons lower than the GOP 
estimate.  (Comment:  FAS Islamabad's unofficial forecast of the 
crop in March 2007 was 21.8 million tons.  End Comment.) 
 
¶4.  In April 2007, the GOP lifted the ban on wheat exports that was 
imposed in 2003.  Traders quickly took advantage of the wide price 
spread between Pakistani wheat and the international grain market. 
Exporters shipped out 500,000 tons of wheat before the GOP 
reinstated the export ban on wheat by land and sea on May 25, 2007. 
Despite the small window of opportunity, exports had the desired 
effect of raising farm prices.  However, wheat exports also had the 
negative effect of starting the spiral of food inflation which would 
slowly simmer in early summer to ignite during Ramadan. 
 
 
FOOD INFLATION MAJOR CONCERN 
---------------------------- 
 
¶5.  The GOP's inflation target for both FY 2007 and FY 2008 
(July-June) was established at 6.5 percent.  In FY 2007, the CPI 
actually rose 7.8 percent.  It is estimated that the FY 2008 CPI 
will increase by 7.5 percent, mainly reflecting higher food prices. 
Food inflation this August alone reached 8.6 percent as prices for 
rice, beans, peas, lentils, vegetables, fruit and other food 
commodities rose steeply. 
 
¶6.  Wheat and flour prices began rising in May, following the brief 
opening of the wheat export window.  By August, accusations of 
speculative hoarding by major traders and businessmen in Punjab and 
Sindh Provinces were rampant.  In May, a kilo of wheat flour cost 
12-14 rupees ($0.20-0.23).  By the first week of Ramadan, the cost 
of flour had risen 80 to 85 percent to 22 rupees ($0.37), with 
widespread concern that prices would soon rise 100% to 25 rupees 
($0.42). 
 
¶7.  While wheat and flour prices initiated the inflation spiral, the 
cost of all food items rose 40 percent during the first week of 
Ramadan, due in part to the paradoxical increased demand for food 
during the month-long daylight fast.  Families normally hold large 
"iftari" evening meals to break the Ramadan fast, inviting family 
and friends.  This feasting/fasting cycle causes not only digestive 
complaints and weight gain, but contributes to food inflation as 
families prepare larger and more elaborate than normal meals. 
 
¶8.  In response to supply problems and inflationary pressure, the 
GOP began releasing wheat stocks to flour mills on September 7.  On 
September 15, the GOP announced its intention to import 1 million 
tons of wheat.  These combined actions caused a lagged reaction the 
following week as flour prices in the major cities are now floating 
around 16-18 rupees ($0.27-0.30) per kilo, approaching the GOP's 
original target price of 14.25 rupees ($0.24) per kilo.  Prices in 
the NWFP and Balochistan are generally slightly higher due to 
 
transportation costs -- reportedly around 20 rupees ($0.33) per 
kilo. 
 
WHERE'S THE WHEAT? 
------------------ 
 
¶9.  Despite the government's inflated crop estimate, there should 
have been plenty of wheat flour available in Pakistan at this time 
of year.  However, a series of events caused a chain reaction 
resulting in empty shelves of wheat flour at retail outlets. 
 
¶10.  While destinations and volumes of exports during the April-May 
period are not yet officially released, likely buyers of the 500,000 
tons include countries in the Middle East and South Asia, as well as 
India.  In addition, at least one million tons of wheat and wheat 
flour was smuggled into India and Iran due to the favorable price 
differentials.  While a Pakistani living in a border town can earn 
about one third more than his daily wage as a laborer by smuggling a 
single 20 kilo bag of flour into India, most smuggling is organized 
and carried out by influential groups. 
 
¶11.  Due to a lack of operating flour mills, wheat is not normally 
exported to Afghanistan. Consequently, flour is legally exported to 
Afghanistan with a 15 percent export tax.  In addition, illegal 
smuggling into Afghanistan and onwards to the Central Asian 
Republics has siphoned flour out of Pakistan. 
 
¶12.  Speculative hoarders, mainly big commodity traders and others 
with sufficient influence and warehouse capacity, could be sitting 
on as much as 2 million tons of wheat.  It is assumed that the GOP 
knows where much of this wheat is located but the public and press 
are doubtful that any of the hoarders will be held responsible for 
their actions. 
 
¶13.  A final factor is domestic consumption which has increased this 
year as well.  Most of the domestic wheat utilization of 22 million 
tons is for human consumption; however, the high price of corn and 
broken rice relative to wheat has resulted in farmers increasing 
their utilization of wheat in poultry and livestock feed.  Also, the 
high price of rice has contributed to increased human consumption of 
wheat.  This has likely pushed domestic wheat demand above 23 
million tons. 
 
¶14.  Taking all of the above into consideration, and assuming the 
GOP maintains its 4 million ton wheat reserve, analysts calculate 
the shortfall in wheat anywhere between 1.5 and 2.5 million tons. 
 
IMPORTS NEEDED DURING A PERIOD OF WORLDWIDE SHORTAGE 
--------------------------------------------- ------- 
 
¶15.  On September 15, 2007, Prime Minister Shaukat Aziz announced 
that the GOP would import one 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.  For 
December 2007 delivery, Pakistan is now looking at an import price 
of $380-400 per ton.  The timing couldn't be worse.  World wheat 
stocks are at a 26-year low, mainly due to severe weather conditions 
in the major production areas of Canada, Australia, the EU and 
Ukraine.  Consequently, wheat prices have hit all-time record highs. 
 
 
¶16.  The GOP subsequently decided to make smaller wheat purchases, 
rather than a single 1 million ton purchase.  It announced a tender 
for 100,000 tons of wheat for December delivery with additional 
tenders expected monthly.  GOP officials cited overbooking at the 
Port of Karachi and the problems berthing larger vessels as well as 
the need for a monthly review of the wheat situation as reasons for 
moving away from a single tender.  They have also hinted that they 
may lift the ban on private imports.  We expect that Pakistan will 
provide a subsidy for the imported wheat to cover the differential 
between the government issue price and the import price. 
 
COMMENT 
------- 
 
¶17.  (SBU) The GOP unwittingly walked into a perfect storm scenario 
on wheat during the election season.  Not only were its initial 
estimates of this year's wheat harvest overly optimistic, but its 
well-intentioned decision to lift the four-year wheat export ban 
further contributed to shortages and price increases.  Increased 
 
Ramadan demand further contributed to price increases and supply 
shortages.  Inflation, particularly food inflation, is frequently 
cited in polls here as a primary concern of the Pakistani public. 
It is surprising that the Pakistanis have borne this inconvenience 
stoically, with no demonstrations or violence that might have 
occurred elsewhere. 
 
¶18.  (SBU) The food "crisis" scenario which played out this summer 
points to the fact that the Ministry of Food, Agriculture and 
Livestock does not have a coordinated long-term commodity policy. 
There are no staff economists or commodity experts advising 
policymakers on critical issues affecting the wider economy. 
Consequently, the GOP did not have the foresight to see the 
implications of maintaining an artificially high crop estimate or 
allowing wheat exports.  Lowering the official crop estimate would 
have had the same effect on farm prices as exports, while keeping 
more wheat within Pakistan. 
 
PATTERSON