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ZNR UUUUU ZZH        ZDK  ZDK
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FM AMEMBASSY ISLAMABAD
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RUEHLO/AMEMBASSY LONDON 8064
RUEHKP/AMCONSUL KARACHI 9861
RUEHLH/AMCONSUL LAHORE 5605
RUEHPW/AMCONSUL PESHAWAR 4345

UNCLAS SECTION 01 OF 02 ISLAMABAD 002061 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: EAGR EAID ETRD ECON PGOV PREL PK
SUBJECT: FOOD CRISIS IN PAKISTAN: REASONS BEHIND THE SHORTAGES 
 
REF: A. Islamabad 1715 
     ¶B. Islamabad 1705 
     ¶C. Islamabad 669 
 
ISLAMABAD 00002061  001.2 OF 002 
 
 
¶1. (SBU) Summary: While rising fuel prices, nation-wide power cuts, 
insufficient irrigation water and global price trends are all to 
blame for the shortage of basic agricultural commodities in 
Pakistan, government mismanagement remains a primary cause of the 
country's agricultural problems.  The prices of basic food 
commodities have steadily risen over the past year and will 
negatively impact the country's poor.  Wheat serves as a prime 
example of how market distorting price structures have led directly 
to domestic shortages and rent seeking behavior among wheat hoarders 
and smugglers.  With over 100 million Pakistanis living on two 
dollars a day, a large segment of the population remains vulnerable 
to rising food prices.  Whatever the cause of Pakistan's food 
crisis, the nation's poor are increasingly concerned about the price 
and availability of food.  Without a comprehensive plan to alleviate 
the food crisis, poverty levels and malnutrition are likely to rise, 
erasing years of success in poverty alleviation.  End Summary. 
 
¶2. (SBU) The prices of basic agricultural commodities have steadily 
risen over the past year, including the cost of key staples such as 
wheat, rice and cooking oil (Ref A).  Pakistan has been suffering 
from monthly double digit food price inflation since September 2007. 
 The World Food Program (WFP) identified Pakistan as one of 40 
countries at risk for food insecurity.  The WFP recently raised its 
estimate of at-risk individuals from 60 to 77 million, or 48 percent 
of Pakistan's population.  The World Bank estimates that 19 percent 
of Pakistanis are already malnourished (over 30 million people) and 
38 percent of the country's children under the age of five are both 
malnourished and underweight.  Economists from Lahore's Beaconhouse 
National University report that the prices of basic agricultural 
commodities will soon become unbearable for Pakistan's poor, erasing 
recent poverty alleviation gains (Ref B). 
 
¶3. (SBU) Rising fuel costs and nation-wide energy shortages are 
taking their toll on the agricultural sector, increasing the cost of 
transporting produce and limiting the utilization of irrigation 
systems.  Power demand in Pakistan currently outstrips supply by at 
least 4,000 megawatts per day.  Not a single megawatt of electricity 
has been added to Pakistan's national grid since 2000 despite record 
economic growth and population expansion.  Agricultural production 
in Pakistan is dependent on the country's one million wells, all of 
which utilize either electric or gas power. 
 
¶4. (SBU) Pakistan faces a shortage of utilizable irrigation water, 
mainly affecting rice, cotton, fruit and vegetable crops.  The GOP 
estimates that 40 percent of available irrigation water never makes 
it to crops because of inadequate irrigation technology.  Most 
agricultural producers do not use sprinkler or drip irrigation 
systems.  Members of the Pakistan AgriForum report that cotton 
producing regions of Pakistan have 77 percent less useable water 
this year.  GOP meteorological estimates predict that irrigation 
water supplies will be negatively affected by a 25 percent decline 
in snowfall in Pakistan's northern watershed areas. 
 
WHEAT AS AN EXAMPLE OF MISMANAGEMENT 
- - - - - - - - - - - - - - - - - - - 
 
¶5. (SBU) Pakistan's 2008-09 wheat marketing year began in May, amid 
concerns that domestic wheat shortages would continue.  Pakistan 
expects this year's final domestic wheat production to be between 
20.8 and 21.8 million metric tons (MT), well below the target of 24 
million metric tons.  If forecasts prove true, Pakistan will need an 
additional one to 1.8 million metric tons of wheat in 2008-09 to 
meet domestic demand.  During the 2007-08 marketing year, Pakistan 
imported 1.7 million metric tons at a cost of USD 800 million.  On 
May 13, the GOP announced plans to import up to 2.5 million metric 
tons to both meet domestic demand and augment a system of national 
strategic wheat reserves. 
 
¶6. (SBU) On the domestic market, price differentials exist between 
the official government wheat purchase price and the going market 
rate. The GOP provides fertilizer and irrigation subsidies to wheat 
producers who in turn sell their wheat at a below market price to 
government procurement agencies.  Government procured wheat supplies 
are then sold at a discounted rate to consumers, keeping the cost of 
wheat low. The cost of wheat in Pakistan is among the cheapest in 
the world, currently selling at USD 234 per metric ton versus a 
 
ISLAMABAD 00002061  002.2 OF 002 
 
 
world price of USD 375 per metric ton.  This price differential 
between the domestic and international cost of wheat is directly 
responsible for Pakistan's wheat shortage.  The relative low price 
of Pakistani wheat increases the incentive to smuggle wheat and 
wheat flour to neighboring India, Iran and Afghanistan, further 
exacerbating domestic wheat shortages. 
 
¶7. (SBU) Farmers are reluctant to sell wheat to government brokers 
at below-market prices.  The GOP currently pays   Rs 625 (USD 9.3) 
per 40 kg bag while wheat trades on the open Pakistani market at Rs 
800 (USD 11.9) per 40 kg bag.   As of early June, the GOP had 
procured 3.294 million metric tons, well below its internal 
procurement target of five million metric tons.  The provincial 
governments of Punjab and Sindh, the country's largest wheat 
producing regions and home to the nation's most food insecure 
groups, have banned inter-district and inter-provincial wheat 
transportation.  The move is aimed at limiting large-scale private 
sector wheat purchase, transportation and hoarding.  As fuel costs 
and agricultural commodity prices rise, speculators have reportedly 
set up nation-wide networks to buy and hoard key agricultural 
commodities, regulating domestic supply and manipulating prices. 
Although local police have been mobilized to restrict inter-province 
transport and hoarding, wheat flour continues to move freely 
throughout Pakistan. 
 
WHEAT EXPORTS TO AFGHANISTAN 
- - - - - - - - - - - - - - - 
 
¶8. (SBU) Pakistan has officially banned wheat exports to neighboring 
countries, with the exception of Afghanistan.  Traditionally, 
private sector wheat flour sales to Afghanistan average 600,000 
metric tons per year.  During the 2007-08 wheat marketing year, 
sales tripled to almost 2 million metric tons, prompting the GOP to 
prohibit the export of wheat to Afghanistan.  The Government of 
Pakistan announced that it will lift the prohibition this year but 
will allow only 50,000 tons to be exported on a 
government-to-government basis.  Private sector sales remain illegal 
and smuggling is still rampant. 
 
WORLD FOOD PROGRAM 
- - - - - - - - - - 
 
¶9. (SBU) Both World Bank and UNDP reports indicate that over 100 
million Pakistanis live on less than two dollars per day, including 
25 million living on less than one dollar per day.  The WFP 
currently provides food assistance to 3.7 million Pakistanis.  WFP 
analysis further indicates that the purchasing power of Pakistan's 
poor has declined by almost 50 percent in the past year.  WFP 
officials in Islamabad indicate that the organization will likely 
seek to temporarily increase food recipients to between six and 
eight million.  The WFP will field a food assessment mission to 
Pakistan beginning June 10 in an attempt to identify the number of 
Pakistanis at risk of starvation and propose WFP options. 
 
COMMENT 
- - - - 
 
¶10. (SBU) Pakistan is not a food deficit country and should be able 
to feed itself.  However, poor public and private sector management 
of the agricultural sector is to blame for the country's rising food 
prices and insufficient domestic supply.  Market distortions, 
particularly price differentials in the cost of agricultural 
commodities, are the main sources of the problem.  By changing the 
official government purchase price to more accurately match market 
prices, the GOP could purchase more wheat and other basic 
commodities for government-owned utility stores that cater to 
Pakistan's poor, replenish strategic grain reserves and reduce the 
rent-seeking incentive to smuggle and hoard. 
 
¶11. (SBU) Comment continued:  Whatever the cause of Pakistan's food 
crisis, rising food prices are increasing insecurity for the growing 
number of Pakistanis hovering around the poverty line.  The 
country's poorest groups remain vulnerable to malnutrition and 
starvation.  Without a comprehensive national plan to both reform 
the management of the agricultural sector and protect at-risk 
groups, poverty levels and malnutrition-related diseases are set to 
rise.  End Comment. 
 
PATTERSON