LAHORE:
Small and medium farmers are facing a difficult economic situation in the last one year. Earlier they faced lower corn prices and could not get the desired price. They then faced lower prices of wheat in the domestic market, though the government fixed the price at Rs 3,900 per 40 kg.
However, the government has not been able to procure the desired quantity from the farmers since it has imported a reasonable quantity from October 2023 and has no ability to hold surplus wheat.
In the context of financial globalization, there is a correlation between international commodity prices and the federal funds rate. The federal funds rate is also called the international policy rate, which was at 0.25% in February 2022.
This policy rate was gradually raised to 5.5% in July 2023 within 18 months and has remained stable at this level. This shows that price acceleration has slowed in the world and specifically in the US.
Similarly, the policy rates of the European Central Bank and the Bank of England have been stabilized. Since the inflation rate is low, there is an expectation of a lower policy rate, as expected by the international financial markets.
When international policy rates are high, international commodity prices fall and vice versa. When the policy rate was 0.25% in February 2022, the international wheat price was $12 per bushel. The world wheat price fell to $7.5 per bushel in July 2023. The price continued to fall and bottomed out at $5.5 per bushel in February 2024.
The domestic price of wheat was around Rs 2,200 per 40 kg in 2021. The government had to raise the price of wheat to Rs 3,900 per 40 kg in 2022, considering the escalating costs associated with the depreciation of the rupee along with high international prices of wheat.
Hence, the enhanced support price covered the impact of devaluation and international price increase. The farming community, including small and medium farmers, rejoiced at the increase in the support price. Since wheat production was lower last year, the government had to mobilize officials to procure the staple crop from farmers.
The wheat harvest started in April 2024 when the international price was around $6 per bushel. As the value of the rupee remained stable for the past one year, the surplus of domestic wheat caused a fall in the market price, which initially fell to Rs 3,400 per 40 kg.
Poor farmers expected the price to recover and tried to maintain their production. However, they had to bring their produce to the market as wheat is in surplus and its price has fallen to Rs 2,700 per 40 kg in some parts of the country. Now, the international price of wheat is around $7.50 per bushel in anticipation of the Federal Reserve lowering its policy rate in the future. This recovery in the international price of wheat will be reflected in the domestic market in the coming months.
When the international price of wheat rises, domestic finance capitalists will try to take advantage of this price difference. They will pressure the government to ease border restrictions and strongly support exports. Therefore, there is a high possibility that the price of wheat will increase in the coming months.
In short, financial globalization will continue to greatly affect small and medium farmers. However, large farmers will offset their losses due to economic strength.
A strong political government can protect the interests of small and medium farmers. Otherwise, land concentration will continue, which has been happening for a long time.
The author is an independent economist who has worked at SDSB, Lahore University of Management Sciences (LUMS)
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