Why CPEC is a wake-up call for Pakistan’s agriculture

Agriculture

Sharmin Arif and Ijaz Nabi

Many media reports and opinion columns treat the China-Pakistan Economic Corridor (CPEC) as a cure-all. The reality is more complex. The benefit we get from CPEC depends on how much effort we put into using the opportunity. This point was stressed at a recent panel, “What CPEC means for agriculture” hosted by the Consortium for Development Policy Research (CDPR) on November 10th. Following are key points from the discussion.

Why CPEC opens an opportunity in agriculture

CPEC, as elaborated by panelist Hasaan Khawar, policy analyst and CDPR Fellow, is part of a larger economic and strategic initiative whereby China seeks to connect its economy to Europe, Africa and the Middle East through land and sea routes. CPEC is one of the six such routes which connects China to Pakistan through two routes linked to our sea ports: the eastern route and the western route.  Clearly, China knows what it is doing and is here to invest, but Pakistan needs to respond to create the conditions to maximize returns from investments for both economies.

There are seven areas of cooperation for benefiting from the routes, and agriculture is one of them. China’s plan is mainly to invest in our agriculture inputs – specifically fertilizers – as well as in post-harvest infrastructure. Such cooperation in agriculture between China and Pakistan poses challenges and opportunities.

A forthcoming study by International Growth Centre (IGC), cited at the discussion, highlighted that China has become the world’s largest food market with 1.3 billion consumers, and it’s worth $1 trillion. In ten years, it is expected to reach $1.5 trillion. China is undergoing rapid urbanization which is depleting both labor for agriculture and land for growing enough food for its citizens. It has recently struck 80 deals in international food markets worth $12 billion. The U.S., Australia and Brazil have increased their agriculture exports to China three-folds. Russia, recognizing its geographical advantage of being located closer to China, has overtaken the U.S. as the largest wheat exporter to China.

Pakistan, China’s neighbor in the southwest, has yet to take advantage of the opportunity in agricultural trade with China. This is despite the fact that multinational corporations are racing to set up operations in countries close to China for exporting perishable goods in the shortest time and lowest costs. This is unfathomable, as Pakistan is seated on fertile plains, making agriculture a natural source of business for Pakistan’s economy.

CPEC is a wake-up call for Pakistan to energize its agriculture sector through exports. The overall agricultural export basket of Pakistan is mostly reliant on cotton textiles, comprising 70 to 80 percent of total exports. Of that – leaving out cotton and livestock – agri-exports to China account for a negligible portion of other products. Pakistan’s share in the Chinese ballooning market for agriculture imports remains miniscule and will continue to shrink unless addressed effectively.

CPEC will reduce the logistics costs of trade in agriculture products with China. But this will not automatically translate into greater exports for Pakistan. This is because not only does our agriculture sector need to be revamped to improve product quality, but at the micro-level, farmers need to be given better access to formal credit for investing in expensive inputs. Pakistan needs to utilize all available tools to attract foreign businesses. The private sector must accelerate efforts to negotiate new deals with international food companies for export opportunities.

What will it take?

Panelist Arif Nadeem, head of the Pakistan Agricultural Coalition (PAC) and former Secretary of Agriculture, Government of Punjab, pointed out that irrigation costs are a massive 40 to 50 percent of the total production costs of Pakistani farmers. Furthermore, ground water quality has deteriorated sharply, negatively affecting yields. These irrigation challenges need to be addressed, including an overt focus on wheat and sugar cane production, which wastes water resources that can be used for other, more economically viable crops, such as oil seeds, which require much less water for irrigation and lesser input costs. In short, Pakistan’s agriculture needs an overhaul focusing on comparative advantage based on its land and water resources. Additionally, the latest irrigation technologies need to be adopted to produce more crops per drop of water.

Pakistan’s agriculture needs to become part of an eco-system comprising key players from the public and private sectors to help farmers grow high quality produce which can be stored in warehouses that come with crop insurance. Farmers should be able to use their crops as collateral for getting short-term loans from banks for sustaining their investment cycles. This should be accompanied by commodity exchange systems to ensure that farmers don’t have to undergo distress sales, which adversely affect profitability.

The federal government has to improve market access to China. This requires an examination of tariff and non-tariff barriers to trade with China. Currently, the federal government is re-negotiating the Free Trade Agreement with China. However, even though the tariff for seedless citrus fruit is favorable, Pakistan has not shifted toward its production and therefore has not taken advantage of the opportunity. Furthermore, despite the fact that China’s rice imports are mostly non-basmati, there is still significant room to increase exports of basmati rice to China. The major impediment here is the non-favorable tariff regime. No preferential tariff is applicable on any rice category in Pakistan, rendering it non-competitive. Tariff and non-tariff barriers also affect other product categories such as fruit juices and vegetables, which hinder Pakistan’s exports to China.

Pakistan’s agriculture must respond to Chinese food consumption habits, which will entail a move from traditional products to high-value products. The government is making efforts to achieve this and is emphasizing the importance of shifting from cereal production to horticulture, as China’s growing urban population demands more fresh produce such as fruits and vegetables.

The government needs to allow market forces to determine prices for farmers’ produce and eradicate exploitation by middlemen who control access to information. Commodity exchange programs for farmers need to be set up that link multiple sellers to multiple buyers and implement alternate marketing mechanisms to save the farmers from distress sales.

Moderator Naved Hamid concluded the discussion by emphasizing that for Pakistan’s agriculture to benefit from CPEC, the federal government must reduce the tariff and non-tariff barriers to improve access to the rapidly growing Chinese market of agriculture produce. The provincial governments must play their part and improve farmer access to modern inputs and market information and encourage arrangements that collateralize agriculture produce, provide crop insurance and reduce distress sales by farmers. China has its own interests in mind, and unless we can meet their needs through a better managed farming sector, we will not be in a position to demand their technology or investment for developing our agriculture sector.

Sharmin Arif is a communications assistant at the Consortium for Development Policy Research.

Ijaz Nabi is Chairman of the Board of the Consortium for Development Policy Research and Pakistan Country Director at the International Growth Centre.  

One comment

  1. The Solution to the Sugar Corrupti-demic !

    What is the solution to the Pakistani Sugar Crisis ?

    Some Basic Facts

    The Sugar Mills make money at the highest capacity,and the lowest material cost.For that,there haas to be overproduction of cane – and farmers have to be pampered and brainwashed,to get the “best” cane prices.High cane prices,are of no impact for the mill,as the cabe price,is a defacto pass through,to the state. dindooohindoo

    In other words,the excess sugar produced,from the excess cane produced – will HAVE TO BE exported – with the subsidy and the drawback,at the cost of the state.In addition,the cane payments are made from working capital loans from banks – and the loans would be liquidated from the export and domestic sale proceeds – and so, the NSR from exports and domestic sales has to be profitable.Otherwise,the mill is bust and the bank loan,is an NPA,and millions of cane growers have no buyer.

    Solution 1

    The state has to rework the subsidy.The mills have availed of the advantage of the maximum capacity utilisation, arising out of a bumper cane crop.Hence,the cost of the export stock,should be computed based on the “Marginal cost of Production and
    Direct costs”, upto sale.The difference of this,w.r.t. the FOB Export rates – should be the subsidy.

    whether the mills should get a Profit on the Marginal Cost – is a separate issue – as the economies of scale have already accrued to the mill owner,for the domestic sugar sold.In the alternative,the mills can be paid a service charge,per ton,as they have acted as an NGO – to service the farmers and use their cane,and have in effect transmitted the subsidy,defacto to the farmers.

    Solution 2

    In the current scenario,there is a time limit for exports – as the working capital bank loans,have to be liquidated – for payments for fresh stock purchases.The precise dates are known to traders and punters,all over the world – as the patterns
    of behavior of a baboo,in the state – as to,steps to liquidate the stocks – are predictable.

    Hence,the mills have to be provided additional unsecured credit,for fresh cane purchases – and a central state agency should sell sugar futures,every quarter,with or without selling options, and give delivery where the futures and the options are out
    of the money,or where the contango on futures and option premiums,added to the futures price,is closest to the Price to be paid,to the mills

    The nation will,at least, get the maximum NSR on Sugar exports – and the subsidy loss,will be minimised.

    If the 12 month futures contango or option premium, is in excess of the working capital cost of the stock,the state can hold some of the sugar stock,as the net working capital cost is nil or negative.If the futures and options turn a loss,the state
    can provide stock delivery.There would be several such combinations.

    Solution 3

    The farners have to be shifted from cane farming.Instead of giving subsidies to mills,for export stocks – which represent,excess cane production – the subsidies can be given to farmers directly,to shift to other crops.The subsidies can be in the form of free power,seeds,fertilsiers,pesticides,crop insurance,supplements and implements.In addition,value added factories for the new crops,can be set up near the crops – with subsidies.As time passes,the viability of the crops will increase,and the subsidies will be nil

    It is possible that the NSR on exports + export subsidy – Marginal cost of Production and sale of export sugar, is more than the financial profit,earned by the cane grower.

    In such a case, a subsidy equal to the financial profit,which COULD be earned from the cane sales – can be paid,as a subsidy,to the cane farmer – NOT TO GROW THE CANE.

    Solution 4

    Each crushing season,the state should calculate the excess stocks expected over 1 year based on demand and current stocks.The current production which will be in excess of the safety and base and emergency stocks – is the likely surplus stock
    to be exported.

    70% of the expected surplus stock – should be transported to state godowns,on a quarterly basis – by the cheapest mode – which is rakes.The state godowns can be near or inside the ports (warehouses),or near or inside the dry ports.

    All exports should be made from STATE GODOWNS only. This will make sure that there are no bogus exports,and also,there can be no money laundering.

    Solution 5

    A locust,is a drone with AI,and a perpetual battery of a few years,and the drone can clone itself.The cane production has to be reduced.The state can use Bio war tools to destroy crops in certain regions and certain strains – and this is surely being done,in many parts of the world.The loss to the farner,is the financial opportunity to the farmer foregone – which has to be compensated by the state.Loss to the sugar mills need not be compensated – but the interest on loans,can be waived – and banks,can be compensated,for the interest loss.

    The aggregate compensation to the farmers and mills, will be less than the subsidy and drawbacks on exports,interest and storage cost on export stock,and storage losses of export stock.dindooohindoo

    Like

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