Agriculture is the backbone of Pakistan’s economy. Nearly 65% of the total population is involved in agriculture. Cotton one of the largest cash crop, provides raw material for textiles and clothing industry, which has over 60 percent share in total export earnings of the country. Lately Pakistan has also attained the status of wheat exporting country. Rice is also exported in huge quantity every year. However, there are two regrets: 1) yields of various crops in Pakistan are far below the global average and 2) from 15-40 percent of agriculture produce goes stale before reaching the market.
To improve the yields, farmers need pre-harvest loans for the purchase of inputs. While over Rs600 billion are being lent to the farmers, the biggest beneficiaries remain the big land lords, as the lending is done against the papers of land ownership. Similarly, after the harvest growers are forces to sell their produce under stress as they have to pay back the loans acquired from informal lenders i.e. middlemen. This often results in paltry return to farmers. Farmers are forced to sell their produce as they neither have their own storage facilities nor the third parties offer such facility. To facilitate the farmers the two apex regulators, State Bank of Pakistan (SBP) and securities & Exchange commission of Pakistan (SECP) are working together to offer Warehouse Receipt Financing Facility. Under this scheme farmers will be able to get loan against their produce kept at the designated warehouses. Lending by the financial institutions will be done against the warehouse receipt.
Without mincing words it may be said that Pakistan does not have proper storage facilities, the financial institutions are reluctant in lending money to the farmers against their produce. Therefore, both the private sector and financial institutions will have to work jointly to construct modern warehouses/grain storage silos. This involves millions of dollars investment. To get an idea of quantum if investment, it suffice to say that up to 25 million tons storage facilities have to be established in major wheat growing/consuming area. In addition to that the country needs to establish warehouses for rice and maize.
To provide comfort to farmers both the warehouses and quantity of wheat have to be insured. The value of 25 million tons wheat alone comes to US$7.5 billion or Rs750 billion, for which insurance cover will have to be obtained. This is besides insurance of the warehouses structure. Even if the premium is charges at 2% of the value of wheat the quantum of premium would be around Rs15 billion for wheat alone. The total amount would increase significantly once rice and maize kept at the warehouses have to be insured.
The positive point is that Habib Bank limited has already started disbursing loans against warehouse receipts of wheat. It is believed that one of the Islamic banks has also consented to participate in this venture. It is believed that encouraging wheat growers to keep their produce at third-party warehouses will take some time. Their biggest concern is that their produce may be delivered by the collateral management company without seeking farmer’s approval. It is believed that collateral management companies will take all the precautionary measures to save the wheat from going stale and any misappropriation.
It will be appropriate to say that Pakistan will not be the first country to undertake this kind of venture. In many other countries this model is working effectively and efficiently. In this plan two entities will play a major role: 1) the company that issues quality certification and 2) the entity that offers advisory service to the farmers from sowing to harvesting. While lending against produce will help the growers in meeting their immediate cash requirement, the produce will have to be sold as and when price become attractive.
Therefore, an electronic trading platform will also have to be involved. Pakistan Mercantile Exchange (PMEX) has an electronic trading plat form that will help in price discovery, undertaking sale/purchase transaction and making payment. PMEX has already facilitated in the trading of Red Chilli at its platform and it is also involved in facilitating farmers/bank in issue of warehouse receipt and facilitating financial institutions in lending against warehouse receipts issued to the farmers keeping their produce at the designated ware house.
To develop an effective value chain it is necessary that the pre and post harvest lending should be organized in the best possible manner. Since the produce will be kept at warehouses owned/operated by the third party insurance companies will play the most vital role. It is highly desirable that all the value chair partners join their hand in completing the chain from deposit of certified quantity of the produce to actual delivery of produce to the buyers. One this becomes a norm farmers will be saved from selling their produce under stress, but saving the gods from going stale will on one hand help the country in enhancing exportable surplus and farmers in getting a fair price of their produce. The time has come to go for construction of modern grain storage silos on war footing.