Since 2013 the Government of Pakistan (GoP) has been working on introducing warehouse receipt financing for key food crops. Ideally, wheat being the largest staple food crop and having an annual output of 25 million tons, should have been the first crop. However, due to restriction of its intercity and interprovincial movement, the target could not be achieved. Rice is the second largest crop, which also fetches huge foreign exchange, also failed in convincing the key stakeholders to opt for warehouse receipt financing, mainly due to the lack of modern storage facilities.
It has been observed that the consumers of maize, particularly manufacturers of chicken feed, have succeeded in creating an elaborate infrastructure which qualifies to be declared ‘fit and proper’ for warehouse receipt financing. The apex regulators, State Bank of Pakistan (SBP) and Securities & Exchange Commission of Pakistan (SECP) are requested to review the prevailing infrastructure and adopt it at the earliest.
Pakistan produces around 6 million tons maize annually. At present local farmers gets around 5 ton/acre yield, which is lower as compared to China (6 tons), but far better than India (3 tons). The yield in Pakistan may be termed attractive but can be improved further. The growers can start receiving higher income from the crop, simply by achieving higher yield through application of balanced fertilizer and better crop management. Normally, farmers grow two crops, but third one can also be harvested.
Nearly two-third of the crop (approx. 4 million tons) is bought by feed manufacturing units after quality certification and stored at well maintained silos. It is estimated that these feed mills have over 4.5 million tons storage capacity, which can be increased further if production is increased. The feed mills primarily buy crop for their own consumption and store it. However, the scope of services can be broadened by renting out the warehousing facilities to farmers and feed mills can operate as warehouse management companies.
Farmers can be the key beneficiary of the proposed system as they will be able to keep their produce at the warehouses of their choice and get cash against warehouse receipts. This would help them avoid distress selling, but get cash immediately. The produce itself will be used as collateral and farmers will not have to mortgage their agriculture land or any other property.
The biggest beneficiary of the proposed system will be those farmers who don’t own land. The second biggest beneficiary will be the owners of the feed manufacturing units who will not have to invest huge amount in buying maize. The added advantage will be that they (feed manufacturing units) would be able to keep the produce at their own premises, maintain quality and draw only that much quantity that is required at a particular juncture of time.
Storage of maize at designated warehouses will also save the farmers/traders from frequent transfer of produce from one location to other location. However, title of ownership will be changed through trading of warehouse receipts and produce will remain in the same silos.
It is on record that nearly 20% of good crops go stale before reaching the market. If produce is promptly moved to silos and stored in appropriate environment this 20% waste can be saved. This on one hand will increase the income of farmers and on the other hand enable the country to earn extra foreign exchange by exporting the surplus quantity.
Storage of maize at designated warehouse will help the government in achieving its key objectives: 1) containing post harvest losses; 2) achieving food security; 3) documenting the economy and above all; 4) facilitating lending to small farmers. As the GoP also aims at promoting corporate culture, entrepreneurs should be encouraged to convert their entities into private/public limited companies. One of the key hurdles in the promotion of corporate culture is high tax incidence. If the GoP is serious in promoting warehouse receipt financing it will have to exempt the income of warehouses for minimum five years. The reason for making this suggestion is that farmers are hardly paying any rental cost, as the produce is kept at ‘rudimentary’ warehouses, but corporate entities building modern warehouses at significant cost are required to pay cumulatively nearly 25% taxes to the federal and provincial governments.
Emerging maize shortage
Japan faces an impending shortage of corn this year and the country will be compelled to import the commodity to overcome crop losses caused by an armyworm infestation. Damage from the armyworm has been confirmed in 11 regions, since the infestation was first detected in July. The country is most likely to purchase feed corn from United States. Reportedly the damage caused has expanded nationwide. The arrangement being made for the import of commodity from the US is attracting extensive criticism from within Japan. Those opposing the deal say Japan is being forced to buy corn from the US as sales to China plunged due to the ongoing trade war.