Required Report - public distribution

**Date:** 3/30/2004

**GAIN Report Number:** PK4002

PK4002

**Pakistan**

**Grain and Feed**

**Annual**

**2004**

**Approved by:**

Michael Henney, Regional Director, US Consulate,
Du![](media/image1.wmf)bai.

**Prepared by:**

Asif Farrukh, Agri. Marketing Specialist, US. Embassy, Islamabad,
Pakistan

**Report Highlights:**

Pakistan\'s MY 2004/05 wheat production is forecast at 20 million Metric
Tons (MMT), resulting from widespread rains in November and December,
and greater availability of fertilizer and herbicide inputs. Despite the
second largest cop forecast, Pakistan is expected to import 200,000 MT
of wheat due to the lower stock level in the government reserve and an
anticipated shortfall in local supplied available for procurement for
the food department. The GSM-102 program remains a viable tool for
importing U.S. wheat once final institutions overcome apprehensions
rooted in policy inconsistencies. New wheat specifications for
government tenders includes a requirement for non-GM commodity.

Pakistan\'s MY 2004/05 rice crop is forecast at 5.0 MMT, with expansion
in acreage of IRRI rice crop. Rice exports are forecast at 2.0 MMT.

Includes PSD Changes: No

Includes Trade Matrix: No

Annual Report

Islamabad \[PK1\]

\[PK\]

Table of Contents

[Executive Summary 3](#executive-summary)

[WHEAT 3](#wheat)

[Table 1: Wheat Production, Supply and Demand
3](#table-1-wheat-production-supply-and-demand)

[Production 3](#production)

[Consumption 4](#consumption)

[Trade 5](#trade)

[Stocks 7](#stocks)

[Policy 7](#policy)

[RICE 8](#rice)

[Table 2: Rice Production, Supply and Demand
8](#table-2-rice-production-supply-and-demand)

[Production 8](#production-1)

[Consumption 9](#consumption-1)

[Trade 9](#trade-1)

[Stocks 9](#stocks-1)

[Policy 9](#policy-1)

# Executive Summary

Pakistan's MY 2004/05 wheat production is forecast at 20 MMT on higher
expected yields based on greater use of production inputs. Nevertheless,
imports (estimated at 200,000 MT) are projected given the government's
determination to continue its unrestricted trade policy coupled with the
domestic market that attracts above market rates for wheat and wheat
flour. MY 2003/04 imports will likely not achieve earlier projections
after the Government of Pakistan rejected 150,000 MT of Australian wheat
purchased in January purportedly due to presence of karnel bunt (which
Australian officials question).

Pakistan's MY 2004/05 rice production is forecast at 5.0 MMT on higher
production of IRRI rice. With higher production and static demand in the
domestic market Pakistan is expected to export upwards of 1.8 MMT of
rice in MY 2004/05.

# WHEAT

## Table 1: Wheat Production, Supply and Demand

  ------------------- -------------- ---------- ---------- ---------- ---------- ----------
  **Country**         **Pakistan**                                               

  **Commodity**       **Wheat**                                       (1000      
                                                                      HA)(1000   
                                                                      MT)        

                      2002           Revised    2003       Estimate   2004       Forecast

                      USDA Official  Post       USDA       Post       USDA       Post
                      \[Old\]        Estimate   Official   Estimate   Official   Estimate
                                     \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]

  **Market Year                      05/2002               05/2003               5/2004
  Begin**                                                                        

  Area Harvested      8057           8057       8000       8094       0          8200

  Beginning Stocks    2591           2591       1433       1433       0          1725

  Production          18226          18226      18200      19192      0          20000

  TOTAL Mkt. Yr.      181            181        500        50         0          200
  Imports                                                                        

  Jul-Jun Imports     181            181        500        50         0          200

  Jul-Jun Import U.S. 160            160        0          0          0          100

  TOTAL SUPPLY        20998          20998      20133      20675      0          21925

  TOTAL Mkt. Yr.      1185           1185       200        50         0          50
  Exports                                                                        

  Jul-Jun Exports     1137           1137       400        50         0          50

  Feed Dom.           400            400        400        400        0          200
  Consumption                                                                    

  TOTAL Dom.          18380          18380      18750      18900      0          19500
  Consumption                                                                    

  Ending Stocks       1433           1433       1183       1725       0          2375

  TOTAL DISTRIBUTION  20998          20998      20133      20675      0          21925
  ------------------- -------------- ---------- ---------- ---------- ---------- ----------

# Production

MY2004/05 production is forecast at 20 MMT, or 4 percent above last
year's crop, due to expected increase in yield. This year's crop
planting was delayed due to heavy rains in mid-November 2003. However,
with a one percent increase in area, adequate rainfall from November to
January 2004 in most areas, and increased application of production
inputs of both nitrogenous and phosphoric fertilizers (15 percent),
herbicides (40 percent), and greater availability of irrigation water
(30 percent) as compared to the corresponding period of last year, this
year's crop is forecast to be the second largest crop harvested on
record. The 20 MMT production forecast represents potential production
and assumes no further deterioration in the condition of the crop before
the harvest scheduled to commence the later half of March.

Pakistan is emerging rapidly from the ravages of the 3-year drought that
many considered the worst since the world's largest contiguous
irrigation network became operational in the 1970\'s. Water supplies
available for agricultural irrigation currently stands at 19 percent
below normal, compared to 50 percent below normal for same period a year
ago. Water used for irrigation is held mainly in two large reservoirs
-Tarbela and Mangla, during the summer for use during "Rabi," or the
winter growing season. About two-thirds of the country's water for
irrigation is sourced from snow and glacier melts, with the remainder
derived from seasonal monsoon rains. The Indus River System Authority
(IRSA) currently projects water supplies for irrigation would improve
after March due to a larger snow pack this winter.

Since the irrigation system was completed in the 1970s, demand has
increased more than 50 percent while storage capacity has decreased
one-third due to silting, leaving per capita availability at a fraction
of its original level. As a result, chronic shortfalls in water supplies
available for irrigation are expected to play an increasingly larger
constraint on Pakistan's agricultural advancement in the absence of more
systematic planning and management of water resources.

In addition to the water supply situation, this year's output will be
affected by a delayed planting in areas where wheat is double-cropped
with sugarcane. The sugarcane crop was harvested late due to a dispute
over farm gate pricing thus causing a delay in wheat sowing.

In Sindh Province, where the shortage of water is less severe than last
year and where the Pakistan harvest begins, the crop is good. In this
province ground water in most areas is alkaline and not fit for tube
well irrigation, necessitating a greater reliance on canal water. In the
Punjab province, where extensive tube well irrigation is utilized, the
crop is generally considered to be in above average condition. With the
bulk of the Punjab crop about to enter the grain-formation stage,
adequate irrigation and moderate temperatures during the month of March
will be critical for the success of this year's output. Condition of the
highland crop, which comprises 10 percent of total production, is in
better shape as compared to last year's crop.

The 2003/04-crop output estimated by the Ministry of Agriculture
(MINFAL) is suspect. The MINFAL production figure of 19.192 is based on
a harvest of 15.36 MMT in Punjab. However, Punjab province scientists
and farmers groups disagree with this revised size of harvest. The
market apparently agrees with the Punjab locals as prices rose
significantly above the official procurement price of Rupees 7,500 per
metric ton shortly after completion of the nation's harvest in July
2003.

# Consumption

Consumption is difficult to gauge. With wheat export now legal,
cross-border trade with Afghanistan should be captured as an export
whereas before it disappeared as domestic consumption. However, local
officials note around 1,000 MT of wheat and wheat flour is still moving
across the border to Afghanistan from different points daily. Further,
customs data do not report export to Afghanistan.

Prior to September 2003, domestic flour and bread prices generally
remained stable due to adequate government stocks as well as privately
held stocks. However the quick draw down of government-held stocks and
very limited availability of supplies in the open market due to a short
crop this past year, have combined to nudge wheat and wheat-based
product prices upward.

Consumer preferences are shifting, from traditional flat bread to
western style loaf bread, particularly in urban areas where it is viewed
as a convenient breakfast food, and, from traditional home-ground flour
to commercially produced flour. The change in preference from higher to
lower extraction flour is translating to greater consumption of wheat.
Demand for specialized products also is expected to increase in response
to changing lifestyles more supportive of western-style fast food chains
recently introduced into the country.

Pakistan's wheat milling industry is privately owned. Principal milled
products include "midda" (which is a 72 percent extraction flour used
for loaf bread and other products) and "atta" (which is an 82 percent
extraction flour used for flat breads). For quality and price reasons
millers prefer to mix local semi-hard white wheat with imported soft
white wheat at a 60:40 rate. Although consumers traditionally prefer
white bran wheat, millers can blend up to 20 percent bran wheat to
produce "atta" and up to 10 percent to produce "midda" while still
producing an acceptable product.

Under ongoing reforms the government is removing itself from regulating
the market and is reducing the remaining consumption subsidy offered for
wheat. With the market better able to set price, advantages' accrued for
buying from or selling to the government is declining. With removal of
many restrictions on wheat transportation and storage, the government is
creating an environment better to facilitate trade. Further, since the
2003 crop season, the State Bank of Pakistan (Central Bank) now
authorizes commercial banks to provide private sector financing for
wheat purchase. If the government stays the current course, barring a
natural disaster, this year's wheat market should be regulated only by
stock availability and international price.

# Trade

MY 2003/04 Pakistani wheat exports are projected to be minimal.

Traditionally, Pakistan is a wheat importer. It is expected that wheat
imports would commence from the fall 2004 to cater demands in MY
2003/04, especially if the government's liberal domestic sales and wheat
export policy continue. The GOP has announced a continuation of the more
liberal trade policy set for wheat and its products in the coming year.
MY 2004/05 import volume is projected to be larger based on a
combination of a smaller than initially projected MY 2003/04 ending
stock, a more moderate MY 2003/04 crop than forecasted, stronger open
market prices and stronger domestic demand. Political pressures to check
prices may increase demand for government release of subsidized stocks
onto the market which leads most observers to believe that imports would
be necessary to avoid a crisis during the second half of MY 2004/05.

During MY 2003/04 the Ministry of Food, Agriculture and Livestock
(MINFAL) redefined its wheat specifications to be used for government
tenders. Revised specifications and type follows (note the specs call
for GM free and new crop wheat):

Type: Medium Hard White Wheat

Test Weight: 76 kg/HL minimum

Protein: 10% minimum

Moisture Contents: 12% maximum

Foreign Matter: 0.5% maximum

Wet Gluten: 26% minimum

Falling Number: 350 per second minimum

Shrunken & broken Kernel: 2% maximum

Damaged grains: 0.5% maximum

(sprouted, heat damaged etc)

Edible grains other 1% maximum

Color Original

Mycotoxin: Not more than 5 parts per billion

Dockage total deductible: Over one half of one percent

Quarantine: Should meet quarantine requirements of Pakistan

Ergot: Nil

Dioxin: Free

Dead/Live insects/larvae: Free

GMO: Free

Heavy metals: Within WHO permissible limits

Special requirements: a) Minimum lot size 25,000 metric ton

b\) Free from Kernel bunt and Striga weed

c\) Fit for human consumption

> d\) Treated with phosphene at or immediately prior to loading at
>
> rate of 10 ounces of active ingredients per 1,000 bushel
>
> of wheat
>
> e\) Fresh crop stocks

USDA has raised concern over requirements of the new wheat
specifications with the Government of Pakistan. The matter is still
under discussion.

During MY 2003/04 MINFAL contracted to import 150,000 MT of wheat. Due
to a delay in scheduling imports, and a smaller than anticipated stock
level, open market wheat prices now average around 30 percent higher
than official government prices. Prices are not likely to drop as
reportedly the 150,000 MT of Australian wheat imported under the
contract was rejected due to presence of Karnal bunt. Reports of wheat
flour shortages in many parts of the country are now appearing. Other
wheat imported in MY 2003/04 and all wheat imported in MY 2002/03 was
donations to the World Food Program for Afghan refugees housed both in
Pakistan and Afghanistan.

The United States traditionally has been the primary wheat supplier to
the Pakistani market due to quality and reliability reasons. Australia,
however, has made significant inroads into this market through the use
of predatory pricing, cheap freight and credit, and other non-market
tactics. Canada is an occasional supplier to this market. The Australian
Wheat Board (AWB) considers Pakistan to be a premium market. The AWB
often commands a premium of \$10 or more in this market over
better-quality U.S. soft white wheat (SWW) FOB prices by virtue of its
freight advantage. The AWB also receives an additional premium through
the manner in which Pakistan tenders. Although June is when U.S. prices
are lowest and the government already has a clear idea on the local crop
size and import requirements, the GOP generally waits several months
before buying. As a result, Pakistan buys more wheat late in the year
and via large tenders. Although U.S. participation in these tenders
ensures the required competition, timing is such that the tender offers
are much higher than should be necessary. Pakistan could save
significant foreign exchange by procuring earlier in the summer when
prices are much more attractive. With the more liberalized environment,
the private sector is likely to apply a stronger business orientation in
their buying decision.

Import duties/taxes are as follow:

Wheat - zero import duty, zero sales tax

Wheat flour - 10 percent import duty, 15 percent sales tax on import

# Stocks

MY 2003/04 ending stock levels is causing quite a controversy. The GOP
holds most stocks through various provincial food departments. If
imports increase as many in the private sector speculate due to the
difference in international and domestic prices, carry-over stocks in MY
2004/05 are likely to rise significantly. MY 2004/05 opening stocks of
the government food departments have been forecast at around 100,000 MT
only. The overall large opening stock is based on the MINFAL estimate of
a larger than initially estimated harvest of MY 2003/04 crop.

# Policy

MINFAL has announced it will continue the current policy for wheat
procurement and trade thru the new marketing year. Wheat and wheat
products can be traded freely and banks can finance such trade.

# RICE

## Table 2: Rice Production, Supply and Demand

  ----------------- -------------- ---------- ---------- ---------- ---------- ---------- --------
  **PSD Table**                                                                           

  **Country**       **Pakistan**                                                          

  **Commodity**     **Rice,                                         (1000                 
                    Milled**                                        HA)(1000              
                                                                    MT)                   

                    2002           Revised    2003       Estimate   2004       Forecast   

                    USDA Official  Post       USDA       Post       USDA       Post       
                    \[Old\]        Estimate   Official   Estimate   Official   Estimate   
                                   \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]    

  **Market Year                    11/2002               11/2003               11/2004    
  Begin**                                                                                 

  Area Harvested    2201           2201       2400       2440       0          2210       

  Beginning Stocks  101            203        84         45         0          211        

  Milled Production 4228           4479       4900       4866       0          5050       

  Rough Production  6343           6719       7351       7300       0          7576       

  MILLING RATE      6666           6666       6666       6666       0          6666       
  (.9999)                                                                                 

  TOTAL Imports     0              0          0          0          0          0          

  Jan-Dec Imports   0              0          0          0          0          0          

  Jan-Dec Import    0              0          0          0          0          0          
  U.S.                                                                                    

  TOTAL SUPPLY      4329           4682       4984       4911       0          5261       

  TOTAL Exports     1600           1992       1650       2000       0          2000       

  Jan-Dec Exports   1700           1925       1700       2000       0          2000       

  TOTAL Dom.        2645           2645       2700       2700       0          2750       
  Consumption                                                                             

  Ending Stocks     84             45         634        211        0          511        

  TOTAL             4329           4682       4984       4911       0          5261       
  DISTRIBUTION                                                                            

                                                                                          
  ----------------- -------------- ---------- ---------- ---------- ---------- ---------- --------

# Production

MY 2004/05 production is forecast at 5.0 MMT based on expected
improvement in yields and expanded planting of IRRI rice. In MY 2003/04,
Basmati production totaled 2.4 MMT (up 286,000 MT OVER the previous
crop) and IRRI production totaled 2.03 MMT (up 163,000 MT over the
previous year).

Water availability during the critical March-May period is expected to
be good. If a cut in water distribution during this period occurs, the
affect would be more pronounced on the IRRI rice more than the Basmati.
The IRRI rice generally is grown in areas that rely heavily on canal
irrigation, while Basmati is grown in areas employing large-scale tube
well irrigation. Based on the source of the water input and current
water availability situation, both types of rice are expected to be sown
on time. Since 2000, the government discontinued setting a procurement
price for paddy and milled rice, and abandoned rice procurement through
state trading enterprises.

## 

# Consumption

Rice is not a staple commodity in the Pakistani diet. Its consumption is
increasing slowly as compared to that for wheat. About 60 percent of the
crop is destined for local consumption with the remainder exported. The
government does not maintain official grade standards for rice. Annually
an estimated 150,000 metric tons, 40 -100 percent broken, is used in
poultry feed.

# Trade

Pakistan is a major exporter of rice. MY 2004/05 export volume is
projected at 2.0 MMT, consisting 700,000 MT of Basmati and 1.3 MMT of
IRRI rice varieties. All trade is conducted by the private sector, as
the state owned Rice Export Corporation was abolished several years ago.
Today, another state trading agency, the Trading Corporation of Pakistan
(TCP), plays a limited role in the rice trade by facilitating
government-to-government exports through the private sector. The GOP, in
consultation with the Rice Exporters Association of Pakistan (REAP),
established a quality review committee to certify the quality of
Pakistani rice prior to shipment in an effort to boost the image of
Pakistani rice, especially that of Basmati rice. In CY 2003 Pakistan
exported 823,242 MT (only 592,867 Mt in CY 2002) of basmati rice and
1.135 MMT of IRRI rice. The increase in Basmati rice trade in CY 2003
was driven by the EU offer to allow brown Basmati rice import at zero
duty rate. The EU has withdrawn this concession for rice shipments
contracted after December 31, 2003. Pakistani trade still has to
sizeable quantities to ship under the old agreement. Pakistani Basmati
rice traders are optimistic the EU concession on Basmati rice will be
restored in a new contract to be negotiated in CY 2004.

# Stocks

MY 2004/05 ending stocks are projected to increase due to the larger
crop. All stocks are held by the private sector and are in small lots.

# Policy

There is no restriction on rice exports. For rice imports there is 10
percent import duty and 15 percent sales tax.