Published On: Thu, Dec 19th, 2013
Published in Category: Islamabad

Farmers bolstered by progressive pricing

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Islamabad: After emerging as one of the highest performing cash crops in Khyber Pakhtunkhwa, Punjab’s farmers are also leaning towards Tobacco farming, owing to its low risk and high reward nature.

According to sources, a number of shelters have been provided to growers by Pakistan Tobacco Board (PTB) and manufacturers, making Tobacco farming an extremely safe form of agriculture. Currently, KPK produces nearly 80 per cent of Pakistan’s total tobacco crop—worth more than Rs 10 Billion.

The province has attained global recognition for its achievements in tobacco yield per hectare—the yield is 14 percent higher than the global average.

In order to protect farmers, a Minimum Indicative Price (MIP) for tobacco crop is set annually by the PTB guaranteeing farmers receive a minimum price, even in surplus supply situations, sources said.

MIP is calculated on the basis of various factors including increase in cost of tobacco production, rate of inflation in Pakistan, global tobacco trends, cross-commodity price increases, and wholesale prices of industry specific raw material.

According to the Martial Law Order-487 of 1985 the minimum price at which the farmer sells cannot be lower than the previous year. Therefore, farmers are continuously benefitting from annual protectionist pricing. The MIP has risen 15.7 per cent annually over the last 5 years—which is very promising considering annual inflation of 10.5 per cent over the same period. That being said, the market price of tobacco is routinely higher than the MIP—last year the average market price was 14 per cent higher than MIP.

The most important factor in determining the MIP is cost of production, which is ascertained in active consultation with tobacco farmers, agriculture departments, and the PTB. The timing of the MIP announcement is also very important in assisting farmers. The price is declared before the crop sowing season, allowing growers to choose which crop they will grow, sources said.

It is worth mentioning that, given the choice, most farmers who have grown tobacco in the past continue to do so. Unlike the vicious debt cycle existing in many agricultural commodity markets, tobacco farmers are assisted by a vibrant tobacco auction process. This dynamic purchasing mechanism routinely leads to tobacco being purchased at significantly higher prices than the MIP. Additionally, tobacco farmers do not have prolonged payment procedures, as the tobacco industry has implemented various methods of tobacco purchase which expedite payments. Furthermore, the industry spends millions of rupees annually on mechanisms to provide innovative marketing facilities for the growers.

Tobacco growers are further sheltered from global commodity price fluctuations by the MLO-487. The document states that cigarette manufacturers are required to buy all tobacco being grown, regardless of their demand. Therefore, tobacco farmers are never faced with the prospect of throwing away surplus production—as is the case with many other crops. All of this means that tobacco farmers avoid negative price fluctuations, and are protected from inflation, weak demand for their crops, and have the option to grow other crops if they are not happy with the prices offered to them. Last year, after discussions in the Standing Committees for Ministry of Commerce in the National Assembly and Senate, it was decided that the PTB follows due process of law while setting the MIP.

In fact, the MIP set in Pakistan is almost 30 per cent higher than some regional prices—although this carries the risk of slowing down Pakistan’s growing tobacco export market. Additionally, the cigarette manufacturers incur the most risk, having to purchase all production—regardless of their own production requirements. If tobacco prices continue on rising at such meteoric pace, there is a fear in some private quarters that tobacco companies might start buying less tobacco or even have to shut down local manufacturing.

That being said, the manufacturers still contributed to local community benefit, including award winning projects on adult education, rural healthcare, and afforestation.

The sustainable success of tobacco farming will rely upon the continuing positive relationship between farmers, manufacturers, policy-makers, and academia.
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