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This short paper explores options available to the government and millers to adjust wheat and wheat flour selling prices to cover the cost of fortification and is intended to inform policy makers at federal and provincial governments. The health benefits for the population and economic gains for the country from wheat flour fortification are well known and although food fortification is considered to be a cost effective mechanism to enhance the nutritional status of the population the question of how this is to be funded in the long term is of fundamental concern to the commercial wheat flour millers and requires policy makers to make informed decisions.
The fortification of staple foods is a safe and cost-effective in the prevention of micronutrient deficiencies and has been widely practiced in developed countries for well over a century. In the case of Pakistan the fortification of wheat flour with iron, zinc, folic acid and vitamin B12 is recommended to address the micronutrient deficiencies highlighted in the National Nutrition Surveys 2011 and 2018. Fortification quality assurance processes also bring additional benefits for food safety measures.
Pakistan has long experience with examples of food fortification with legislation for mandatory fortification of edible oil dating back to 1965 and the Universal Salt Iodisation (USI) Program which was launched in 1994. More recently Pakistan has been implementing programmes for wheat flour fortification for wheat flour milled at commercial mills. While progress has been made in preparing for mandatory legislation the final steps remain to put this into place. The key objectives of this short paper are:
• To highlight the population health benefits to be gained through a programme of mandatory fortification
• To highlight the relatively low cost of fortification to the overall production costs
• To review options that Federal and Provincial Governments could consider for absorbing the additional cost of fortifying atta.
Commercial wheat flour millers in Pakistan produce wheat flour from wheat obtained from two possible sources; government procured and distributed wheat stocks, or from private sector open market mechanisms. It is estimated that 70% of marketable flour is produced from wheat supplied through the government procurement mechanism with the remainder obtained from the private wheat market.1 The wheat milled produces the following types and ratios of wheat flour:
Government wheat is milled as stipulated by Food Departments according to the following formula: 65% atta flour; 22% maida and other fine flours; 13% bran. Privately procured wheat is milled into mainly maida but also other higher value products at a higher rate of refinement speculated at 75% extraction, leaving 25% bran.
Estimates for the size of total marketed wheat segmented into both public procurement and private market segments is shown in the table below. This represents the total wheat supply available to rollers mills – and to flour fortification. Based on Ministry of National Food Security & Research (MNFSR) data, this total of government procured, and marketed wheat represent an average of 32% of the national wheat supply.
As the dominant supplier to roller mills, government allocation policy, fixed prices and other stipulations, essentially hold the key to profitability and viability of roller mills.
• Access to GOP allocation determines each mills production volume and capacity utilization – a key to profitability;
• The stipulated 65% atta, 22% maida, 13% bran formulation determines product mix;
• Fixed ex-mill price for atta flour determines the profit margin, which represents an average 5% share of all roller milled flour.
Applying these parameters for milling extraction to the estimated wheat supply suggests a 5-year average roller milling totalling approximately 6.8 million metric tons of atta, maida and other flour products.
Hypothetically, if the supply of atta and maida had been fortified over 2015-2019 to the current national standard, the cost of universal roller mill fortification would have averaged PKR 2.1 billion annually.2 In the classic, proven and sustainable fortification financing model, this high national cost is dispersed throughout the value chain into literally hundreds of millions of individual transactions. When the market is free to transfer costs down the value chain the, fortification is affordable and easily absorbed into industrial and marketing expenses
The estimated cost of fortifying wheat with iron, folic acid, vit B12 and zinc in Pakistan is PKR 306/MT3. This cost is based on the premix mix cost of PKR 266/MT plus 15 percent to cover overhead costs, quality assurance and financing costs. This is equivalent to PKR 0.3 per kg or an additional PKR 6 per 20kg bag.
Caught in the tight fiscal space between GOP set input costs and fixed output costs, the small added cost of fortification cannot be transferred down the value chain to consumers. Consequently, the small unit cost of fortification must be paid by millers or by government. With miller’s margins averaging around 5%, paying an added PKR 306/MT with no ability to recoup is
2 Premix costs to fortify atta at Pakistan’s ~1000 roller mills is currently PKR 266/MT and running costs including staff, administration, quality assurance testing, amortization of capital costs and overhead estimated at 15% a total of PKR 306/MT.
3 The premix cost of PKR 265.68/MT is calculated from the premix cost to the mill of PKR 1328.4 per kg and consumption of 0.2kg of premix used to fortify 1MT of wheat flour. The QA and overhead costs have been estimated to be 15% of the cost of premix (13% of the total cost of fortification) based on Pakistan’s context, consultants' judgement and experience from other global wheat flour fortification projects.
not a feasible proposition. This PKR 306 equals 40% of the government stipulated mark-up for selling atta flour (ex-mill price)4
The classic, proven and sustainable fortification financing model, which absorbs the fortification cost throughout the value chain through a process of individual transactions. When the market is free to transfer costs down the value chain the, fortification is affordable and easily absorbed into industrial and marketing expenses. However, GOP wheat policy with multiple objectives to protect farmer livelihoods, increase agricultural productivity and keep flour prices affordable has the unintended consequence of blocking the market from absorbing these small costs.
Based on federal guidelines, GOP Wheat policy is mainly implemented by provincial Food Departments in Punjab, Sindh, Balochistan, and Khyber Pakhtunkhwa along with Pakistan Agricultural Storage & Services Corporation (PASSCO), a federal agency. Government agents purchase wheat at the farmgate at a nationally fixed price minimum support price (MSP); allocate the supply to mills at a fixed cost; stipulate the mix of flours to be milled from the government allotment, and set the ex-mill price for atta flour sold by roller mills into the distribution chain. While this public programme has accounted for an average of around onethird of the national wheat production since 2006, GOP allocations control an estimated 70% of the marketed wheat supply the reaches Pakistan’s roller mills. As the dominant supplier to roller mills, government allocation policy, fixed prices and other stipulations, essentially hold the key to profitability and viability of roller mills.
Flour fortification is mandatory in 85 countries globally. The mix of micronutrients is dependent on individual government policy reflecting national priorities for the population. For example, in Australia mandatory fortification of flour used for making bread is in place for thiamin (vitamin B1 and folic acid, while in the UK white flour fortification is mandatory for iron, calcium, thiamin and niacin (vitamin B3) and, government consultations are ongoing for the inclusion of folic acid. While some countries not intervening in the wheat and flour market would allow the fortification cost to be absorbed through the value chain, e.g. UK and Australia, there are examples where country government that do intervene in the wheat and flour market via distribution, subsidy and/or fixed prices have successfully addressed fortification financing. Examples include:5
• In Morocco and Yemen, the fixed flour price at the retail level was adjusted upwards to account for the onetime increase from fortification.
• In Egypt where the Ministry of Supply imports and distributes ~80% of the national wheat supply at highly subsidized prices, the cost of fortification is deducted from the wheat price charged to millers.
• In Oman, Bahrain and Iran the cost of premix is covered via a line item in the Ministry of Health Budget (in the same way as importation and distribution of essential drugs).
• In Jordan, revenue from a government service fee/tax charged on the import of wheat is specifically targeted for the fortification cost of the wheat (Jordan imports nearly all its flour).
• In Uzbekistan, a sales tax on the sale of fortified flour is recycled back to industry via the miller’s association bank account and used to pay fortification costs (as the price of flour rose, this tax yielded significantly more than the price of premix).
Other than restricting the proportion of maida that millers can produce from government distributed wheat there is no involvement in setting retail prices for maida. Maida and other fine flours whether milled from government wheat or from private market wheat is traded under open market conditions. If the cost of fortification is passed through the value chain it is estimated that the annual cost to the public would be approximately PKR 30 per person. The total volume of maida and fine atta produced by commercial mills, comprised of maida from government stocks as well as a range of refined products from privately procured wheat, totals ~3.1 MMT. Assuming the costs of fortification at PKR 306 per MT the estimated additional cost of fortifying this volume of fortified maida and fine atta to be aroundPKR 943 million/year. This additional cost would be expected to be included in the mark-up from the mill in the price e to the whole sale and distributor – and eventually to the consumer. At 0.6% of the ex-mill price, or 0.5% of the retail price, or at PKR 30 per person per year the added cost is invisibly addressed in an environment where food inflation is projected at 9.5%/yr.6 A small market survey conducted by FFP has revealed there are currently no retail price differences between the selling prices being charged for fortified maida and fine atta and their unfortified equivalents. This is most likely due to the 100% premix subsidy offered through the project meaning the miller is not experiencing an increased cost of production. Also volumes of fortified maida and fine atta remain very low compared to the total volumes produced. Once mandatory fortification is introduced and subsidies are withdrawn cost differences will likely become more evident.
Evidence from a survey of flour millers showed that under conditions of mandatory legislation millers would be willing to fortify their products to agreed fortification standards7. However, without legislation for mandatory fortification millers choosing to comply with fortification standards consider their products adversely affected by an increased selling price compared to mills selling unfortified flour at marginally lower prices. This argument is frequently cited by the industry by those who choose not to fortify their flour without legislation.
Recommendation: Provincial Governments pass legislation for mandatory fortification to provide an even playing field for millers to set market driven selling prices for producers.
Atta is dominantly milled from government stocks of wheat purchased and sold at fixed prices allowing a fixed margin for millers. With margins only at about 5% millers are not able to absorb the additional production costs of fortification which are effectively 40% of their fixed margin. Therefore the cost of fortification requires the government or consumer to cover these additional production costs.
6 Trading Economics: https://tradingeconomics.com/pakistan/foodinflation#:~:text=Food%20Inflation%20in%20Pakistan%20is,macro%20models%20and%20analysts%20expectations.&text=In %20the%20long%2Dterm%2C%20the,according%20to%20our%20econometric%20models.
7 Millers’ Incentive Study: Results 31 August 2018 Prepared by Dr Umar Taj, Dr Avri Bilovich and Edward Gardiner for FFP
Using lessons learned from international experience in the context of government market intervention and price controls domestic financing of fortification options available to the government requires adjusting the fixed ex-mill price to the consumer or for government itself to shoulder the cost. Options for government consideration are therefore:
• Government provided wheat subsidies could be prioritised for flour mills fortifying with a mechanism to adjust fortification costs in wheat cost charged to the mills
• Leave fixed prices unchanged while assigning general fund revenues to relevant agencies or ministries to finance procurement of fortification premix. This would need amendments through the Federal Ministry of Finance Budget Acts and implementation by Provincial Finance Departments.
• Transfer cost down value chain to consumer level via raising the fixed ex-mill price. This would require action by PASSCO and provincial authorities
• The FBR could allocate revenues from specific taxes on the milling industry or flour market. This could be through a reduction in the turnover or sales tax imposed on millers or through reducing the bran tax.
• Offer these tax exemptions or rebates to the milling industry upon proof of fortification to encourage fortification without mandatory legislation.
