2 Situation summary

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.

Table 1: Wheat Supply to Roller Mills (Fortifiable)

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 not a feasible proposition. This PKR 306 equals 40% of the government stipulated mark-up for selling atta flour (ex-mill price)4

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.

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.