Important News on Bread Prices: Will the New Wheat Purchase Formula Make Bread More Expensive?

Transferring the purchase of wheat needed by the bakery and industrial sectors to the private sector will bring a new phase to the market for this strategic product.

Handing over the purchase of wheat required by trade and industry to the private sector is not just changing the buyer of an agricultural product; It is a structural change in the relations of Iran's wheat market, which can affect the supply path of the product, the way prices are formed, the government's share of domestic purchases, and ultimately the country's food security. The importance of this development is revealed when we know that unlike many agricultural products, wheat is an economic commodity and one of the pillars of national security.

The wider entry of the private sector into the purchase of wheat, on the one hand, can lead to an increase in competition, acceleration of payments to farmers, reduction of direct government employment and the formation of more efficient purchase and distribution mechanisms. But on the other hand, in a market where the government is responsible for providing subsidized bread wheat, the expansion of private demand can change the previous balance between buyers. Simply put, the government can no longer decide on the amount of its domestic purchases regardless of free market prices.

Based on the market prices, the wheat required by Azadpez bakeries and trade and industry sectors is now in the range of 75 thousand Tomans per kilogram. If the inflationary conditions continue, there is a possibility of increasing this price until the end of the year. Such price differences, if continued, can change the sales behavior of farmers; Because the manufacturer offers its product to the buyer that offers a more suitable combination of price, speed of payment and financial security.

An important consequence of this development is that the increase in domestic production will not necessarily mean an increase in government purchases. The country's wheat production may be at an acceptable level, but instead of entering the subsidized bread and flour supply network, a part of the product will be directed to trade, industrial and free market uses. Therefore, in the new market structure, food security is not only a function of the amount of production; It will also depend on how the product is allocated among different uses.

This issue is especially important for the year 1406. The scenario estimations of Tarbiat Modares University's wheat policy support system show that the domestic purchasing capacity of the government under certain circumstances is within the range of 9.5 million tons, while the financial burden related to the wheat market can approach the scale of 1000 hemats. The expansion of private sector competition is a new and decisive variable that must be taken into account in evaluating the realization of these values; Because the purchase price of the government can no longer be analyzed independently of the prices offered by other buyers.

The financial aspects of this competition are also significant. For the purchase of 9.5 million tons of wheat, each thousand tomans increase in the purchase price adds about 9.5 hemets to the purchase value; Therefore, price competition without calculating its consequences can put a heavy pressure on the public budget. On the other hand, refraining from proportional adjustment of the price may also reduce the delivery of wheat to the government and increase the cost of alternative supply. This duality shows that buying cheap does not necessarily mean supplying the country's wheat cheaply.

The most important point is that the transfer of the purchase of guilds and industries, if designed correctly, can be an opportunity to reform the market structure. Reducing the direct burden of purchasing and financing non-subsidized sectors, increasing the transparency of transactions, developing purchase contracts and clearer separation of bread wheat market from industrial uses are among the capacities of this change. However, the realization of such benefits depends on the existence of regulatory mechanisms, accurate transaction information and coordination of pricing policies. Otherwise, there will be the possibility of unbalanced competition, increase in price gap and unanticipated movement of wheat flow between markets.

From an economic point of view, the most important policy issue in the new structure is to identify the reaction of farmers' supply to relative prices. Guaranteed price, trade and industry market price, shipping cost, payment time and debt collection risk all affect the buyer's choice. Therefore, determining the government purchase price without simultaneous evaluation of the private market can lead to an incorrect estimate of the purchase volume, budgetary costs and import requirements.

Finally, the success of handing over the purchase of wheat to industry and industry should not be measured solely by the reduction of employment or direct government spending. The more important criterion is how much this change contributes to market efficiency without disrupting the reliable supply of subsidized bread wheat. In a market where food security and public resources are simultaneously involved, price policy must be determined based on a quantitative assessment of the interplay of production, supply, demand, and trade.

Leaving the purchase of wheat to the private sector can be the beginning of an important economic reform; But its success depends on how the government deals with this issue.