Fiscal year 2016-17 (the most recent period for which official statistics are available) proved to be fruitful for Pakistan’s agricultural sector. A 3.45% growth was recorded (growth rate in FY2015-16 was a dismal 0.27%) on the back of government-led interventions in the form of the Prime Minister’s Rs 341 billion Kissan Package, as well as relief measures in the Federal Budget. These included direct cash assistance to farmers, improved availability of water through reduced tariffs on electric tube wells, increased credit disbursements to the tune of Rs 700 billion, subsidised fertiliser prices and reductions in customs duties on the import of machinery for the dairy, livestock, poultry and cold chain sectors.

As Pakistan faces the twin challenges of a rapidly growing population contributing to increasing food insecurity and a deteriorating balance of trade, improving agricultural output is no longer optional. The advantage is that Pakistan has (and in abundance) all the natural resources required to address these problems and propel the country to a position of dominance in the global agriculture industry.

Agri and food experts interviewed by Aurora were of the opinion that if agriculture is to realise its potential, the key challenges undermining performance have to be resolved.

It would not be an exaggeration to say that the agricultural sector has been the lifeline of Pakistan’s economy since Partition. According to the Pakistan Economic Survey 2016-17, agriculture contributed 19.5% to Pakistan’s GDP, employed 42% of the labour force and (along with ancillary industries) provided livelihood to 62% of the population and constituted 65% of export earnings. Given the current economic outlook, the last statistic is of particular significance. In FY2016-17, the trade deficit hit an all-time high of $32.6 billion and economic experts are of the view that boosting the volume (and more importantly, the quality and value) of agricultural output will be crucial in stabilising and strengthening the economy.

The question is what needs to be done to accomplish this. Organisations and brands working within the agricultural and related industries in Pakistan are of the view that the answer is in developing and streamlining farm to fork linkages.

A value chain focus

The simplest definition of a value chain is a set of inter-connected activities that contribute to value-addition in products and link commodity producers to processors, markets and consumers. An agricultural value chain includes the dissemination of plant and animal genetic material, input supplies, production on the farm, provision of technologies for post-harvest processing and handling, grading criteria and facilities, cooling and packing technologies, storage, transportation and distribution systems and finance and credit facilities.

Pakistan’s agricultural value chain (like most developing countries) is characterised by dual value chains for the same commodity that operate in parallel; in other words, informal (traditional) and formal (modern). Small farms (the majority of landholdings in Pakistan), are typically involved in the informal chain that delivers low-quality, low-price products (in limited quantities) either to middlemen or small markets which yield low returns. Formal value chains deliver the same products, but of far superior quality (in bulk) and which are priced higher and sold to commercial wholesalers and exporters.

In the case of rice for instance, the only crop grown with an export focus and which accounts for three percent of the value added in agriculture and 0.6% of GDP, the informal chain comprises small-scale farmers who bring their rice paddies to auction markets known as mandis. Here, the grain is sold to huskers and shellers who remove the husk and the top bran layer and sell the semi-finished rice to processors who clean and grade it according to size and colour. Middlemen, who work on commissions, are involved in the transactions across mandis and as a result, farmers who bring unprocessed rice paddies to market, barely earn enough to support their families and prepare for the next growing season.

Operating in parallel are fully integrated agribusinesses (Matco is the largest player in the rice market), which purchase rice paddy directly from farmers or from the auction markets. The difference between the formal and informal chains is what happens from this point onwards.

“Once paddy is bought, it has to be dried before storage; it has a 22 to 28% moisture content which has to be reduced to 12% before milling. If not dried properly, the rice starts to rot and Aflatoxin (toxins produced by fungi on agricultural crops) levels in the wet paddy increase. This becomes an issue for exporters as there are strict Aflatoxin limitations; in the EU for instance, the level cannot exceed 10 parts per billion,” says Faizan Ali Ghori, Director, Matco Foods Limited (MFL). This is why the Rice Exporters Association of Pakistan (REAP) has been focusing on the installation of modern rice processing machinery as this will enable value-addition across the value chain. The benefits of increased mechanisation have already started to trickle in as rice exports increased by almost 30% to two billion dollars in FY2017-18, reversing a trend of declining rice exports during the last two years.

In addition to technological innovation, two other factors contributed to this trend reversal. First, the increasing level of scrutiny of pesticide residue in the rice value chain due to the health risk this poses has led to international regulations mandating the eradication of the pesticide Tricyclazole from rice cultivation. According to Ghori, “this development put Pakistan at an advantage as the world’s largest rice exporters (India, Vietnam and Cambodia, among others) use the pesticide extensively, while in Pakistan, it has never been used due to the costs involved.” With Cambodia (the largest rice exporter to the EU) and India (the world’s largest rice producer and exporter) struggling to phase out Tricyclazole from their rice crop, exports of Pakistani sela and basmati varieties increased manifold.

A related development has been a substantial increase in demand for organic rice in the US and EU, which has given Pakistan a competitive edge, because, says Ghori, although there is widespread fertiliser, insecticide and pesticide use along the Basmati Belt (Sadoki, Hafizabad and Sialkot), further away, chemical use declines because farmers are not very affluent. “MFL’s organic rice programme was initiated in Jhang as chemicals had never been used on farmlands there; natural fertilisers (field and farm waste manure) and pesticides were used instead, while post-harvest storage safety was secured by using carbon-dioxide instead of chemical fumigation, making it easier to obtain both EU and US organic certification.”

Interestingly, while rice exports have benefited from strict compliance with international quality control measures, the livestock sector, which accounts for approximately 58% of the value-addition in agriculture and 11% of the overall GDP, contributes a meagre five percent to exports. The main reason why this share is so small is because Pakistani meat products are not allowed in the EU (the world’s largest meat market) due to the fact that they do not comply with its strict animal and meat traceability standards.

Ghori and Arifeen point out that Pakistan has a bumper tomato crop almost every year, yet due to the absence of advanced and temperature-controlled storage and processing facilities, ketchup manufacturers in the country import tomato pulp from China.

The plight of the livestock sector in the international arena is mirrored in the domestic market. The sector is struggling to become competitive, mainly due to low per unit animal productivity, outdated breeding practices, the inability to control diseases and the absence of a cold chain infrastructure that would preserve meat quality across long-haul distribution chains.

Mansoor Arifeen, CEO, Icepac, says the reason why Pakistani consumers are forced to pay more than Rs 1,200/kg for mutton and over Rs 700/kg for beef is because the required volume of quality meat does not make it to the urban retail markets. Yet, there are plenty of reasons why the livestock sector should receive focused attention, investment and long-term incentives. In addition to the foreign exchange it can drive into the economy, in Pakistan, almost eight million families derive more than 35% of their income from livestock production activities. This is why the Livestock Wing of the Ministry of NFS&R has identified the sector as an important tool for poverty alleviation, rural socio-economic uplift as well as ensuring food security.

From commodities to brands

With increasing consumer awareness, there is an emerging segment of the population willing to pay a premium to purchase staples of standardised quality that have undergone processing and filtration and are properly packaged, so that hygiene, nutrition and integrity is maintained until consumption. As a result, in recent years, several agribusinesses have launched branded rice, flour, sugar, salt and masalas.

The launch of Onaaj by Engro Foods towards the end of 2015 was perhaps the first time that an extensively marketed branded staple was introduced nationwide. Ashrafi, on the other hand, is the oldest branded flour available and is believed to control the lion’s share of the branded category, although official figures are not available. However, the brand has never been big on advertising and relies instead on word-of-mouth and an extensive distribution network to maintain a foothold in the market. The flour category, valued at approximately Rs 700 billion, includes whole wheat (chakki flour or atta used in rotis) and maida (white flour used in biscuits, breads and noodles). Of this, the branded flour category accounts for 10% of the market (in the absence of official figures, this is the most widely cited estimation by flour traders). In launching Onaaj, Engro’s vision was to bring to market a whole wheat flour brand of a quality superior to that offered by traditional chakkis with packaging that prevented spillover and retained the quality and hygiene of the flour by protecting it from environmental moisture and contamination by insects, pests, microbes and dust. Although the brand was discontinued in 2016 (no official reason was provided by Engro), the consensus was that the failure was not due to lack of demand. This is mainly why 2017 witnessed the launch of another heavily marketed whole wheat flour brand, Sunridge Chakki Atta. Muhammad Amin, CEO, Sunridge Foods, is of the view that with progressive urbanisation, more people are appreciating the benefits of the higher nutrition of whole wheat flour produced through automated milling machines and in a few years, the conversion from chakki to branded atta will take off in a big way.

Similar developments are taking place in the rice category. The category comprises basmati (Pakistan’s claim to fame, grown in Punjab), irri (cultivated in Sindh), parboiled (colloquially known as sela in Punjab) and brown rice (grown on a limited scale on rocky terrains of Northern Pakistan). Unbranded (khulla chawal) accounts for almost 96% of the total industry output and branded players including Matco’s Falak, Engro Eximp’s Rymah and Guard Basmati, account for the remaining four percent. Ever since rice exports by the private sector were allowed in the early 1990s, the focus of growers and millers had been on exports because of the higher profit margins. The launch of Jazaa rice by Jazaa Foods in 2016 was a game changer because this was the first time that a rice brand was extensively marketed and distributed within Pakistan. In the two years since, the brand has achieved significant export volumes as well, although according to Ali Jabbar, CEO, Jazaa Foods, “we catered to an untapped local market segment which was looking for extensively refined sela and basmati rice of superior quality but not priced at a premium. Given the focus on product quality and packaging that complies with international food regulations, breaking into the export markets was not difficult.” The size and revenue potential of this value-conscious, urban consumer segment proved to be too large to be ignored by established export-oriented rice brands. Matco has quickly expanded the distribution of their flagship brand Falak in Karachi, Lahore, Islamabad and other major cities and increased their investment in OOH and in-store marketing.

The discussion of branding commodities is incomplete without a mention of the dairy sector, simply because the annual milk production of almost 50 billion litres makes this single livestock product more valuable than all the cash crops combined. It would be logical to assume that a country which is the third largest milk producer is also a major exporter. The reality is quite the opposite. Not only are milk and other dairy products absent from the export basket, Pakistan is a net importer of dairy products. The trade regime, which allows milk and whey powders to be imported at low customs duties and replace fresh milk supplies from famers, is one culprit. A more serious problem is that the dairy sector is underdeveloped in terms of infrastructure, which is why Pakistan has been unable to achieve efficiency and productivity in milk production, processing, storage and transportation. A handful of milk brands which deliver on the promise of hygiene, quality and nutrition, remain too expensive for the general public which is why packaged milk only accounts for five to 10% of total milk consumption. One way the industry is attempting to tackle this issue is by introducing packaged yet affordable milk brands. Engro’s Dairy Omung (priced well below Olper’s) and Haleeb’s Asli are two examples.

Vision 2025 has identified the nexus of food security with water as one of the main pillars – and the objective here is to ensure sufficient, reliable, clean and cost-effective access to water and food. To achieve this, Pakistan needs to build a climate change resilient agricultural sector.

According to Memosh Khawaja, CEO, Haleeb Foods (HFL), “HFL is able to provide packaged milk at substantially lower prices than the market average by focusing on the basics. Asli is not fortified and comes in stripped down packaging; it has been priced at Rs 100, which means that the price is 35% lower compared to the competition and margins are very limited.”

Khawaja is optimistic about the future of the packaged milk industry because one of the goals of the Punjab Government is to convert the province (from where 70% of the milk is sourced) from loose milk to minimum pasteurised milk (processed to the minimum quality standard) within the next five years. This implies that 90 to 95% of the value chain has to be modernised, paving the way for new milk brands to enter the market and for the existing players to expand their milk portfolio, much as Haleeb has done.

Future outlook

The public sector focus on developing the agricultural sector is expected to continue for the next five years, particularly with CPEC providing an unprecedented opportunity for boosting agricultural output and exports (see box above CPEC and the agricultural opportunity). Economic experts are of the view that increasing the value and profitability of agriculture will depend on two factors. The first is to move beyond merely maximising the production of raw commodities to a value-addition approach with mechanisation and automation replacing manual agricultural processing. This will be lucrative not only from an export angle, it will also create possibilities for import substitution. Ghori and Arifeen point out that Pakistan has a bumper tomato crop almost every year, yet due to the absence of advanced and temperature-controlled storage and processing facilities, ketchup manufacturers in the country import tomato pulp from China. The second is for agribusinesses and agro-based food processing companies in Pakistan to address the issue of traceability in their supply chains from the farming stage to the packaged product, because without this, export markets will remain no-go areas and Pakistan will fall well short of becoming one of the top five economies in the world.

Pakistan's food security status

Despite the progress that Pakistan has made in food production, food security poses a significant threat because population growth has outpaced the increase in agricultural output. According to the Food Security Assessment Survey 2016, approximately 18% of the population is malnourished, a situation further exacerbated by rapid urbanisation, erratic food production, inefficient food distribution systems and the declining purchasing power in marginalised regions and communities.

Nevertheless, there are grounds for optimism because of the Rs 29,292 million allocated in the Federal Budget 2016-17 for the development of agriculture and related food industries, the Ministry of National Food Security & Research received a dedicated sum of Rs 1,520 million to improve the core issues of affordability, availability and quality and safety of food delivered to people.

Furthermore, Vision 2025 has identified the nexus of food security with water as one of the main pillars – and the objective here is to ensure sufficient, reliable, clean and cost-effective access to water and food. To achieve this, Pakistan needs to build a climate change resilient agricultural sector. Pakistan’s main water source is the Indus canal irrigation system, yet due to ongoing operational and maintenance issues, there are extensive water losses in transit which adversely affect landholdings at the tail end of the distribution channels. This, combined with the inefficient water usage on farmlands, leads to low yields, which in turn reduce farm income, creating a vicious cycle. The recurrence of droughts in certain areas and floods in others in recent years, has further increased the number of food insecure people. As Faizan Ali Ghori, Director, Matco Foods Limited, points out “the risk is not of water scarcity, but the lack of efficient water management across agricultural value chains.” He is of the view that these challenges can be managed by adopting soil and water conservation technologies, installation of high-efficiency irrigation systems and developing drought-resistant crop varieties. — AS

CPEC and the agricultural opportunity

According to CPEC’s Long-Term Plan (LTP) prepared by the National Reform Commission (NDRC), the People’s Republic of China and China Development Bank, of the many economic areas that stand to benefit from CPEC, it is Pakistan’s agricultural sector which will gain the most immediate boost through improved supply chain linkages between both countries. A host of Chinese enterprises are in the process of setting up self-operated farms, processing facilities for fruit, vegetables, grain and other perishables, while logistics companies are starting a large storage and transportation system for agrarian produce. From the Chinese standpoint, the main driving force is to increase Kashgar province’s output in agriculture, forestry, animal husbandry and fisheries through infrastructural developments along the CPEC route. For Pakistan, which shares a border with China, the potential of exports is exponential. Currently, China is the world’s largest importer of agricultural produce to feed a population of 1.3 billion people. Bloomberg estimates that in the next 10 years, domestic consumption is likely to increase by a further $500 billion, prompting countries such as Brazil, the USA and Russia to develop long-term plans to cater to the Chinese market.

Pakistan should therefore focus on increasing vegetable exports to China, as currently, more than 50% of the vegetables are sourced from Brazil and the US. It is a well-known fact that in trade, long distances translate into additional costs, added to which, when it comes to the shipment of perishables, additional risks of spoilage and contamination have to be taken into account. Furthermore, the added expense of preservation also has to be incurred so that once food products reach retail outlets, adequate shelf life must remain for the products to be sold. This is where Pakistan has a natural competitive advantage since the transportation distances, and consequently the costs, are substantially lower compared to China’s other trading partners.

It is therefore imperative that the uncertainties with regards to Pakistan’s agricultural sector priorities vis-à-vis CPEC are resolved and a clear strategy is devised focusing on negotiating better tariffs for its agricultural exports, rationalising food and safety inspection requirements and standards and forging partnerships with Chinese enterprises to explore viable market opportunities. — AS

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