Trade and agriculture policy options to improve the wheat subsector in Afghanistan

In Afghanistan wheat availability is important for national food security as it is the key staple food, accounting for over half of calorie intake. The country has imported on average 32% of its wheat consumption over the period 2000-2015, primarily from Pakistan and Kazakhstan. Since domestic production is volatile, consumer well-being depends on access to international markets. Pakistan, a key supplier of wheat and flour to Afghanistan, has not been a reliable source for Afghanistan to meet its wheat deficit. Pakistan subsidizes and stabilizes its wheat production, and this benefited Afghan consumers before 2008. Pakistan restricted wheat and flour exports to Afghanistan during the 2007-08 food crisis. Pakistani export restrictions combined with a severe shortfall in domestic production placed substantial pressure on the Afghan grain market. This forced Afghanistan to find alternative suppliers, so it started wheat imports from Kazakhstan. Kazakh prices are more variable than Pakistani prices, and the Afghan wheat market was not as well integrated with Kazakhstan as with Pakistan. The increase in the wheat prices in Afghanistan in 2008 was much greater than the increase experienced in international and regional grain markets. Afghan policy responses have focused on self-sufficiency (which could bring greater instability) and stockpiling in commercial centers. In this research we assess the impacts of trade and stockholding policies on market outcomes in Afghanistan. Prior to assessing these stabilization policies, we use a VECM model to assess price transmission signals from regional to domestic markets, and between rural and urban areas in Afghanistan. Our analysis suggests domestic price adjustment occurs very slowly, particularly with respect to prices in Kazakhstan. Moreover, Pakistan’s export restrictions in 2008 had a major impact on transmission of price signals from Pakistan to Afghanistan. After the export restrictions policy there is no longer a statistically significant price linkage between Afghanistan and Pakistan. Our analysis also suggests that markets are not well integrated between rural and urban areas, but that commercial centers along the ring road are tightly integrated. We also conducted a trader and miller survey in Afghanistan. Our survey findings suggest commercial centers are supplied by imported flour from both Pakistan and Kazakhstan. This implies rural zones are segmented from the urban centers and often surplus wheat is retained as private stocks in rural areas. The survey findings also suggest that domestic wheat is not a perfect substitute for imported wheat. Imported wheat, especially Kazakh wheat, is higher quality than domestic wheat and is preferred by bakeries in commercial centers. Using the results and findings from the price transmission analysis and the trader survey, we develop a simulation model using Armington specifications that captures both weak market integration and imperfect price transmission to assess the impacts of trade and stockholding policies on prices and welfare of producers and consumers. Modeling results suggest that trade policy is effective mainly in trimming the upper tail of price distributions and thus mostly improving consumer welfare. Also, a trade policy is not as effective in stabilizing prices in rural areas as in commercial centers. A stockholding policy with a primary objective to support producer prices is mainly effective in eliminating the lower tail of price distributions and this mostly improves producer welfare. A stockholding policy may also be used to stabilize prices for consumers and prevent extreme price shocks. Such a policy has to maintain large quantities of stocks (up to 2MMT) in commercial centers likely for several years, with an estimated annual holding costs of about $120 million. Considering the welfare of both producers and consumers, and the costs of these stabilization policies, a combination of public stockholding and trade policy is recommended. Trade policy is more cost effective than a public stockholding policy in stabilizing prices for consumers. Public stockholding/procurement policy in rural areas of surplus regions is required to support producer prices