Managing price risk in the Pakistan wheat market

The government intervenes in the wheat market in Pakistan to ensure food security for consumers and to provide adequate and stable incomes for producers. The cost of this intervention is high, and its impact on the performance of agriculture has been significantly negative. The World Bank is urging policy changes such as removing agricultural trade restrictions, price supports, and subsidies. However, policymakers often resist such reforms, fearing that they will expose the domestic market to fluctuating international commodity prices. This article assesses the risk management needs of the sector and evaluates whether using financial instruments-such as commodity hedging using futures, options, or swaps-would improve risk management. Simulations based on monthly data for 1994 show that market-based methods of risk management could reduce the impact of international price volatility on the domestic market without incurring high government cost or distorting price signals.