Thursday, May 8, 2008

Grain Shortages & Fallow Land

Shyam Ponappa / New Delhi May 01, 2008

What ails wheat and rice farming in India, and how to fix production and distribution.

Mercifully, A Good Harvest…

With another lease of life, this is an opportunity to consider how to mitigate food shortages. Food supply and demand are closely matched. Sudden developments — drought in Australia, pests in Vietnam — create imbalances. Defensive national reactions exacerbate these imbalances. With fears of shortages receding in India after good wheat harvests and with record prospects for rice, now is the time to think and act for the future.

Farm Economics

Figure 1 shows the procurement or support price for rice with production costs and wholesale prices from 1980-2005.

Figure 1

The salient points:

a) Production costs ranged around Rs 2,000-2,500/ton in intensive cultivation areas (Punjab). Anectodal sources estimate lower costs for less intensive cultivation, e.g. in Coorg, Karnataka, with lower yields of 1.2 tons/acre, versus 3 tons/acre in more productive areas.

b) Market prices ranged around Rs 12,000-13,000/ton barring two spikes. However, India's farm prices were often below world prices adjusted for transport and marketing costs.*

c) Procurement/support prices were around Rs 4,000/ton, one-third the market price. Small farmers typically cannot hold out for better prices.This, together with higher profits from cash crops, is why farmers stopped growing rice in fertile areas like Kerala and Karnataka. Many switched to cash crops. Many who didn't left their lands fallow, reducing supply potential.From the 50s to 2000, India's production of wheat and rice turned from deficits to surpluses. Our approach has been confused by lack of clarity on food security objectives, the balance of interests of producers, suppliers (the market supply chain), consumers, and politicians indulging in populism — ‘acts of ecological suicide', in Prof. M.S. Swaminathan's phrase. Examples are free electricity in AP and Punjab by the Congress governments, and the rice-at-two-rupees-a-kilo ploy originally by the TDP, used more recently by the DMK and the Congress. There were also sins of omission: lack of organisation and marketing support, and lack of or attrition in extension capabilities, with R&D a question mark — who knows what's there?

Food Security

It helps to be clear about the goal of food security. If this is not clear, market fundamentalism argues for reliance on imports. Imports appeal to consumers, but have been unreliable. Food security is therefore a conscious choice, heavily subsidised in America and Europe.

One way to rebuild is to choose what result we want. If it is food security, we might aim for farming without subsidies ultimately like New Zealand, but only after a period of many years of (a) market prices for producers, and (b) direct subsidies on a progressive scale to consumers, to the extent subsidies are affordable. These choices work best when the factors and their relationships are understood.

Low profitability of food crops results in small changes in demand having large effects on price (Figure 2).

Figure 2

Historically, wheat and rice prices declined from the mid-70s.
From 1998 to 2002, India experienced wheat and rice surpluses together with declining per capita consumption. By 2006, however, there was a wheat deficit, with higher outlays for subsidies but declines in real terms in procurement prices between 2000 and 2006 (details in USDA report). Weak growth in production, relatively low yields, and low growth in consumption constrained by low income comprise the elements of the problem.

Meanwhile, the downward trend in global food and commodity prices changed by 2003 (Figure 3). Prices rose for wheat and rice, along with crude oil.

Figure 3

The IFPRI estimates rising prices through 2015 (Figure 4) . Meanwhile, India's shift from sheltered domestic markets to an import-oriented stance coincided with this change in price trends.

Figure 4

What Should We Do?

The National Commission on Farmers chaired by Prof. M S Swaminathan recommended five areas of action for an end-to-end solution.*** A practical way to begin implementing this daunting charter is to disaggregate it and adopt a "ballooning" approach in phases: prioritise a subset of initial elements for the first phase; then a second, larger subset in the next phase; then a third subset, etc.

Phased Implementation

The government could start by giving farmers market prices for stocks, and directly subsidise consumers with lower incomes: give food to the poor. The most efficient way, although difficult to institute, would be to use smart cards. The next best would be food coupons. The distribution could be integrated through retail markets, disbanding the retail PDS and the NREGS. The CACP could structure progressive subsidisation so that, e.g. those whose basic food expenses comprise more than a certain percentage of income (60%?) get the most subsidies (100%?), and there could be a cut-off point for no subsidies, e.g. basic food expenses at 20% of income. These issues need good decision support modelling to help determine gradation, cut-offs, and probabilistic inputs, e.g. weather conditions (with awareness that outcomes do occur beyond modeled assumptions).

A possible strategy premised on food security might include:

1. Market prices for producers;

2. Organise market access;

3. Distribute subsidised wheat/rice on a graduated scale directly to consumers (smart cards/food stamps through retail shops);

4. Dismantle the PDS retail system (and the NREGS, with trade and services [occupational] training, e.g. Bharti's retail training — this is a major effort requiring considerable planning in itself);

5. Irrigation/water management schemes in a sustainable, evolutionary plan;

6. Soil, inputs and practices (i.e. timely credit/insurance/soil/seeds/nutrients/pest management at reasonable cost);

7. R&D — Extension.

- Items 1 and 3 substituting for 4 should be straightforward to implement, although execution on a large scale quickly (3 and 4) would not be trivial.

- Item 2, organising market access, may be much more complicated.

- The next three (5, 6, 7) are very complex and need new paradigms and cutting-edge design and technology (e.g. the medium: IT and broadband, as well as the content). Once given proper attention, they are likely to take years to develop and roll out. Occupational and services training for retail, hospitality services, construction, welding, equipment maintenance and repair… medical transcription … would be a separate, major endeavour, ideally integrated as part of a systemic solution.

My next article will deal with energy, which is closely linked. That leaves manipulation, misappropriation, and political incentives, also closely linked, to be addressed.

* ‘Indian Wheat and Rice Sector Policies and the Implications of Reform', Shikha Jha, P.V. Srinivasan, and Maurice Landes; Economic Research Report No. (ERR-41) 52 pp, May 2007:

** ‘Rising Food Prices: Dimension, Causes, Impact and Responses', Joachim von Braun, Director General, International Food Policy Research Institute:

*** See Shobha Warrier's interview on Rediff for a recap:

From the Business Standard, August 26, 2009:

Not high enough
Support prices for rice and pulses pegged too low
Business Standard / New Delhi August 26, 2009, 0:58 IST

The government’s decision to only marginally hike the minimum support prices (MSPs) of paddy, pulses and selected oilseeds, and to freeze the prices of other crops at last year’s level, is unlikely to go down well with farmers in a drought year. The timing of the announcement of new prices is also flawed, as kharif sowing is virtually over in most of the country. On paper, the paddy MSP has been upped by Rs 100 a quintal to Rs 950 for common varieties, and from Rs 880 to Rs 980 for fine varieties. But considering that the government had paid a bonus of Rs 50 a quintal on paddy last year, this year’s actual MSP hike works out to only Rs 50 a quintal, or about 5 per cent, which is of no consequence in view of the high ruling prices of rice and the escalation in the cost of production due to deficient rains. The MSPs of the major pulses have also been stepped up by small margins, but here too the new prices range from Rs 2,300 a quintal for tur (arhar) to Rs 2,760 for moong, which are low when compared to the prevailing market rates.

The government’s decisions seem to have been guided more by concerns of food price inflation than protecting the interests of the farmers, who are already in a difficult year. But this approach may prove counter-productive as the low MSPs may prompt farmers to shy away from selling their stocks to the official agencies, making it difficult for the government to leverage its grain reserves for taming open market food prices.

MSPs are relevant only in a few states, where the official gain procuring agencies operate and where farmers have marketable surpluses, produced largely from irrigated lands. These farmers have to incur extra expenditure this year on running their irrigation pumps for longer hours because of the shortage of rainfall. Diesel consumption in the rural areas has gone up substantially, even as the prices of diesel were raised last month. Labour costs have surged due to the implementation of the National Rural Employment Guarantee Programme. Other costs, including those of plant protection chemicals and transportation, have also swelled. Unfortunately, these factors have not been taken into account. Nor have the prevailing domestic and international prices been taken into account while fixing the new MSPs. The only option for the government now is to announce a bonus on the MSPs of paddy and pulses so that the shortfall in the output of these essential commodities in the kharif season can be made good, even if partly, through larger and early planting of rabi crops.