Will record food crop ease prices?
by Virendra Parekh on 18 Apr 2011 1 Comment

“Corn is not dear because rent is paid (by the farmer to the landlord) but rent is paid because corn is dear”, said the classical British economist David Ricardo (1772-1823) in his classic defence of the landed gentry of 18th Century England.


A sympathiser of the UPA government may contend in a similar vein that the food prices are not high because of government meddling, but government meddles with agri markets because food prices are high. He would be as wrong as Ricardo. If there is no respite in food prices despite record crop, blame it on government meddling. 


The country’s farm sector has done quite well, following normal monsoon last year. Latest official estimates put food grains production in 2010-11 at a record 235.9 million tonnes. Wheat at 84.27 million tonnes and pulses at 17.3 million tonnes are likely to see a record production. Besides food grains, oilseeds production is estimated at 30.25 million tonnes, sugarcane at 340.55 million tonnes and cotton at 33.93 million bales.


So, has the country done exceptionally well on the farm front as is being claimed? More importantly, will the record crop bring any meaningful relief to the hapless consumers who have been paying through their nose to feed their mouth? While the performance is creditable, the overall picture is far from inspiring. A closer look at production estimates against output targets as also a comparison with output in the last two years shows that there is little to rejoice in.


At 235.9 million tonnes, food grains output in 2010-11 is considerably short of the annual target of 244.5 million tonnes and is just marginally up from the 2008-09 crop size of 234.5 million tonnes. It is, of course, an impressive 8 per cent higher than in 2009-10 when production was severely hit by drought-like conditions in large parts of the country. The actual output of rice, coarse cereals and oilseeds is about 10 per cent below the target.


This year’s rebound in agricultural production is unlikely to bring any significant price relief to consumers. In the last two years, incomes have grown robustly and population has increased by about 35 million, but the per capita availability of food grains today is less than it was two years ago. Strong lobbies of big farmers, exporters and commodity speculators are determined to thwart any sustained downtrend in prices. Their efforts will be aided by faulty government policies and market imperfections.


The minimum support price (MSP) policy followed by the government has been a big driver of food prices in recent years. The government is committed to buy from farmers at MSP whatever quantity is offered by them for sale. In effect, the MSP becomes the floor price for the market. The UPA government has been systematically raising MSP for various crops year after year. It is a conscious policy to transfer wealth from urban centres to the rural sector.


The result has been a steep increase in food prices, aided of course by other factors. Even when the crop is large, grains are more likely to go into sarkari godowns rather than enter the market and bring down prices. The government is forced to buy grains even when it has more than adequate stocks and has no space to store what it buys (as is the case now). The mismanagement and theft at FCI godowns add to the cost of grains bought at an artificially high price.


Then again, the farmer cannot sell his produce directly to the consumer. It has to be routed through wholesale markets run by APMCs and dominated by commission agents, brokers and several other middlemen. Many states restrict interstate movement of goods and levies like octroi, entry tax, purchase tax etc. increase the cost of transit. There is no way food can be cheap in India.    


As the crop is believed to be large, the government is already under pressure to resume export of wheat and rice. Mr. Sharad Pawar, the agriculture minister, is trying to push the government to liberalise its exports policy. “Our stocks are more than the buffer norm. In such a situation, we must take a view on exports as soon as possible. I am sure the Government will apply its mind and take an appropriate decision amidst bumper harvests,” he says. Exports of wheat have been banned since February 9, 2007 and non-basmati rice shipments prohibited with effect from April 1, 2008.


Another villain is rampant speculation, better known as futures trading, in agricultural commodities. Commodities have emerged as an asset class for people with investible surplus. Speculative capital has started flowing into these markets via futures trading and is driving up prices much higher than what they would otherwise have been.


About a decade ago, futures trading in commodities was allowed in the name of facilitating price discovery and price risk hedging for farmers, processors and exporters. The system has, however, evolved along altogether different lines. Genuine hedgers continue to shy away from this market for a variety of reasons including lack of confidence in the systems and processes of exchanges where speculators rule the roost. The current regulatory system allows speculative capital to flow freely into the futures market. Margin trading allows players to build up large positions by leveraging small amounts of capital. This generates artificial demand for commodities wholly unrelated to market fundamentals, and prices begin to spike.


An inflationary environment is building across the world, caused primarily by high and rising crude prices, a weaker US dollar and weather aberrations. Add to that the loose money (US dollar) floating around and unchecked financialisation of agricultural markets and you will see why genuine relief for the consumer is unlikely any time soon.


In fact, the government may regard as real challenge the management of stocks of food grains in its warehouses. As on April 1, total grain stocks in the Central pool were placed at 45 million tonnes (15 million tonnes of wheat and 30 million tonnes of rice) as against their corresponding normative required levels of 21.2 MT (7 million tonnes of wheat and 14.2 million tonnes of rice) for that date. Even as its granaries are literally bursting at seams, it will have to buy millions of tonnes more by way of price support operations.


A bold government would scrap the MSP and start buying from the market what it needs for ration shops, lift all restrictions on prices, storage and movement (including export) of agricultural goods, exempt them from all levies and, last but not the least, ban futures trading in edible agricultural goods and replace it with delivery-based forward trading. That will solve several problems at a stroke. But powerful interests are ranged against such a free and fair policy. We must await a bolder and more enlightened government.


The author is Executive Editor, Corporate India, and lives in Mumbai

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