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Agri-commodity
pricing: putting an end to anomaly
MIAN ASIF SAID
ARTICLE (June 21 2002) : United
Nations Food and Agriculture Organisation's (FAO) world food
summit that began in Rome on June 10 was greeted by large
placard-wielding crowds jeering delegates from the rich OECD
countries.
The last such summit in 1996, attended by high-powered
delegates from 186 countries (including 112 Heads of State or
Government), had solemnly vowed to halve the world's starving
millions by 2015 - an intended pace of progress that Cuba's
Fidel Castro deemed "shamefully slow". Six years later, it
appears Castro was too optimistic by half.
The planet's population of Les Miserables has barely budged in
six years. down from 840 to 830 million. The UN
Secretary-General, Kofi Annan, in his concluding remarks on
June 13, opined that at this rate it would take another 60
years to eliminate poverty. As regards the voiceless nations,
they voted by their attendance at the Rome summit (only 140
countries sending delegates, the number of Heads of State and
Government thinning out to a mere 40), General Musharraf
preferring a visit to UAE instead.
Is it because the developed world lacks the requisite
technology or resources to make a difference? Hardly. The
truth that has now dawned even on ordinary citizens, like
those chanting "Shame" at the conferees in Rome, is that for
powerful nations of this world, progressive elimination of
dehumanising and rampant poverty in the third world is not a
serious agenda item. In this regard, Dr Jacques Diouff,
Director-General of FAO, himself alludes to some of the
following eye-popping statistics:
In 1999, USA and EU spent $362 billion on subsidies and price
supports to keep their rural populations in gravy... a
staggering payout of $16.5 thousand for every man, woman and
child among their 22 million strong rural citizenry.
That year, farm-gate value of their crops, livestock, and
forestry was $345 billion. In other words, the famed
efficiency and superiority of the rich world's agri-sector is
a farce because it spent 105 cent for each 100 cent of value
produced, a negative return of 5% per annum.
Meanwhile, OECD's food aid to the most impoverished countries
of the world during the year was a pathetic $7.6 billion...
two and a half cent per head per day for the starving millions
mentioned above, while USA alone spent ten times that amount
on pet foods for its domesticated canine population.
But, the farce of the West's concerns about poverty goes
further. Just one example should suffice. During the year in
question, to keep average farm-gate milk prices from falling
below 35 cents per litre, EU and US governments spent $6.2
billion out of their agricultural subsidy programme (called
CAP in EU and DEIP in USA) to take 2 million tons of surplus
milk powder off their domestic markets.
Indefinite storage of this perishable commodity being
infeasible, the cost free alternative was to "dump" it
offshore (indicative of the word's etymology in international
trade). However, they successfully dumped it at $1,200 per
ton, in third world food markets for a windfall gain of $2.4
billion. Thus, in order to receive $7.6 billion in food aid,
beggar nations were forced to provide a reverse subsidy of
$8.6 billion, the value of displaced indigenous dairy output
($6.2 billion plus $2.4 billion) to the already affluent, at a
net loss of $ one billion to themselves. Rapacious mayhem of
this sort is simply shrugged off by cat's paws like FAO and
WTO, while their colleagues at donors agencies (IMF, WB, IDA)
stare down aid-recipients who dare demur.
It does not, however, absolve third world countries from doing
their bit. Delegates to the 1996 summit had vowed that they
would increase budgetary expenditures on their agricultural
sectors by at least 12% per annum. Of course, none of the
poorest 50 countries in the world did that (a club that
Pakistan joined under the present Government in March 2001
when, with per capita GDP falling to $429, and the population
below poverty line swelling to 38 million, it was ranked 47th
from the bottom of the heap by FAO). In inflation-adjusted
outlays, at an annual outlay of under half a billion rupees
per annum over the past three years, this government already
has the worst record of tangible investment in the agri-sector
since Ayub Khan popularised 5-year development plans. Perhaps
they understood the 1996 FAO resolution with a minus sign
before it!
All the same, to crystallise the damage caused to the
agricultural sectors of the third world countries by predatory
agri-policies of the West, let's look at a case in point, that
of Pakistan. Though we are the 5th largest milk-producing
country in the world (up from 6th place because all European
milk producing countries are now clubbed as EU), our Federal
government's fiscal managers allow EU exporters to annually
dump $15 to 20 million worth of milk powder in Pakistan,
depressing local prices, and discouraging development of Milk
Processing Industry in the country.
Today our domestic dairies are fighting off SMP (skimmed milk
powder) and WMP (whole milk powder) arriving in Karachi at
$1000-1200 per ton. Even after paying 30% import costs (mostly
CBR levies in the shape of 20% duty and 6% value added income
tax), in terms of reconstituted milk, the dumped powder costs
PKR 9.70 to 11.75 per litre as demonstrated below:
1,000 x 1.3 x 60/8,000 = 9.70, & 1,200 x 1.3 x 60/8,000 =
11.75
While the Jodia Bazaar Seth goes laughing all the way to the
bank, the proverbial peasant widow, her orphaned children, and
her buffalo learn to live with hunger pangs. The lighter side
of this tragedy is that it leaves dairy experts at the
Ministry of Food, Livestock and Forestry (MINFAL) scratching
their heads to figure out why per animal milk yields are less
than 1300 litres a year in Pakistan and over 5,500 litres in
the West. It must have something to with the widow's ignorance
of sound practices of animal husbandry.
Though natural endowments of soil, water, and weather favour
many poorer Asian, African, and Latin American nations, the
world's agri-based trade of $550 billion (9% of annual global
trade) is dominated by heavily subsidised farm sectors of the
developed world - an equation that is not about to change in a
hurry. As noted above, international agencies like the UN and
its subsidiaries and affiliates (World Bank, IMF, FAO, WTO, et
al.), being dependent on OECD largesse, have no choice but to
promote its mercantilist trade agenda. Small wonder then that,
except for China and Thailand, all 15 of the world's largest
agri-commodity exporters are rich developed countries.
The crowning irony of fate is that, for over 50 years, such
rapacious practices of developed countries have found ready
collaborators among ruling classes in the third world, willing
and eager pawns in progressive destruction of the agricultural
base of their own home countries. While the OECD persists with
blatant subsidisation of its intrinsically uncompetitive
agriculture, its Wall Street/World Bank trained economic
managers implanted in third world countries sing paeans to
free trade and wax eloquent over the need for taxing
agricultural incomes of the already impoverished.
In my last article entitled "ECON-l01 for managers of our
economy", which appeared in the May 13 issue of this paper, I
tried to show that naive urbanite economic managers have been
the root cause of failure of our economic polices because they
refused to accept that Pakistan's economic salvation lay in
single-minded focus on its potentially world-beating agri-potential.
As a first step on the road to economic salvation, I argued
for exigent and accurate documentation of the various economic
sectors that make up our GDP. For purposes of my own article,
meanwhile, I used the Government's own data regarding physical
outputs, but used market price multipliers (appropriately
deflated for farm-to-market transportation costs), to compute
the realistic share of agri-sector in our GDP. The results
showed that it is officially understated by at least 10-12%,
principally, by valuing the country's milk production at the
aforementioned dumping prices. Having read my article, the
Governor of SBP reportedly announced that he had enquired at
the Federal Bureau of Statistics (FBS), and, "yes, our milk
output is valued at Rs 9 per litre (courtesy EU dumping)...
but the accuracy of FBS data is unimpeachable."
Governmental apathy on an issue, which ought to be of
monumental concern to it, can best be judged from the fact
that even after a lapse of over a month since I questioned the
numerical fiction published by FBS, no representative of the
agencies directly concerned with this activity (MOF, MINFAL,
or FBS), has bothered to defend these egregious defects in our
official GDP data. Meanwhile, to avoid the inevitable
embarrassment that it will inevitably cause, the recently
issued 2002-03 version of the fairy tale, popularly known as
Pakistan Economic Survey, does not mention a monetary value
for the 28 billion litres of milk that it says we produce.
In 1999, before it went ahead and declared economic priorities
for development (ITT, SMEDA, Oil & Gas, and sundry Visions
2005-2015), the present government ought to have undertaken a
rigorous verification of each economic activity's
contributions to GDP. It is apparent that no such exercise was
even contemplated, much less undertaken. Why? Obviously
because it apprehended that the results of such a survey would
expose its lopsided investment priorities based on denial of
the obvious - that the only sector in which we have a
competitive advantage against most nations of the world is
none other than agriculture in general and dairy in
particular.
For a preliminary survey in this direction, I would like to
share some data with the reader. Being conscious that the
first attack on my conclusions would focus on veracity and
verifiability of data, I have restricted myself to impeccable
American and European sources, such as the United States
Department of Agriculture (USDA), the US Government's Office
of Management and Budget (OMB), European Union (EU) Budgets,
and FAO. A surprising discovery of the exercise is that we
appear to be a unique agri-country.
In all of the six principal agri-sector commodities of the
world, namely, wheat, rice, sugar, cotton, meat (beef and
mutton), and milk, Pakistan ranks among the world's top ten
producers! For good measure, I have added data on two key
seasonal fruits, oranges and mangoes. Here too, Pakistan makes
the cut as one of the top ten producers. If you didn't know
this already, don't fret. One can safely wager that it's news
to MINFAL, MOF, SBP, and even the figure-jugglers at FBS!
Frankly, despite my personal exposure to this sector, I was
unaware of the true dimensions of our country ranking in
global agriculture.
The worksheets shown herein are quite instructive. From the
first chart, adding together the trade values of just the
eight commodities shown (already corrected for price
distortions due to the West's subsidy policies, like the one
for milk and dairy products) gives a figure of Rs 1.38
trillion, as opposed to the figure of Rs 0.8 trillion
Agricultural GDP recorded in the Pakistan Economic Survey
2000-01.
Even deduction of input and intermediate costs, the
reservation that Governor of SBP had to similar valuations in
my last article, would yield Rs 1.30 trillion (itemised cost
of seeds, fertilisers, chemicals, and diesel as per GOP's
Economic Survey 2000-01). It is a safe bet that if the fair
international market values of all minor agricultural crops,
fishery, and forestry (estimated by the 2000-01 Survey at a
deflated figure of Rs 150 billion, as well as similarly priced
contribution of poultry, eggs, hides and skins, bone meal,
wool, hair, etc, is added in, Agriculture's GDP contribution
would surpass Rs 1.6 trillion - double the reported figure and
40% of GDP (if one appropriately restates the Rs 3.19 trillion
(fc) GDP mentioned in the survey to Rs 4 trillion). Now, that
is a 15% understatement of Agri-sector's contribution to our
GDP.
The second worksheet is a further analytical look at six of
eight commodities mentioned in the first chart. This clearly
demonstrates the value of hidden or reverse subsidy that our
farmers have been routinely providing to other sectors of our
economy for the last fifty-five years. Even though the worst
(robbing them blind with cotton priced at confiscatory pricing
of cotton, to subsidise the country's spinners all through the
sixties, seventies, and eighties) is largely over, we still do
not give them fair value for their produce. On just six
products captured in the chart, agri-sector pays a 43% hidden
sales tax worth Rs 550 billion, an amount which is 40% larger
than the Rs 392 billion collected by CBR in the last fiscal
year. Some interesting conclusions can be summarised as
follows:
--On the assumption of 43% underpayment for agri-output
demonstrated in the chart, and based on painstakingly
cross-checked fair prices, the unmonetised value of Pakistan's
agri-GDP noted above is Rs 800 billion. Assuming farmers are
reimbursed for this short changing inflicted on them by market
forces, with direct restitution payments (the quantum,
time-frame, and mode being a vast subject that will be
dissected at length in a subsequent article), GOP could easily
deduct a 15% Sales Tax on total farm produce of Rs 1.6
trillion at source to yield Rs 240 billion in incremental
revenues, boosting revenue collections to Rs 654 billion for
the current year Rs 414 billion final CBR target plus Rs 240
billion), realising its long-cherished dream of taxing
agricultural incomes, satisfying donor agencies, and forever
solving MOF's annual budget deficits. It would be a win-win
situation all round as, with their agri-incomes enhanced by Rs
560 billion (net of sales tax), farmers could easily afford
critical outlays for purchase of high quality seeds, chemicals
and fertilisers to immediately boost crop yields per acre, and
also invest in long-term productivity enhancing capital
assets.
--In the unlikely event of GOP ever deciding to put an end to
its aforementioned unstated policy of Robbing Peter to Pay
Paul (Peter = Farmer; Paul = Trade, industry, and urban,
populations), and mustering requisite courage to thumb its
nose at Western sponsors, (long since done by some courageous
nationalistic governments, including Malaysia, Thailand and
India), it can demonstrate to IMF and WB that our tax to GDP
ratio is not 12.5%. In fact, on the foregoing assumptions, it
would straightaway jump to 16.35% for the last fiscal year
(654 divided by 4,000 = 16.35%). All that MOF needs to do is
to tell it to IMF and World Bank the way it is. "..An awful
injustice in our economic policy to date, which we have now
decided to rectify, by valuing and paying for all agricultural
produce at effective international prices net of producer
subsidies, transportation costs, and distribution expenses".
--Given political will for the steps mentioned above, it would
be relatively easy for GOP to devise specific crop wise
strategies to reimburse our farmers' for their recurring
underpayments (with less than perfect data at hand, the
figures advanced by me could serve as benchmarks, not
immutable claims cut in stone). For their part, I am sure that
farmers would be very glad to let GOP deduct its sales tax
share out of these restitution payments at source. Such direct
support payments are today the rage in USA and EU as they fall
in the "BLUE-BOX" of least distorting farm subsidies allowed
under the WTO regime, only, in Pakistan's case they will not
be subsidy payments, but restitutions of short payments
emanating from current imperfections in our agri-commodity
trade based on a wholly unequal exchange (impoverished farmers
living hand to mouth vs. Shylocks - known as Arthis in our
rural culture - with money to burn).
--A major advantage of implementing the foregoing policy is
that it can easily address the issue of funding of local
governments - critical to the success of GOP's devolution
plan. As matters now stand, provinces are dependant on federal
handouts for their meagre budgets. They have no appetite for
further dilution of these resources by subventions for
district governments. Since, by its very nature, sales taxes
on crops will have to be collected and documented at the
village and tehsil level, the local governments can be
empowered to collect and remit these to the federal
government, retaining the 2.5% for themselves, a revenue
collection rate being currently discussed as the funding need
to make devolution a success.
--Going forward, of course, the level of restitution portion
of unit price for each crop can be determined before the start
of each sowing season, and if need be, altered near harvest
time.
Once the country successfully increases its capacity for
storage of cereals and builds sufficient cold storages,
seasonal price volatility in food grains, and perishables
(processed dairy products, meats, vegetables, and fruits)
would diminish to manageable levels. Thereafter, properly
organised commodity futures and options exchanges could be
established to put an end to GOP interventions in marketing of
agri-produce. Unfortunately, in keeping with its proclivity
for inverse priorities, while it still has not outlined a
comprehensive multi-year food storage and crop insurance, GOP
has displayed undue haste in sanctioning a commodity futures
exchange - unique in its conception in as much as it is owned
by the country's stock exchanges and is proposed to be
monitored by SECP. None among the 85 odd futures exchanges,
operating in 30 countries around the world, is either owned by
a stock exchange (KSE in the present instance), or supervised
by a regulator of capital markets (like our SECP).
It is obvious that the esoteric prerequisites of commodity
futures and options trading are Greek to all those (MOF, KSE,
and SECP) involved in this process, a classic demonstration of
Blind leading the Blind, while scores of pertinent questions
remain unanswered. For instance, where will the major
exchanges be located? How close will they be to principal
crop-producing geographic areas? Who will issue "warehouse
receipts"? How will "basis" be determined? What are standard
contract "specifications" for each commodity? How will these
be benchmarked to similar contracts on other exchanges of the
world to enable cross selling and allow for synthetic hedging?
And, so on and so forth ad nausea.
On the heroic assumption that such groundwork has already been
accomplished, the real grunt-work will have barely begun.
Apocryphal tales of a firm of Chartered Accountants having
been hired to prepare guidelines in this regard, if they turn
out to be true, is a sure recipe for disaster like the one
that befell India when it tried to do so some years ago. Bean
counters have neither the training, nor the experience to
prepare campaign outlines for such a complex undertaking.
Pricing of specific futures and options are dependent on
running regression analysis on robust and accurate relational
databases. Standard statistical methods of probability theory,
Fibbonaci algorithms, or stochastic models like "Black-Scholes"
have little tolerance for fictitious data, which is all we
have (obliquely acknowledged by the Finance Minister during
his budget speech wherein autonomy of FBS was declared a
desirable goal). However, that is another story, again one
that I intend to write on in these columns at a future date.
--Reverting to our present theme, the proposed policy of
giving farmers a fair price for produce should ensure that,
within a span of five years, Pakistan could reasonably expect
to match crop yields currently enjoyed by rich farmers of OECD
countries. This would translate into an incremental potential
value of $5.5 billion in crops and $36 billion in dairy the
latter potential contribution being the reason for my great
enthusiasm regarding the prospects for Dairy Industry in
Pakistan. And, if you have not noticed, adding current $13.2
billion short-payment to farmers (the Rs 800 billion requiring
restitutional reimbursements) to potential enhancements in
agri-GDP (estimated in the chart at $4l billion) would
translate into an assured doubling of our GDP within a short
span of 5 years, a burst of economic growth at a breathtaking
15% per annum clip that could do China proud!
However, it might be useful at the very outset to pre-empt two
knee-jerk objections against this novel idea of fairness in
dealings with our impoverished and despised rural population.
1. How will such a grandiose scheme be financed, and what of
the implicit monetary inflation if we resort to the printing
press?
2. With our urban sprawls already groaning under the burden of
unemployed millions, how will city administrations cope with
inevitable unrest following spiralling food prices caused by a
policy shift in favour of equitable treatment for farmers?
On the first point, it is not difficult to see that, for Rupee
funding requirements, Government has no physical constraints.
While interest on domestic debt is funded from sale of
incremental Government securities, Principal obligations are
routinely rolled over, never repaid. For the fiscal year now
ending, due to a falling rate environment, domestic public
debt has already declined from Rs 1.8 trillion to Rs 1.6
trillion. It offers an excellent opportunity to commence
restitutions of the Rs 800 billion discussed above.
These outflows could be comfortably spread over 8 crop sowing
seasons (four years). Rs 100 billion at the time of each
Kharif and Rabi planting, keeping in mind that a third of each
disbursement will actually be deducted at source as Sales Tax!
Thus, net outflows would not exceed Rs 125 billion per year...
quite a manageable number in terms of monetary expansion with
M2 of Rs 1.5 trillion (SBP data shows that M2 expansion of Rs
200 billion over the past 12 months was absorbed by the system
without undue inflation).
The inherent injustice of subsidising urban consumers at the
cost of progressive immiserisation of disenfranchised rural
citizenry must, however, end. But, as in the case of the
restitutions described above, the whole process could be
cautiously planned and implemented over time so as to minimise
suffering of the least well-off urban residents. Towards this
end, GOP could devise effective food-stamp type of relief
using some of the revenues generated by sales taxes recovered
from the agri-sector.
Actually, in the end, with the economic pie becoming
significantly larger, the boost to general welfare should
result in a decade long burst of GDP growth at an annual
compound rate in excess of 10% per annum. A gratuitous pay-off
of this exercise should perhaps be highlighted. Future finance
ministers would no longer have to trot out tiresome bromides
to justify inevitable failures of untenable economic policies
(the outgoing fiscal year's flavours being drought, border
tensions, 9/11, and international recession).
Hare-brained gibberish? Not really. Twenty years ago, when its
per capita income was roughly comparable to Pakistan's,
Thailand launched on a comprehensive agri-policy of fairness
to its farmers. Today, its agricultural exports alone surpass
$10.5 billion, exceeding our total exports figure by a healthy
margin, ranking it alongside the OECD as an agri-products
powerhouse. Think again.
Courtesy Business Recorder
Views presented
here are of those of the writer and Pakissan.com is not liable
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