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Economics of
farm price policy
By Saeed-ur-Rehman
As it is irreproachable to say that agriculture is the
backbone of the country's economy, so it seems quite rational
to have more government attention towards this sector.
 The farm programme includes: support for farm prices, income
and output - soil and water conservation- agricultural
research - farm credit - subsidized sale of farm products in
world market etc.
However, the typical farmer and the average politician both
have viewed the farm programme primarily as one to prop up
prices and income and it is this "price support" aspect of
farm policy, which we will explore further.
Price support is meant to act as a minimum but guaranteed
price for the growers during the post-harvest period. It is
not meant to replace the market-determined price but to
correct the shortcomings and failures of the market system
during the harvest season when prices often fall to the
disadvantage of growers.
A variety of arguments have been made over the years to
justify farm subsidies and price support that are as
following:
(1) Although their products are needed, many farmers are
comparatively poor; they should therefore receive higher
prices and income through public help.
(2) Farmers are subject to extraordinary hazards i.e. floods,
droughts, insects, which other industries do not face. For the
most part, farmers cannot fully insure themselves against
these disasters.
(3) The input producers have considerable market power, so
control their product prices while on the other hand farmers
are at the 'mercy of the market' in selling their output.
But, the questions arise that to which extent this price
support policy is fruitful for the poor farmer? What are the
ultimate consequences of latest increase in cotton and wheat
price support in the shape of consumer's costs? And what sort
of strategy is required in the future? When we deeply
investigate in this area, we find that price support and
subsidy programmes are most beneficial for those farmers who
need them least.
If the goal of farm policy is to raise low farm incomes, it
follows that any programme of federal aid should be aimed at
farmers with the lowest income. But the poor, small-output
farmer does not produce and sell enough in the market to get
much aid from price supports.
These are the feudal and large corporate farmers, which reap
benefits by virtue of their sizable output. Price support
involves not simply a transfer of money from tax-payers to
farmers but costs which are hidden as higher food prices,
storage costs for surplus output, costs of administrating farm
programs, and costs associated with both domestic and
international misallocations of resources.
As wheat and its products are important items of expenditure
in the average household budget. These are also important
components of the basket of goods used for monitoring the rate
of inflation in the economy through the estimation of various
price indices such as Wholesale Price Index (WPI), Sensitive
Price Indicator (SPI); Consumer Price Index (CPI), it would be
useful to examine its likely impact on the household
expenditure and CPI.
As per the estimates of Federal Bureau of Statistics (FBS),
every increase of Rs4 per 40 kgs in the support price of wheat
over the existing level of Rs300 per 40 kgs is expected to
raise the CPI by 0.09 per cent, other things remaining the
same.
The above analysis assumes that the prices of wheat flour
would increase in the same proportion as those of wheat. This
rise in CPI is the direct and the first round effect of the
increase in price of wheat. Indirect and multiplier effects of
the increase in support price of wheat, if any, should further
push up the CPI.
In the same context, according to the Household Integrated
Economic Survey (HIES), FBS, the average household in Pakistan
consists of 6.8 members. The average annual per capita
availability of wheat based on the balance sheet method
averages at 119kgs.
It has been estimated that every increase of Rs4 over the
existing price of the crop is expected to raise the annual
expenditure of the average household on wheat by Rs75 or Rs11
per head, holding other factors constant. In other words, the
monthly expenses on wheat consumption would rise by about Rs1
per capita with every increase of Rs4 per 40 Kgs in the
support price.
Thus an increase of Rs50 over the last years support price of
Rs300 per 40 Kgs resulted in an additional expenditure of Rs85
per month (Rs1020 per year) approximately on wheat and its
products for the average household.
The foregoing results are premised on the assumption that
increases in support price are proportionately reflected in
prices of wheat flour and other wheat products. Similarly,
recent increases in support price in case of cotton, will
ultimately affect the consumer in the same pattern.
The consumer pays a higher price and consumes less of those
products, which are supported. Moreover, price support has
also lots of other marketing and environmental drawbacks. It
creates economic inefficiency by encouraging an
over-allocation of resources to agriculture.
It attracts more resources to agriculture sector and more
specifically to a particular crop that is going to be
assisted. It discourages the crop rotation, which is the
natural source of pest control, and encourages exorbitant use
of fertilizer, insecticides, which caused environmental
distortions. Similarly price supports result in the use of
more water for irrigation for a particular crop and the
resulting runoff may contribute to soil erosion.
There is a need to design economic strategy in agriculture to
treat symptoms of the farm problem, not its causes. The root
cause of the problem is the misallocation of resources between
agriculture and the rest of the economy. The effect or
symptoms of this misallocation is, relatively low income in
agriculture.
For the most part, public policy was oriented towards
supporting farm prices and incomes rather than toward fixing
the resources allocation problem, which is the fundamental
cause of relatively low farm income.
Courtesy: The
DAWN
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