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Agri Overview 

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.

Economics of farm price policy 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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