Setting new wheat price or extending support price

Extending support price mechanism
Farmers will greatly benefit if a realistic and extended support and procurement price mechanism for crops is introduced
By Tahir Ali

http://www.jang.com.pk/thenews/oct2011-weekly/nos-30-10-2011/pol1.htm#3

As the wheat season starts, demand to increase the crop’s support price is on the rise. But should it be increased or the old support price should stay unchanged in the coming year?

Increased cost of production in the wake of rising cost of agriculture inputs like fertiliser, seeds and pesticides, and growing prices of oil and electricity on account of eradication of subsidies and imposition of general sales tax apparently necessitates raise in prices but the question is to what extent that could be beneficial both for farmers and general consumers.

While an appropriate raise in wheat support price cannot be contested, it must be remembered that any exorbitant raise, like the one in 2008 when it was raised from Rs650 to Rs950 per 40kg at once, would make life miserable for the poverty/floods/terrorism-hit people in the country.

Raise in support price is a foregone conclusion. The government may eventually raise the price as it can’t displease the powerful landlords who are to massively benefit from the raised price and because the poor have no organised/powerful lobby to thwart the attempt.

But with elections due in 2013, the government finds itself in a quandary: it wants to win over the farming community by raising the wheat support price but it also knows any raise would further fuel food inflation and increase public unrest, which could fan anti-government drive started by its arch-rival Nawaz Sharif. This explains the delay in taking a decision on the issue.

The agriculture planning institute (API), earlier known as the agriculture pricing commission, while acknowledging the sharp rise in the cost of production, has recommended a wheat support price of Rs1200 per 40kg for the coming season.

This recommendation was sent to the federal cabinet for approval. But approval of the provincial chief ministers would also be needed for increasing the support price as the ministry of food and agriculture and federal committee on agriculture stand devolved after the 18th constitutional amendment.

Will the newly-empowered provincial governments give their consent to the proposal, thereby, directing the wrath of the people towards themselves and totally absolving the federal government of any blame? It remains to be seen.

Pakistan is the only country in the world to have subjected agriculture inputs to general sales tax and brought commission agents and dealers under sales tax which eventually mean high prices for consumers. The API also called upon the government to withdraw taxes and duties on agricultural inputs.

Pakistan has an annual average wheat production of about 24 million tons. It means farmers pocket around Rs57bn from wheat crop alone. This is a big amount and the state of life of millions of farmers should have improved but the opposite is the case. Big landlords might have benefited but smaller ones are not as they should have been.

Small farmers have been complaining of their negligence and malpractices in the procurement system and distribution of bardana by food department and PASSCO.

Initially, eight crops- wheat, cotton, rice, sugarcane, some oilseeds, gram, onions and potatoes,-were covered by the support price system. However, under the pressure of international lending agencies, it was restricted to four crops- wheat, cotton, rice and sugarcane in 2001.

Support price in Pakistan was determined by the Agriculture prices commission (APCOM) from 1980 to 2000. APCOM was initially an autonomous body. Then, under goading from the international lending agencies, it was made an attached department of agriculture ministry and later was converted to API. Wheat price was increased from Rs650 to 950 in 2008 without considering its implications.

Despite trends of liberalisation and deregulation, the system of guaranteed minimum price is used in several countries — USA, Turkey, Egypt, Brazil, Argentina, CIS States, Russia, Japan, Saudi Arabia, Australia, Canada, Indonesia, etc, — to stabilise prices of agriculture produces. India, too, established agricultural costs and prices commission in 1968 to ensure a minimum guaranteed price to growers.

The support price system needs to be revamped. Farmers will greatly benefit if a realistic and extended support and procurement price mechanism for crops is introduced and efficiently implemented.

The problem should be addressed on two counts: One, the scope of the price support system should be enlarged to cover more crops like maize, horticulture crops and others; Two, support price determination should be done not haphazardly but in a transparent and comprehensive manner after talking to all stake holders and taking into account multiple factors, such as the cost of production, domestic and world prices, domestic and international demand and supply situation, etc.

There should also be compulsory direct procurement for most crops by the public sector to save farmers, especially the smaller ones and those residing in the poor most areas, from exploitation of cartels and commission agents.

“Officials should purchase wheat from growers at their doorstep rather than at procurement centres. The agriculture department should enter into contracts with farmers as in the case of tobacco crop. The government should announce the list of wheat procurement centres and open procurement centres at tehsil and union council levels,” a farmer Niamat Shah said.

Globally, five types of prices — monopoly price, procurement price, support price, free-market price and administrative price — are being used for agriculture produces.

Free market prices are fixed by the forces of supply and demand. In the system, the farmers benefit in a poor crop year as supply decreases and demand increases, but invariably suffer in a bumper crop year when the situation is reversed.

Administered prices are the prices which the government administers for the benefit of producers and consumers.

………..

Extending the support price mechanism
Or
new wheat support price
By Tahir Ali

As the wheat season starts in the country, demands to increase the crop’s support price are on the rise. But should it be increased or the old support price should stay unchanged in the coming year?

Increased cost of production in the wake of rising cost of agriculture inputs like fertiliser, seeds and pesticides and growing prices of oil and electricity on account of eradication of subsidies and imposition of general sales tax apparently necessitates raise in prices but the question is to what extent that could be beneficial both for farmers and general consumers.

While an appropriate raise in wheat support price cannot be contested, it must be remembered that any exorbitant raise, like the one in 2008 when it was unceremoniously raised from Rs650 to Rs950 per 40kg at once, would make life miserable for the poverty/floods/terrorism-hit people in the country.

Raise in support price is a foregone conclusion. The government may eventually raise the price as it can’t displease the powerful landlords- PPP’s traditional strength- who are to massively benefit from the raised price and because the poor have no organised/powerful lobby to thwart the attempt.

But with elections due next year, the government finds itself in quandary: it wants to win over the farming community by raising the wheat support price but it also knows any raise would further fuel food inflation and increase public unrest, which could provide further fuel to the anti-government drive started by its arch-rival Nawaz Sharif. It explains the delay in taking a decision on the issue.

The agriculture planning institute (API), earlier known as the agriculture pricing commission, while acknowledging the sharp rise in the cost of production, has recommended a wheat support price of Rs1200 Per 40kg for the coming season.

This recommendation was sent to the federal cabinet for approval. But approval of the provincial chief ministers would also be needed for increasing the support price as the ministry of food and agriculture and federal committee on agriculture stand devolved after the 18th constitutional amendment.

Will the newly-empowered provincial governments give their consent to the proposal thereby directing the wrath of the people towards themselves and totally absolving the federal government of any blame? It remains to be seen. But one thing is certain: a huge increase would increase food insecurity for millions more in the country.

Pakistan is the only country in the world to have subjected agriculture inputs to general sales tax and brought commission agents and dealers under sales tax which eventually mean high prices for consumers. The API also called upon the government to withdraw taxes and duties on agricultural inputs.

Pakistan has an annual average wheat production of about 24 million tons. It means farmers pocket around Rs57bn from wheat crop alone. This is a big amount and the state of life of millions of farmers should have improved but the opposite is the case. Big landlords might have benefited but smaller ones are not as they should have been.

Small farmers have been complaining of their negligence and malpractices in the procurement system and distribution of bardana by food department and PASSCO.

Support price is the minimum guaranteed price which the growers must get when the market prices tend to fall particularly after a bumper crop. The government purchases all the produce from the farmers if there is no other buyer.

Support price is endorsed by considerations of equity, productivity, price stability and agricultural development. It not only ensures a fair return for the crop in times of dropped prices but also stabilises prices when they go upwards for black-marketing. It also encourages farmers to grow more wheat each year.

Initially eight crops- wheat, cotton, rice, sugarcane, some oilseeds, gram, onions and potatoes-were covered by the support price system. However, under the pressure of international lending agencies, it was restricted to four crops- wheat, cotton, rice and sugarcane in 2001.

The support prices are implemented for wheat and rice through PASSCO, for cotton through Trading Corporation of Pakistan and for sugarcane through sugar mills.

Support price in Pakistan was determined by the Agriculture prices commission (APCOM) from 1980 to 2000. APCOM was initially an autonomous body. Then, under goading from the international lending agencies, it was made an attached department of agriculture ministry and later was converted to API.

Wheat price was increased from Rs650 to 950 in 2008 without considering its implications. The big landlords might have pocketed hundreds of billions of rupees since then, but it added to already acute food inflation making life miserable for over 70 per cent of the people.

The poor farmers could not benefit from the price as they had no resources to carry their output to the procurement centres. They have to sell it at lower prices than the support price.

Despite trends of liberalization and deregulation, the system of guaranteed minimum price is used in several countries- USA, Turkey, Egypt, Brazil, Argentina, CIS States, Russia, Japan, Saudi Arabia, Australia, Canada, Indonesia etc- to stabilise prices of agriculture produces. India too has established agricultural costs and prices commission in 1968 to ensure a minimum guaranteed price to growers for their output.

The support price system needs to be revamped. Farmers will greatly benefit if a realistic and extended support and procurement price mechanism for crops is introduced and efficiently implemented.

The problem should be addressed on two counts: One, the scope of the price support system should be enlarged to cover more crops like maize, horticulture crops and others; Two, support price determination should be done not haphazardly but in a transparent and comprehensive manner after talking to all stake holders and taking into account multiple factors -the cost of production, domestic and world prices, parity prices, domestic and international demand and supply situation, comparative economics of competing crops, real market prices, profitability of input use, impact of support price on other sectors of the economy and the incidence of poverty in a particular region etc- to name a few.

There should also be compulsory direct procurement for most crops by the public sector to save farmers, especially the smaller ones and those residing in the poor most areas, from exploitation of cartels and commission agents.

“Officials should purchase wheat from growers at their doorstep rather than at procurement centres. The agriculture department should enter into contracts with farmers as in the case of tobacco crop. The government should announce the list of wheat procurement centres and open procurement centres at tehsil and union council levels,” a farmer Niamat Shah said.

An agricultural costs and prices commission needs to be established in all provinces to provide data and basis for fixing support and procurement prices of agricultural commodities.
Globally, five types of prices- monopoly price, procurement price, support price, free-market price and administrative price – are being used for agriculture produces.

Monopoly prices are fixed by the government below the market prices and farmers have to sell their crops to government or its authorised agents. This policy harms the farmers but is pro-consumers. The system was followed in Pakistan at the time of independence for wheat, rice and later in sugar crops.

1950 onwards, Pakistan opted the procurement price system in which the farmers are free to sell their produce but the government can/does purchase the produce anytime at a fixed price.

Free market prices are fixed by the forces of supply and demand. In the system, the farmers benefit in a poor crop year as supply decreases and demand increases, but invariably suffer in a bumper crop year when the situation is reversed.

Administered prices are the prices which the government administers for the benefit of producers and consumers.

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About Tahir Ali Khan
I am an academic, freelance columnist, writer and a social worker.

5 Responses to Setting new wheat price or extending support price

  1. sara says:

    how increase in support price of wheat leads to inflation??

    Like

    • By inflation I meant food inflation or food costliness. It is obvious wheat flour prices will also rise in the market following the raise in support price. When last time the wheat support price was increased, the wheat flour price had jumped by about 40-50 per cent in one go. higher prices i.e. food inflation, means food insecurity for millions.

      Like

      • sara says:

        By increasing the support price domestically, government is making the wheat in international market uncompetitive which means that we won’t be able to export so if domestic supply of wheat increases then why the price of flour will go up ?

        Like

      • yes, the raise is support price will and have already raised wheat prices in the market. prices go up theoritically on the basis of demand and supply but in practice intrigues and the lust for more profit on part of the traders and cartels do so. forces of demand and supply are not free; these are manipulated. please keep in mind that when prices were raised last time, the wheat prices in the market went up despite the fact that Pakistan had produced enough wheat. the case of sugar is also there. when supreme court intervened the angry sugar cartel got activated and the commodity was no where in the market. obviously, when the government would buy costly wheat, eradicate subsidies on it as it did and provide it at higher prices to the mills, why would the mills and the traders not raise the prices to offset the diminished profit on that account. Best wishes Tahir Ali Mardan Pakistan (+92)03459366452 tahir_katlang@yahoo.com https://tahirkatlang.wordpress.com/

        ________________________________

        Like

  2. sara says:

    so you mean that despite having enough wheat in the country, hoarders, mill owners create artificial shortage in the country. Basically its all politically motivated. Any link where in detail whole picture of the global and domestic wheat market over the last 10 years or so is given.?

    Like

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