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Agriculture: Policy Options

Ramesh Chand

National Centre for Agricultural Economics and Policy Research(ICAR)

New Delhi

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Variable Year Share (%)

Gross National Product 2009 2.93

Population 2009 23.14

Land Area 2009 3.68

Arable Land derived 2009 14.24

Poverty (People Living on less than 1.25 a day) 2005 43.38

Prevalence of Under-nutrition derived (million) 2009 36.37

Total Merchandise Export ($ million) 2009 1.64

Total Merchandise Import ($ million) 2009 2.57

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ParticularReference

yearBangla-

desh India NepalPakistan

Sri Lanka

Per capita gross national income ($) 2009 580 1220 440 1000 1990

Income rank in the world 2009 189 160 196 171 151

Arable Land (ha. Per capita) 2008 0.05 0.14 0.08 0.12 0.06

Poverty, people living on less than $1.25 a day (%) 2004 -2007 49.6 41.6 55.1 22.6 7.0

Share of Agriculture in GDP (%) 2009 19 18 34 22 13

Workforce in Agriculture 2006-10 48.1 56.1 65.7 45.1 32.5

Agriculture value added/worker (2000 $) 2009 435 468 238 903 926

Source: World Development Indicators, 2011

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CountryDietary Energy Consumption

(Kcal/person/day)

Prevalence of undernourishment in total population

(%)

Number of undernourished

persons (million)

1990-19922006-2008

1990-19922006-2008

1990-1992

2006-2008

Bangladesh 1960 2270 38 26 44.4 41.4India 2290 2360 20 19 177.0 224.6Nepal 2190 2340 21 17 4.2 4.7Pakistan 2210 2280 25 25 29.5 42.8Sri Lanka 2170 2370 28 20 4.8 3.9South Asia 2270 2360 22 20 267.5 330.1Developing World 2440 2640 20 15 833.2 839.4Total World 2610 2790 16 13 848.4 850.0

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Item IndiaBangla-

desh PakistanSri

Lanka NepalChina World

Cereals excl. beer 152.6 180.9 129.8 143.5 171.3 152.5 146.6

Rice (Milled Equivalent) 70.9 159.7 14.5 97.3 78.0 76.8 52.9

Wheat 60.2 14.7 106.1 44.1 37.9 67.4 65.9

Pulses + (Total) 12.9 4.8 8.1 8.0 8.4 1.3 6.5

Vegetables + (Total) 64.8 19.7 30.0 40.1 77.9 279.9 119.4

Fruits - Excluding Wine 45.1 20.7 36.5 27.2 38.8 64.4 69

Eggs + (Total) 2.1 1.3 2.4 2.2 1.0 17.4 8.6

Meat + (Total) 3.3 3.6 13.4 6.8 9.8 53.4 40.1

Milk - Excluding Butter 68.7 16.2 159.0 36.1 40.9 28.7 85.1

Sugar (Raw Equivalent) 17.3 5.3 23.9 24.6 4.3 8.3 20.3

Vegetable Oils + (Total) 8.2 6.2 11.5 4.1 6.8 9.4 11.4

Source: FAOSTAT, Food Balance Sheets

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• Shrinking natural resources• Decline in quality causing decline in capacity• Competing demand• Climate change and rising environmental

stresses• Rising sensitivity of output to weather

fluctuations

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Ground Water Exploitation (BCM)

Categorization of administrative units according to status of water, 2004

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Safe Over Exploited Semi-critical or Critical

Punjab 18 75 7

Haryana 37 49 14

India 71 15 14

RegionPercent Distribution of Assessed Units

Dynamic resources Punjab Haryana IndiaAnnual replenishable ground water resources 23.8 9.3 433.0Net annual ground water availability 21.4 8.6 399.3Annual ground water draft 31.2 9.5 230.6Stage of Ground Water Development (%) 145 109 58

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• Demand side– Population growth– Dietary diversification, meatification– Rise in per capita demand: low level– Required growth rate till 2020, 2050: >2.5%

• Supply side– Widespread deceleration in productivity growth of

most staple– Natural resource constraint– Rising environment stress– Outbreak of new pests, diseases

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• Food prices show third spike in six years• After 2006, food prices have moved up and showing no

sign of going back to pre 2006 trajectory• Alongwith upward shift, prices also show rising

volatility • Higher prices have brought higher response, but higher

prices are considered adverse for poor and food security??

• Understanding of new developments in global food markets:– Standard 5 reasons! Are we over simplifying.– Are global and regional forums ignoring some real issues to

tame volatility?

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50.00

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Food Price Index: 2000=100

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Intra Year Variation

Global food prices after 2005:1980-2000= - 60%2000-2010 = +120%

Clear indication of scarcity

Intra year price variation:1980 to 2005: 2 to 13%2006 to 2010: 10 to 51%

Clear indication of shocks

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Clear evidence of increase in inter year instability.

Change in level after 2006 (prev slide)

What is happening is: Increased instability combined with rising trend in prices, unlike what was seen before 2006.

0

5

10

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30

35

Trend in Instability of FAO Food Commodity Price Indices (Base 2002-2004= 100)

Food Price IndexDairy Price IndexCereals Price IndexOils Price Index

Sugar Price Index

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• Supply shocks (weather related)• Speculative investments in food market• Diversion of food for biofuel (ethanol, bio diesel)• Trade restrictions• Increase in crude prices• Dietary shifts towards livestock product s(food-

feed competition)• Slowdown in food growth: demand and supply

imbalances• To what extent these can be addressed through

policies, institutional response? Other options?

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Policy Options

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• In most cases deceleration in growth got reversed after 2005

• It seems that sharp rise in food prices after 2005 has positively influenced growth in food production

• Model based estimates project worsening of hunger

• Evidence from SOFI (2012)Year South Asia West Asia World2004-06 20.6 8.8 13.82010-12 17.6 10.1 12.5

• What does it indicate?– Production is more important than prices

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• However, this has important lessons:– Growth in food production is now led by increase in

prices. Higher prices results in higher use of inputs and area expansion – involving increase in average cost of production. Necessitates higher subsidy to supply food at low prices.

– If we want growth to take place and at the same time prices to come down, we need to rely on input saving technological change.

• Options: if technology led growth fails to materialise let higher prices lead to growth and address food security of poor through subsidies, safety net.

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• Recent price behaviour (post 2006) is different than historical trend.

• Shift in level as well as increase in fluctuations around trend. No possibility in sight for prices to go back to pre 2005 level.

• Both shocks as well as scarcity are operating.• Shocks causing price swings and scarcity

moving trajectory.• Food prices are moving in tandem with energy

and metal prices not Manufacturing prices

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2005Q2 2006Q4 2008Q2 2009Q4 2011Q2 2012Q4

Nominal Commodity Prices(2005 = 100)

Metal prices

Fuel prices

Food prices

Sources: WEO, and Fund staff estimates.

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2005 2006 2007 2008 2009 2010 2011 2012

Real Commodity Prices(Deflated with average LIC per capita nominal

GDP in US$)

Food prices

Fuel prices

Metal prices

Sources: WEO, and Fund staff estimates.

Commodity prices surged recently, and are expected to remain high in the near future.

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• CAUSAL FACTORS– Supply Side

• Primary reason for change in behaviour of prices after 2005 has been imbalance in growth in demand and supply; and slowdown in growth in output particularly during 1995 to 2005.

• The second causal factor is diversion of food towards biofuel(40% US Corn)

• The third causal factor is increase price of energy.– Demand Side

• Growth in population (next slide)• Dietary shifts led by rising PCI

• AGGRAVATING FACTORS– All other factors like trade restrictions, speculative investments in food

market are aggravating factor. Also, they cause volatility not trend

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• Global food production facing both shocks and scarcity (next slide)

– two require different strategy.• Shocks: can be addressed though stock management,

trade, better coordination, advance warning• Scarcity: Require efforts on production front

• Require both the strategy• Need to relook into public sector stock holding

capacities for absorbing shocks: If shocks (volatility) are becoming frequent, severe, and longer, can they be left to market forces and private trade

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• The link is complex, certainly not one way• If higher food prices erode purchasing power, poverty reduction put

strong pressure on prices (high MPC at low income). • Sharp poverty reduction post 2000 resulting from high economic

growth, put strong pressure on demand• Poverty = f(food prices, agriculture growth)• Agriculture growth = f(Real food prices)• Net result depend upon change and strength of coefficient:

Aspect Scenario I Scenario IIChange in price % 10 10Poverty elasticity wrt price 0.2 0.1Agri supply elasticity 0.26 0.26Poverty elastcitywrt ag growth -0.45 -0.45Effect on poverty 0.83 -0.17

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Production growth brought prices down Output growth accompanied by

increase in prices

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• Substantial growth has to come from increase in productivity• Natural resource base (land and water) shrinking and declining in

quality: lower capacity• Rising cost of production; Environmental stresses• Quality –quantity tradeoffs; Incentive for production• New sources of demand• Nature of technological change: cost enhancing• New technology: no more public good, case of cotton in India• Producers seeking large margin

• What can help in reducing prices– Reduction in average cost

• Efficient production: Growth with efficiency– Only science, genetic engineering, biotech crops

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Input

OutputCost reducing

Cost increasing

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• R&D in agriculture inadequate• Biotech crops : more promise, less deliverry• Scope for spillover from developed to developing

coming down.• Global emphasis on strengthening CGIAR system• South- South cooperation, south – north

cooperation• Very less talk on co-operation between private

sector in North with public sector in south

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• Stock v/s trade. Trade is effective tool of stabilisation when global production is normal. When global output falls, trade cant help in stabilisation – implication for public stockholdings. Domestic stabilisation helps global stabilisation

• Privatisation of food trade and price stability• Rising sensitivity of output to weather

aberrations and rising sensitivity of prices to output fluctuations: technology

• Food safety net: when do they work?

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• Technological• Institutional• Policies• Traditional knowledge• Decline in quality causing decline in

capacity

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Ramesh Chand

Thanks