Pricing of agricultural produce

Source: http://dawn.com/2008/04/07/ebr4.htm


By M. Shafi Niaz

Support and procurement prices of wheat are two different modes by which the price issue is tackled. Going by different public statements, the same word is commonly used to identify these two different modes. Thus it seems quite pertinent to define clearly these terms to prevent misperception among stakeholders.

Strictly speaking, there are five types of prices that are being used internationally and any one country uses one or more types that are found suitable to its local conditions.

These different types are: monopoly price; procurement price; support price; free-market price and administrative price. It indicates a wide range of agricultural pricing policies that have been opted to achieve the desired objectives.

Monopoly prices: These are the prices fixed by the government at which the producer must sell his produce to the government or its designated/authorised agency. Such prices are generally lower than the market prices. In such a policy, the movement of the produce from one place to the other is generally prohibited. The system is rigid and does work against the interest of the farmers but helps the welfare of the consumers.

Such a system was followed by the government at the time of independence and was applicable in the case of wheat and rice – particularly basmati rice. At times, the same system was also followed in the case of sugar industry. This allowed the sugar-mills to buy sugarcane from the growers at a fixed price to produce given quantities of sugar. The government used to purchase sugar from the mills at a pre-determined price which supplied to the public at a given price under the then prevalent system of rationing.

In fact, each sugar mill was allotted certain areas of sugarcane growers called ‘zones’. The farmers were obliged to sell their cane to the specified mills and no one else. The system worked against the interest of the farmers and the beneficiaries were the mill owners. The mills would buy the produce according to their will and needs. Sometimes, the lifting of sugarcane was so late that the sowing of the following crop which normally is wheat, was delayed adversely affecting the production of the crop.

Procurement Prices: These prices are fixed by the government to enable it to buy the produce from the farmers when required for either issuing to the consumers at a given price, and/or supply to the military personnel or to building strategic or otherwise reserve stocks to stabilise prices during the year. When the government gave up its fixed price policy in 1950, it was resorted to procurement price system.

According to this system, there is generally no restriction on the growers to sell their produce in the open market but the government would reserve the right to purchase the produce anytime at a price to be announced by it. The price thus fixed is generally lower than the market price, which worked against the interests of the farmers. At times it led the farmers to shift to another equally income-giving crop.

Support Prices: This is the minimum guaranteed price which the growers must get for his produce should the market price tend to fall below the fixed support price which generally happens immediately after the harvest is over, particularly when a bumper crop is reaped. In such cases, the government is morally bound to purchase all the produce offered to it by the growers.

In case, the free market price is higher than the support price, the farmers are free to sell their produce to anyone and anywhere. Such a policy is helpful to the farmers in raising their production of the relevant crop.

This gives security and certainty to the farmers when they know that at least they would get what they have spent and some more. The support price is generally somewhat higher than that the cost of production which, as in the case of Pakistan, had been meticulously determined keeping all the relevant factors in view by the Agriculture Prices Commission until couple of years back.

However, unfortunately, due to the pressure of international aid giving organisations like IBRD, Asian Development Bank and IMF, the local financial wizards i.e. the prime minister, the finance minister and special finance secretary succumbed to their pressure to give up support price system.

This system has almost fizzled out gradually. The Agriculture Prices Commission (APCom) has been forced to die its natural death. It then became an attached department losing its autonomous status and later was converted to Agriculture Policy Institute.

The Agricultural Development Commissioner,despite his multifarious duties, is given the additional charge of Chairman of API, a position that hardly exists under the changed status of the institute. The reports, if prepared by the new organisation, are hardly considered by the decision- making authorities. Some say that decisions are taken on ad hoc basis without taking into account the cost of production and other relevant factors while making recommendations of support price of any crop. The recent examples of such a nature are being cited for the wheat crop 2006-2007 and 2007-2008.

Free market prices: These are the prices which exist without any government control and generally represent the equilibrium prices arrived at by the supply and demand relationship.

In such a structure, the farmers benefit in a poor crop year when the supply turns out to be short of demand, but do suffer in a bumper crop year when the supply and demand position is reversed. In a situation when there would be excess supply or otherwise, the farmers feel insecure and uncertain as to the ultimate fate of their crop. And it was one of the main reasons when the government decided to adopt the support price system in 1981 as this would also help them to use it in favour of changing cropping pattern.

Administered prices: These are the prices which the government administers through the intervention for the benefit of producers as well as consumers. Therefore, it could be either monopoly prices, support prices, or the prices at which the government issues the agricultural commodities to the consumers.

At this stage of the wheat crop, when it is being harvested in Sindh to be followed by Punjab in mid-April, it would be right to say that the government is revising its support price. It should be the procurement price at which the government intends to procure wheat for its multiple purposes.