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By Shahid Kardar THE Sensitive Price Index has now crossed the frightening rate of 20 per cent (the latest being 24 per cent), largely on account of the recent revisions in the domestic prices of petroleum products and food inflation.
Excessive liquidity in the banking sector owing to robust capital inflows and a loose monetary policy fuelled by government spending have contributed to the swelling of food prices. However, this price surge has principally been driven by changes in global markets and long unaddressed domestic structural factors.
The increase in the prices of food items (rising at double-digit rates for almost three years) started with wheat prices touching a 30-year high — the price doubled in the first quarter of 2008 over last year (and this was after a substantial increase in 2007). Both the shifts in demand and supply of products and those trading in commodity futures have influenced market behaviour and prices; in the process speculators and multinationals dealing in agricultural products made huge profits from the sale of food to poor countries.
This spurt in prices has now overwhelmed all cereals and vegetable oils, meat, milk, fruit and vegetables. Matters have been made worse by suppliers of edible oils and pulses (Malaysia and Myanmar) having near monopoly-like control over the international prices of these products, the price of palm oil having almost tripled in two years since 2006.
Increases in the price of oil and energy have enhanced the cost of production of agriculture. Since most farm operations worldwide are nowadays mechanised, the increase in the price of crude oil have pushed up the production cost curve.
The price of energy, especially of gas, is also a significant cost factor in the manufacture of fertiliser, a critical input in crop cultivation. And prices of urea and DAP in the international markets have climbed up more than 200 per cent since 2006. These factors combined with the rise in the outlay on transportation (having become more expensive because of rising oil prices) has contributed principally to the increase in the costs of agricultural production.
While these factors have directly contributed to the rise in crop prices, other developments have caused a decline in the production of wheat. These include the diversion of maize and vegetable oils to the manufacture of ethanol and biofuels, severe drought in the major grain producer Australia, adverse weather conditions in eastern Europe and the shrinking of the natural resource base for food production and climate change.
There is a spill-over effect on other crops of use as feedstock for biodiesel. Low food prices from the late 1990s to nearly 2003 also slowed down, if not actually served as a basis for the regression in, food production. The net result of these changes was that the world production of cereals fell from 357kg per person per year in 1998 to 317 in 2006/07.
As the government struggles to fight these fires of inflation it should not be forgotten that things have come to such a pass also because of decades of neglect of the agriculture sector. Since the mid-1990s, the yields of major agricultural crops have been showing stagnation, with crop productivity growth actually becoming negative from 1990 to 2003.
Farmers are now attaining additional increments in yields at a fairly high marginal cost. As a consequence, the per acre net return is declining and this is the real crisis of the rural sector.
Successive governments have failed to tap the huge potential of the agriculture and livestock sectors. They have not ensured food security by not providing adequate support to agriculture through strengthening marketing and price and non-price incentives. Neither have they created a system for better clarity regarding property titles to facilitate access to credit, development and the maintenance of storage.
The issue of water scarcity has not been addressed by building storage dams, improving efficiency of water use and promoting crop insurance or the balanced use of nitrogen and phosphate fertilisers.
The government has not put in adequate investments in the research and development of edible oil seeds (sunflower and canola that also use less water) and new varieties of seeds of other principal crops with the idea of improving cropping patterns. Similarly, the introduction of BT cotton, the extension of services and the construction and maintenance of farm-to-market roads would also have made a difference.
This is required since inclusive and sustainable growth of this country has to be anchored in agriculture, the backbone of our economic foundation, which we can ignore only at our peril. Also to be noted is the sharp rise in the international prices of food crops and the opportunities arising for farmers to trade in other cash crops and enhance their earnings quickly in the foreseeable future.
The gradual removal of subsidies in OECD (Organisation for Economic Cooperation and Development) countries and the resulting increases in prices of such crops have made them attractive for farmers.
The high dependence of the rural population on farm incomes — close to 45 per cent of the workforce relies on agriculture for its livelihood — makes them vulnerable to weather shocks and technological risks.
Supporting such groups is not only required for poverty reduction but also to bring more stability in the growth of the ‘wage component’ of demand. Growth biased in favour of the lowest income households will ensure stability since their consumption patterns are more stable in nature.
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