Stabilising agriculture markets

Couple of interesting articles covering agriculture over the past weeks. 

One by Harish Damodaran draws attention to the recent spurt in agricultural production, something he has described as an "age of surplus". Consider this,

In 2010-11, pulses production, for the first time, crossed not 15 mt, but 18 mt. Even in 2014-15 and 2015-16, both drought years, it stayed within 16-17 mt. And as farmers ramped up plantings in response to the high prices of 2015 and 2016, output soared to 23.13 mt in 2016-17 and 24.51 mt in 2017-18... In the past, sugar production typically took two years to recover from a drought. But 2017-18 will see output rebound to a record 32 mt-plus, from a seven-year-low of 20.26 mt last season. Thus, the old “sugar cycle”, where three bumper years were followed by two lows, is dead. Now, we have only one-in-five bad years. The same goes for vegetables... We have, indeed, entered a regime of “permanent surpluses” in most crops... There is practically no agri-commodity today that isn’t a victim of “permanent surpluses”. 

Another by Ashok Gulati points to the same story in dairying,

The increase in milk production since 2014-2015 has been unprecedented (6.3 per cent per annum between fiscal year FY 2015 and FY 2017; FY 2018 figures are not yet finalised), compared to about 4.2 per cent in the three years preceding that (see graph-1). Moreover, the milk output, instead of falling during the lean (summer) season, registered high growth in 2017-18 vis-à-vis 2016-17... (but) milk prices have fallen by 20 per cent to 30 per cent (by Rs 5 to10 per litre for cow milk) in several milk-surplus states in western and northern India, including Maharashtra, Gujarat, Rajasthan Punjab, Haryana and UP.

What has contributed to this? Harish has this answer,

Better seeds and faster diffusion of technology have made a difference. HD-2967, a blockbuster wheat variety released in 2011, could cover 10 million hectares area in a single season within five years. Along with HD-3086, a newer variety more resistant to yellow rust fungus, it has ensured that the Green Revolution’s yield gains haven’t plateaued yet: The average Punjab wheat farmer harvested 5.12 tonnes per hectare in 2017-18, as against 3.73 tonnes in 1990-91 and 2.24 tonnes in 1970-71. No less impactful has been Co-0238, a cane variety that not only yields more crop per hectare, but also more sugar from every tonne crushed. First planted in 2013-14, it now accounts for well over half of the cane area in North India, while singularly responsible for UP’s sugar output spiralling from 7.5 mt in 2012-13 to 12 mt this season. But the story of yield increases isn’t limited to publicly-bred open-pollinated varieties (OPV). The 50 quintals/acre yields that farmers in Bihar’s Kosi-Seemanchal belt today realise from rabi corn is comparable to Midwest US levels. With planting of hybrids, as opposed to OPVs, paddy yields have gone up from 15 quintals to 25 quintals per acre even in the Adivasi areas of Jharkhand, Chhattisgarh and Odisha. Kolar farmers, likewise, grow three crops of tomato annually, while Maharashtra’s Jalgaon district would be the world’s seventh largest banana producer, were it a country. The technologies in all these — be it hybrid seeds, high-density cultivation using tissue-cultured plants, or drip irrigation — have been supplied by the likes of DuPont, Monsanto, Bayer, Syngenta and Jain Irrigation.

Note that both public policies and markets have played a role in this. The biggest disappointment has been in the weak government investments in irrigation, especially minor irrigation (the field channels that delivery water to the farmers), and on market's tepid investments in linkages like cold storages. While the failings on irrigation can be attributed to state capacity weaknesses, the market failure in responding with investments in the likes of cold storage, private extension services etc is a matter for reflection. After all vegetable and fruit retailing by retail chains is growing and has enormous potential, and even a small proportion of the market is big. 

Harish's article also has more on the vagaries of price fluctuations, maybe the central social problem with agricultural markets,

Last year, after drought in Karnataka drove up onion prices from July — they went past Rs 30 per kg in Maharashtra’s Lasalgaon market by October — farmers sowed aggressively during the rabi winter season. The result: Average rates crashed to Rs 6-7 this April-May. Farmers did something similar when tomatoes scaled Rs 60-80/kg levels in Kolar (Karnataka) and Madanapalle (Andhra Pradesh) last July. Prices again plunged, to Rs 3-5/kg towards February, and haven’t really looked up even in peak summer this time... Two years ago, garlic fetched an average Rs 60 per kg rate in Rajasthan’s Kota mandi. Enthused by it, farmers in the Hadoti region planted more area, only to see prices halve last May, thanks to demonetisation. This May, rates at Kota further halved to Rs 14/kg. 

Agriculture is more complex than other markets in that we have two directly conflicting dynamics at play - higher prices for farmers and lower prices for consumers. And farm produce being an essential commodity for everyone and farmers being producers themselves exacerbates the challenge. Therefore, public policy and markets have two roles - enhance productivity (and thereby production) and stabilise markets (and thereby increase farm incomes and de-risk agriculture).

It is the latter that is an interesting area since the policies that have been found to be relatively better (albeit with distortions) in realising this objective are not the ones that economists would advocate - public procurements, minimum support prices, direct income transfers, fertiliser and farm power subsidies, and perhaps even loan waivers. Indeed Ashok Gulati proposes public procurement and development of a buffer stock of Skimmed Milk Power (SMP) by the National Dairy Development Board (NDDB) to stabilise price fluctuations in milk. He also makes several other practical suggestions. 

One possible approach to address the price stabilisation problem would be to undertake high intensity public awareness campaigns before each harvest. The campaign should be informed by the best possible assessment of market trends and offer guidance to farmers on crop choices. Remote sensing data and market information (futures, global trade trends etc) can help make good choices. Instead of top-down directions that restrict government's agricultural programs to those not complying (which are unlikely to be actionable given the political realities ex-post), it may be more effective to articulate these concerns (and even threats) in the discussions with farmers groups and other important collective stakeholders at local levels. The success of Andhra Pradesh government with dissuading farmers from planting cotton this year in anticipation of glut and lower prices is an example. The problem though is with carrying out a campaign with high fidelity, which demands both state capacity and high quality leadership (either at bureaucratic or political levels). 

Another area of work is to engage more intensely on refining the electronic market place for agriculture products, eNAM. As I blogged here, this may involve a mission-mode effort involving committed and stable leadership for a sustained period of time to iron out the several loopholes and deficiencies and establish eNAM as a credible and accessible trading platform.  

Yet another option is the choice between crop insurance and direct income transfers. But evidence from everywhere shows that even in the best case scenario, crop insurance is almost 80-90%, if not more, public subsidy. This makes direct income transfer more efficient (less transaction costs) than crop insurance. In fact, it may also be politically more salient (and therefore acceptable) to do direct income transfers. The recent Telangana experiment is a step in the right direction, though the risks of its poor implementation (and resultant disrepute to the approach) is very high.

Though such saliences has its costs (demands to increase transfers, for example), this would have to be traded off with the pain of validation and payouts (and attendant inordinate delays) that weak state capacity and greedy insurers would make inevitable with crop insurance schemes. It is for all these reasons that direct income transfers are the most common farm support mechanism across US and Europe. Crop insurance is therefore yet another example of evidence-free policy prescriptions that international development institutions advocate for developing countries.

It may perhaps be necessary to apply all the three ideas, alongside the buffer stock procurement, to have any significant impact on the market stabilisation challenge in agriculture.