The next farm downtrend

Agriculture could be headed for an extended period of stress following the end of a decade-long global commodity boom.

Written by Harish Damodaran | Updated: January 16, 2015 12:44 am
Crop production, Agriculture, agricultural GDP, Foodgrain production, For Indian farmers, the end of an extended global commodity price boom may reveal the flip side of globalisation.

It’s likely that India’s crop production this year will be lower compared to 2013-14, given deficient rains both in the southwest (June-September) and northeast (October-December) monsoons impacting kharif as well as rabi plantings. But that by itself needn’t be cause for concern. We have seen one-off farm output declines even in 2009-10, 2004-05 and 2002-03, which were also drought years. What should worry us more, instead, is the prospect of agriculture entering a renewed phase of stagnation or low growth.

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Before considering that possibility, one must first acknowledge the relatively good run the country’s farm sector has had in the last 10 years. Between 2004-05 and 2013-14, agricultural GDP grew by an average 3.7 per cent a year, as against 2.9 per cent over the preceding 10-year period. The accompanying table gives a more detailed crop-level picture by taking the average production for three five-year periods ending 1993-94, 2003-04 and 2013-14. Doing so minimises the effects of extreme year-to-year fluctuations induced by the vagaries of weather, thereby capturing the underlying output trend better.

The numbers are revealing. During the five years ended 2013-14, India’s foodgrain production averaged 249 million tonnes (mt), roughly 47 mt more than that for the earlier period. The latter period, by contrast, recorded only a 26 mt increase over the average for the five years ended 1993-94. The same trend — of higher output increases in the recent period — is noticeable for oilseeds, cotton, sugarcane, milk and even staple vegetables like onion and potato. In pulses and oilseeds, the observed acceleration actually reversed the decline/ stagnation seen over the previous period.

What explains the above turnaround, perceptible across crops? In some cases — Bt transgenics in cotton and single-cross hybrids for maize — technology played a part. But the real across-the-board driver was higher prices and improved terms of trade, inducing farmers to produce more.

While overall inflation based on the GDP deflator averaged 6.8 per cent a year during 2004-05 to 2013-14, the corresponding increase for agricultural produce was higher at 9.7 per cent. It was the other way round from 1994-95 to 2003-04: general inflation was lower at 5.9 per cent per year, while farm inflation averaged still lower at 5.8 per cent. The question, then, is: What drove domestic farm produce prices higher in the last 10 years relative to the previous period and also vis-à-vis other goods and services, making it that much more attractive to ramp up production?

One reason, of course, was rising incomes from general growth, which averaged 7.6 per cent annually over this period. These, at low levels of per capita income, would obviously have boosted demand for farm commodities. A more important factor, however, was global prices. Between 2003 and 2011, the Food and Agriculture Organisation’s (FAO) food price index went up from 97.7 to 229.9, the effects of which were twofold.

First, it made the country’s farm exports globally price-competitive, resulting in their surge from a mere $7.5 billion in 2003-04 to $43 billion in 2013-14. Export-fuelled demand, in turn, helped improve domestic price realisations. Second, it forced the government to raise minimum support prices (MSP) to align them closer with global prices. Contrary to what some economists believe, the compulsion here was more economic than political. Globalisation, in other words, wasn’t a bad deal at all for Indian farmers over much of the last decade. Unfortunately for them, though, that situation has changed radically recently.

From its 2011 peaks, the FAO’s food price index has since dropped to 188.6 in December. Between December 2011 and December 2014, international prices of soybean have fallen by a tenth. They have slid even sharper by 28-36 per cent in cotton, rice, maize, palm oil and sugar, and 53 per cent for rubber.

These declines are an outcome of both the lagged supply response to the high prices prevailing till 2011-12, and also agri-commodities ceasing to be an appealing asset class for global fund managers. Moreover, this bearish sentiment — exacerbated by collapsing crude prices, rendering diversion of sugarcane, corn or palm oil for biofuel production uneconomical — doesn’t appear reversible any time soon. The implications of this will not be small. To start with, agri-exports could take a hit; they have already fallen 1.6 per cent year-on-year during April-November. Further, it reduces the scope for MSP hikes. In the past, the government did no favour to farmers by raising MSPs. But the same today would be motivated more by political rather than economic considerations.

For Indian farmers, the end of an extended global commodity price boom may well reveal the flip side of globalisation. While the World Trade Organisation (WTO) might have mattered little during the last decade, this isn’t going to be the case now. We are already seeing all sorts of disputes being raised at the WTO: from India’s restrictions on imported American chicken legs and raw sugar export subsidies to its public grain stockholding for food security purposes. These will only intensify in the days ahead.

The point is, we ought to be prepared for the next agricultural downtrend. The government should, first of all, recognise that the time has come to think equally or more about producers, rather than consumers. There is a problem when crude palm oil and sugar are trading at $650 per tonne and 15 cents per pound respectively, as opposed to their levels of $1,300 and 30 cents four years ago. If cars can attract up to 100 per cent import duty, why not extend the same protection to farm products in the light of the changed reality?

No less urgent is the need to address issues of farm-level productivity that were ignored while the commodity price boom party lasted. The Indian Council of Agricultural Research’s (Icar) budget must be significantly increased, along with greater accountability to its primary clientele, farmers, who are desperate for technologies to raise crop yields, pare production costs, save on labour and reduce drudgery in agricultural operations.

For the moment, whether we like it or not, the only ones seemingly catering to this demand are the likes of Monsanto, DuPont, Bayer CropScience and Syngenta. It is a sad truth that nothing substantial has come out of our public farm research system in recent times, except for the odd Pusa-1121 or 1509 Basmati rice varieties. Going forward, Icar’s model could perhaps be Brazil’s Embrapa or the Chinese Academy of Agricultural Sciences.

The renewed emphasis on farm research needs to be combined with stepped-up investments in rural roads, 24×7 power and broadband connectivity. These are key to improved agricultural productivity and lowering of costs — the only sustainable solutions to weather crop price down-cycles.

harish.damodaran@expressindia.com

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