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Friday, July 10, 2020

Paradox of plenty

Farm incomes may not revive despite good monsoon. There are new challenges for policymakers.

Written by Neelkanth Mishra | Updated: August 22, 2016 2:48:19 am
indian farmers, indian monsoon, india drought, indian commodities, kharif season, global prices, bumper crop, monsoon relief, maharashtra drought, india news, latest news It seems rising agricultural productivity is now creating surpluses across most categories.

India’s per capita calorie demand has been falling for at least the last 30 years. Most people do a double-take when they hear that. One can’t debate the fact much: National Sample Surveys every five to seven years have documented this. What we can debate are the reasons behind this: In their 2009 paper Angus Deaton and Jean Dreze pretty thoroughly narrowed them down to reduced need for calories as lives get more automated (like less walking with heavy loads or more tractors for ploughing) and less incidence of acute diseases (like dysentery, a common form of calorie loss) as drinking water quality and immunisation improved. Likely for similar reasons, this drop in per capita calorie demand has been observed in China as well.

Further, and more intuitively, as incomes have risen, the type of calories consumed has been changing as well: More eggs and chicken, more milk, less cereals. As a result, per capita cereal demand has been falling by 1 per cent per year on average for three decades at least. Now that population growth has also slowed to about 1 per cent per year, this means our total demand for cereals is not growing anymore. Unlike in China, where diets transitioning to red meat (to get one calorie one feeds the animal four) have kept pressure on calorie production, Indians are shifting to chicken, which is far less inefficient (and consumes corn, which is not a staple here).

Cereal production, though, continues to rise, mainly due to rising yields. This started showing up in rising food-stocks from 2008 onwards, till we ran out of storage space. Then exports started, helped by high global prices. In the last two years, consecutive monsoon failures and falling global prices have brought down stocks as well as exports, but if monsoons are good (helping groundwater levels and the rabi crop too), we could see an additional 25 million tonnes of cereals this year. Weak global markets make exports unviable, particularly for wheat. What is the farmer going to do?

Cereals are not just any crop: They are the mainstay of Indian agriculture, accounting for more than half the gross cropped area. And while 60-90 per cent of this area is irrigated, only 15-30 per cent of the area used for pulses and oilseeds is. The latter crops thus get badly affected by weak monsoons. Despite rapidly growing demand for protein and fats, domestic output last year was about the same as in 2004. This meant 12 billion dollars of imports last year, nearly three times the value imported when monsoons were okay. As India seems to be the only large consumer of pulses, there is not (yet) much of a global market in them — if the Indian crop fails, prices go up. For oils, a well-supplied global market kept prices low: So low that the government had to raise import duties last year to prevent local prices from falling. This year, then, a sharp jump in output of pulses and oilseeds, as seems likely, should bring down imports, as well as dal prices.

Elsewhere, remarkable changes are afoot on the perishable side of the food basket: Milk, fruits and vegetables. Of the 160 million tonnes of milk produced in India, less than 40 per cent comes to the market: The rest is consumed within the household or the village. This is mostly due to a lack of infrastructure: Roads (without good roads one cannot transport milk), information (not just on best practices, but also on pricing), and electricity (without electricity in the village one would struggle to keep high-yielding varieties of cattle: one needs milking machines as well as chillers).

We saw six consecutive years of double-digit increases in milk prices. It took time for supply to respond: Cattle take three years to start lactating. Improving rural infrastructure and better prices have resulted in much slower price growth despite the cooperatives supporting farmers by buying more than they needed. With global milk prices down, the export opportunity is also constrained.

Similarly, in vegetables, which are perishable, the supply response to prices has been so strong that even in onions, where the state that drives more than a third of output, Maharashtra, was reeling under two consecutive years of drought, output grew so much that farmers had to sell at near-zero prices. In potatoes, when production hit 48 million tonnes last year, more than 10 per cent of the harvest had to be stored as surplus. Researchers say the use of technology in fruit and vegetables has driven yields up and duration of crop cycles down, so farmers can produce more crops per year. Improving infrastructure (phones, roads) is also helping with transportation and price awareness.

Putting this together, it seems that rising agricultural productivity is now creating surpluses across most categories. The tell-tale signs were that, despite two consecutive years of low production, prices did not go up — this was mistakenly attributed to lower Minimum Support Prices, and to a clampdown on black-marketing. These may have helped, but the root causes go much deeper. This year, as output growth picks up again, prices could come under pressure — in many ways the poor monsoons had put a lid on this problem.

This throws up three important challenges for policymakers. First, agricultural surpluses from India are harder to export without a substantial improvement in food processing. Second, in most categories Indian farming cannot compete in global markets despite the abundance of natural resources (fertile soil, adequate water and sunlight, cheap labour). It is not just due to subsidies in other countries: Our productivity needs to improve as well. The Indian farmer is also affected by currency movements. Farmers in Brazil, Ukraine and Russia have benefited strongly from the fall in their respective currencies. And, lastly, these trends mean that agriculture will shed workers. We no longer need 49 per cent of our workforce producing food for the rest of us. In the US just 2 per cent of the population is in agriculture, with substantial agricultural exports. As one researcher we met mentioned, doubling farmer incomes may need the number of farmers to halve, and he was only half-joking. This makes the job creation challenge much bigger than it already is.

The writer is India Equity Strategist for Credit Suisse.

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