The Hindu Business Line : Rise in agricultural prices is unreal

If the rich countries dismantle the subsidies being given in cotton, wheat and soybean and stop producing those crops, the situation in their respect will become the same as that prevailing in coffee today. If the prices of coffee and other crops have risen in the last few years then we can assume that the prices of wheat, cotton and soybean will also rise on the dismantling of subsidies.

A CASHEWNUT trader from Hyderabad feels that globalisation has been a boon to Indian farmers. Earlier, cashew prices fell dramatically whenever there was excess production. Now they are exported and prices have remained stable. Similarly, there has been a rise in ginger prices recently. It is said, therefore, that globalisation is beneficial for Indian farmers.

The Commerce Minister, Mr Arun Jaitley, is focussing on free trade in agricultural commodities at the WTO negotiations. The assumption is that the farmers in the rich countries will not be able to compete with Indian farmers in such crops as cotton, wheat and soybean without the subsidies, and farmers of the developing countries will then get larger markets and better prices for their produce.

Indeed, the supply of cotton, wheat and soybean in the world markets will reduce upon the dismantling of these subsidies. But it is not necessary that this will translate into a rise in prices for the farmers.

The reason is that supply from the developing countries can increase and nullify the short supply. Whether this is so can be easily verified by looking at the behaviour of prices of such crops as coffee, tea, sugar and rubber, which are not grown by the rich countries.

If the rich countries dismantle the subsidies being given in cotton, wheat and soybean and stop producing those crops, the situation in respect of these crops will become same as that prevailing in coffee and so on today. If the prices of coffee and other crops have risen in the last few years then we can assume that the prices of wheat, cotton and soybean will also rise on the dismantling of subsidies by the rich countries.

The World Bank's Global Economic Prospects 2003 gives us details about the long-term price behaviour of crops. The real price of coffee today is about one-third of those prevailing in 1960. There are two reasons for this decline in price.

There has been a huge increase in production of coffee in Vietnam and Brazil; thus, supply in the world markets has increased. On the other hand, the consumption of coffee in the rich countries is stable, at about 4.5 kg per person. The increase in supply, together with stagnant demand, has led to this decline.

There has been a 6 per cent decline in the price of tea in 2002. There was an increase of 4 per cent in tea production in India, Kenya and Sri Lanka. China and Vietnam are also increasing their production.

The price of sugar has moved between 10 and 30 cents per kg in the last 20 years. They have been around 15 cents per kg in 2002 — the lower end of the range.

The reason is that there has been an 8 per cent increase in production in Brazil, the major exporter. The other exporters are Thailand and Australia, which have had a 50 per cent and a 70 per cent increase in production in the last 20 years, respectively.

The prices of rubber declined much after the Asian crisis in 1997. There has been an increase of 32 per cent in 2002 from the low levels after the crisis. But the prices are still much below those in 1997. The recent increase in prices is more in the nature of a minor correction within the long-term declining trend. Further, the World Bank predicts that the prices are likely to decline by 3 per cent in the next 10 years.

The reason is that the demand of rubber in rich countries for making automobile tyres is declining. Two per cent less rubber was consumed in the OECD countries last year.

The prices of these four major agricultural commodities which are not grown in the rich countries have declined in the last few decades and are likely to decline further in the coming years. Indeed, the prices of these commodities, as also of cashew and ginger, have risen for a year or two due to temporary factors such as drought. But the long-term tendency is clearly downwards.

This is the story of those crops which are mainly grown in the poor countries. The prices of such crops as wheat, cotton and soybean, which are also grown in the industrial countries today, can be expected to behave similarly if the rich countries stop giving agricultural subsidies.

The decline in production in the rich countries due to the removal of subsidies will be more than made up for by increased supply from other developing countries. Indian farmers, therefore, will in the end not benefit much by the dismantling of the subsidies by the rich countries. This does not mean that India should not ask for removal of those subsidies. It must ask for them because they are a good bargaining point and also exposes the true intentions of the rich countries. The farmers will also gain by the expansion of the markets.

India should instead focus its attention on the expansion of the services sector and loosening of the patents laws.

Simultaneously, India should protect its agricultural markets from imports and force an increase in the domestic agricultural prices. That will provide relief to the farmers in the interim period till we can shift them into services in a big way.

(The author is a New Delhi-based freelance writer. He can be contacted at bharatj@nda.vsnl.net.in)