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Farming in US and India — The ground reality on subsidies

Harish Damodaran

A comparison of farm production costs in India with those in the US reveals that the Indian farmer is clearly cost-competitive relative to his American counterpart in virtually every item. How do Indian farmers produce crops at a lower cost, despite their yields being nowhere near American or European levels? Harish Damodaran finds out.

IT IS common knowledge that rich countries heavily subsidise their farmers. In 2003, the Total Support Estimate (TSE) to agriculture in OECD countries was provisionally placed at $349.81 billion, the bulk of which was accounted for by the European Union ($137 billion), the United States ($94 billion) and Japan ($56 billion).

While the volume of subsidy — almost $1 billion a day — is a subject of general consternation, including among Western NGOs and bleeding-heart liberals, a less focussed aspect though is what does all this translate to in concrete, crop-specific terms for farmers in developing countries. To what extent do these subsidies enable European or American growers to cultivate crops at a higher cost and yet effectively compete with farmers in India or Brazil?

For an answer, one needs to first get a picture of relative production costs. How much does it cost an Indian farmer to produce a kilogram (kg) of, say, wheat and what is the corresponding figure for the EU or the US?

This article attempts such an exercise, comparing production costs in India vis--vis those in the US for different crops. The key reference source here is the annual production costs and returns estimates of the US Department of Agriculture (USDA) for various farm commodities, based on actual costs incurred by US producers. For India, the Minimum Support Prices (MSP) fixed by the Government has been taken as a proxy for production cost.

The USDA data gives production costs in terms of dollars per acre along with crop yields per acre, expressed in either bushels or hundredweight (cwt). While the production costs per acre estimates are for 2002 — the latest year for which data is available — yields have been averaged over a five-year period (1998-2002) to eliminate one-time distortions.

Further, to facilitate comparison with Indians costs, necessary quantity and exchange rate conversions have been made to arrive at the corresponding rupee-per-kg figures.

Take wheat, for instance, where the US production cost per acre in 2002 was $175.63, or Rs 8,079 at Rs 46-to-a-dollar, with the corresponding average per acre yield being 36 bushels (980 kg). The cost of producing one kg of wheat in the US, therefore, was about Rs 8.25 per kg, which is much more than the MSP of Rs 6.30 per kg fixed by the Indian Government for the 2003-04 crop.

The Table provides similar information for rice (paddy), corn (maize), sorghum (jowar), soyabean, cotton (lint) and peanut (groundnut-in-shell). In all these field crops (barring corn), the production costs in the US are uniformly higher than the corresponding MSPs declared in India.

The situation is no different for livestock products like milk. The average production cost of milk in the US in 2002 was $18.76 per cwt, or Rs 19.02 per kg. There is no MSP for milk in India. But going by prices paid by cooperative dairies here (Rs 11-12 per kg), the cost can be assumed to be around that level.

Clearly, then, Indian farmers are cost-competitive relative to their American counterparts in virtually every farm product.

This is notwithstanding per hectare yields in the US averaging about 7.8 tonnes for paddy, 8.6 tonnes for corn, 2.8 tonnes for sorghum, 2.6 tonnes for peanut, 2.8 tonnes for soybean and 647 kg for cotton lint, against the corresponding Indian levels of 3 tonnes, 1.8 tonnes, 0.8 tonnes, one tonne, 1.1 tonne and 220 kg, respectively.

An average US cow yields over 9,000 kg of milk in a year which, again, is thrice what crossbreeds here typically produce. Only in wheat are average US yields, at 2.4 tonnes per hectare, lower than the 2.7 tonnes of India.

How do Indian farmers produce crops at a lower cost, despite their yields being nowhere near American or European levels? The main reason for this is the capital-intensive nature of agriculture in the West. The USDA's production cost estimates cover both `operating costs' as well as `ownership costs'.

The former includes cash expenses incurred on seeds, fertilisers, chemicals, fuel, custom operations, purchased water, repairs, hired labour and interest on operating inputs.

Ownership costs mainly comprise the costs of maintaining the capital stock used in production, including asset depreciation and interest (capital recovery), taxes and insurance.

They also cover the opportunity cost of family labour and owned land, which is basically the rental or wage income that farmers forego by deploying their land and labour to cultivate wheat or rice.

It can be seen that the share of ownership cost in total production cost ranges from 40 per cent for cotton to 69 per cent for soyabean, indicative of how capital-intensive American agricultural operations are, and the additional costs they impose on the farmer. Incidentally, the MSPs fixed for various crops in India supposedly take into account — rather exceed — both `C2' and `C3' costs, as computed by the Commission for Agricultural Costs and Prices (CACP).

The `C2' costs encompass "all actual expenses in cash and kind incurred in production by actual owner plus rent paid for leased land plus imputed value of family labour plus interest on value of owned capital assets (excluding land) plus rental value of owned land (net of land revenue)". The `C3' costs equal `C2' costs plus 10 per cent to provide for "managerial remuneration to the farmer".

But either way, capital costs form an insignificant portion of total costs borne by the Indian farmer and many of these notional expenses do not even explicitly figure in his cost calculus. He will produce crops as long as his operational (cash) costs are met, in contrast to the US farmer, who seeks a return on total capital employed, both current and accumulated.

The interesting bit about the American farm economy, however, relates not to its capital intensity and resulting high cost structure.

What sets apart US agriculture from European or Japanese farming is its apparent deference to free trade and the immutable laws of supply and demand. Indeed, prices of agricultural commodities in the US are largely market-determined.

Farm-gate prices of most crops (see column 5 of the Table) not only do not cover production costs, but they are even below the corresponding ruling MSPs in India.

Unlike in India, where state agencies buy grains or oilseeds at the notified MSPs, the US Government does not intervene directly in agricultural trade, which is left entirely to private players and `market forces'.

But this does not mean that the farmer is not guaranteed a price that effectively covers his costs. On the contrary, in the US, the Secretary of Agriculture is required by law to provide income and price support for 20 specified crops, including wheat, rice, corn, sorghum, barley, oats, cotton, milk, peanuts, sugar, tobacco, soyabean and other oilseeds.

There is no such legislative binding on the Government in India to ensure farmers obtain the MSPs declared for various crops. Only in sugarcane is there a statutory minimum price that mills are legally obliged to pay under the Sugarcane Control Order.

As a result, Governmental procurement is mostly an ad hoc exercise, which is, of course, a function of the political clout wielded by individual producer lobbies.

In the US, the new Farm Security and Rural Investment Act, 2002 even establishes `target prices' for each crop that farmers are entitled to receive.

For the 2004-07 period and at Rs 46-to-the-dollar, these work out to (on per kg basis) Rs 6.63 for wheat, Rs 10.65 for paddy, Rs 4.76 for corn, Rs 4.65 for sorghum, Rs 9.80 for soyabean, Rs 73.42 for cotton and Rs 22.77 for groundnut.

The target prices are way above the farm-gate prices that farmers get at the point of sale. Moreover, they cover a substantial part of production costs, making agricultural operations viable on the whole. The target prices also exceed the MSPs that the `rich' farmers of Punjab and Haryana obtain for the paddy and wheat they sell to the Food Corporation of India (FCI).

The key difference, though, lies in the mechanism by which the Government enables farmers to recover production costs.

In the US, the Government simply forks out the difference between the target price and the farm-gate price through direct and `counter-cyclical' payments.

These are over and above crop disaster payments, deficiency payments, market loss payments and assorted other payments towards pest and disease control, conservation programmes, etc.

But importantly, all these payments are `decoupled' and made outside the marketplace. The Government does not seek to influence farm-gate prices, which are plain supply-and-demand-determined.

The decoupled payments mechanism works perfectly well in the US because there are hardly 2.3 million farms there, compared to India's estimated 120 million operational holdings. The sheer number of farming households to be covered makes direct payments impossible in the Indian context.

The Government, therefore, if it wants to guarantee remunerative prices to farmers, has no choice but to `distort' the market by directly engaging in agricultural trade.

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