The Hindu Business Line : Estimation gaps

The Agriculture Ministry has sprung a pleasant surprise. The fourth advance estimate of crop production for 2006-07, released earlier this week, shows record output of foodgrains (216 million tonnes, up 7.5 m.t. from the previous year) with a handsome 5.5 m.t. increase in wheat alone (74.9 m.t.). Sugarcane (345.31 m.t.) and cotton (22.7 million bales) have set new records; oilseeds will be a laggard, though. Overall, the crop estimates are heartening; but not everyone may be willing to buy these numbers.

Variations between estimates — from the first to the fourth — are too wide for comfort. Sugarcane is an example of how poor estimation can distort a sensitive market and influence trade policy decisions negatively. Based on the first estimate, in September 2006, sugar export was banned on fears of less-than-adequate output. From 283 m.t. in the first estimate, cane output has been raised to 345 m.t. in the fourth — up a whopping 20 per cent. Today, the country faces a sugar glut with production in excess of 26 m.t.; mills are in distress. Even wheat output numbers have changed from the third to the fourth estimate. Wide untenable variations suggest something amiss in the estimation. Should the latest estimate of record production be correct, the wheat procurement (targeted at 15 m.t.) ought to have been higher than the actual 11 m.t.

The tentative initial estimates and the delayed announcement of the final estimate (well after the harvest and when next crop is getting ready) do no good to anyone. If anything, they send wrong signals, distort the market and give a free reign to speculators. For players in the farm goods market critical are the demand-supply fundamentals that impact prices. In a tightly balanced market, even a small change either in demand or supply can have a disproportionately large impact on prices. However, the latest numbers are most unlikely to have any effect on commodity prices because either the market has factored in the output or the participants do not trust the official numbers. The Government may take credit for the increased agricultural output in 2006-07; but these numbers mean nothing as market participants have already begun to look at the 2007-08 kharif harvest. Timely collection and dissemination of information is critical.

This is part of the ‘soft infrastructure’ the country needs to build urgently. It is also necessary to make the estimation process transparent. The question that begs an answer is: If the country has really harvested record agricultural crops, why are prices stubbornly high? If a strident rise in demand is an explanation, we could be in for serious trouble, as there is no guarantee that the so-called spectacular performance of 2006-07 will be repeated. Policymakers and researcher have to examine seriously the estimates just published, and convince themselves and the nation that they are close to reality.

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