Competitive agriculture

Under the 18th Constitutional Amendment Bill 2010, agriculture is now a provincial responsibility. With this new paradigm shift the provincial governments, for the first time, would prepare their agricultural budgets - allocating their funds and rearranging their priorities, formulating policies and implementing strategies.
The policy change is in right direction, but do provincial governments have the capacity to meet these new challenges? (This capacity has been a weak link at the federal levels), but in our view is more so at the provincial levels and should be revamped for better use of financial resources and performance-based results. Transferring unqualified staff from the Federal level and giving them responsibilities for formulating policies at the provincial level would make the situation even worse. Furthermore, the provincial government at this critical juncture needs to learn from past mistakes and look for out-of-the-box solutions for creating enabling environments in developing a sustainable and competitive agriculture policy.
A critical look at past trends indicates that the agriculture sector has been, to a large extent, a victim to a case of policy, institutional and market failure. Policy failure is attributed to historical price distortions of implicit taxation of agriculture with unfavourable terms of trade, there are exceptions for a few years but policy prescription has been very misguided and ad hoc. The policy dilemma for the farm sector can be summarised by rising cost of inputs or doing business in the face of uncertain prices and revenues, with very little funds to subsidise investment activities, even where a case can be made. The recurrent commodity (wheat, rice, cotton and sugarcane) crisis with a dubious role of food procurement agencies, the price setting mechanism at the federal level and its costs to producer, consumer and tax payers and effects of relative profitability on competing crops are seldom analysed thoroughly. Often the support to traditional crops has been at the expense of non-traditional crops. Rice and sugarcane are water thirsty crops, but this fact is hardly an issue among policymakers as the political economy of sugarcane is so powerful. There is need to study the virtual water content of these and other crops as water scarcity is a major issue. The potential of livestock/energy (biogas) nexus has not been exploited in spite of a severe energy shortage. The policy to promote food security crops (sugarcane) for bio-fuel might not be a good idea with the current growing water shortage.
Stagnant yield and less than desirable performance of the agriculture sector is largely attributed to slow progress in releasing new high yielding varieties. Farm services are lacking proper extension facilities as well as trained and devoted personnel, a major constraint towards efficient transfer of technology. The rural credit mechanism is so central to developing agriculture and supporting agro-industry in generating income and employment and reducing poverty, yet large farmers have been the main beneficiaries. Helping small farmers, SMEs and landless labourers has been the domain of the government flagship programmes that support more of a handout philosophy rather income generating activities that results in profound change in the economic profiles of these groups. In the recent budget allocation, the Benazir Income Support Fund was increased from Rs 50 to 70 billion. As the fiscal space is constrained and shrinking, allocation has to be at the cost of other viable programs and massive borrowing. At the same time with inflation ranging from 10 to 20 percent during the last three years, the real value of disbursed amount is negligible which was so modest to begin with. Further, an exit strategy for such a programme is hard to envisage; one expects its size to keep growing as everyone wants to have a share of the pie. The basic point is the size of the program will soon approach close to a billion dollars, but infusion of approximately Rs 900 million in real terms to the poor would not create the expected impact. Let's hope the World Bank and now USAID support brings a more result-oriented focus and impact to a program that carries heavy political baggage. On the other hand allocation to education and agriculture is less than even the subsidy provided to steel mills. Our recent extensive travel in rural Sindh for studying three value chains (rice, chillies and dates) for ADB revealed that these poverty-stricken groups are not even aware of well-talked about support programs, rural financial institutions and other grassroot organisations. There has been complete policy failure to link small farmers and SMEs to knowledge, credit and markets, which is where priority should have been given.
The institutional failure is highlighted by the fact that seed corporations have failed to provide strategic inputs and impeded private sector entry. It is shocking to note that we are a decade behind Bangladesh in developing a competitive seed industry. Substandard seeds are available in the market as good quality seeds are scarce or costlier. The government policy has been unsuccessful to make quality seeds available to the small farmers and failed to crackdown on dealers for selling substandard seeds. Stealing water (like electricity) is not a crime any more and water allocation is marked by head/tail conflict at national, regional and farm levels. Institutional failure is also attributed to marketing inefficiencies.
The reform process is slow, marketing transaction are still run by the spirits of outdated Agricultural Produce Markets Act (1939), which restricts wholesale transactions for agricultural commodities such as fruit and vegetables to regulated markets run exclusively by government-appointed registered commission agents. This system favours 'arhti' at the expense of farmers, as his rate of return is as high as a galloping 200 percent and he controls the supply chain both for the farmers and traders. Agricultural commodities are marketed through poorly functioning agricultural markets. The monopolistic role played by the government and its direct engagement in the operations of the markets have made the governing body less accountable and increased the possibility of collusion between intermediaries and management, to the disadvantage of farmers, especially small and marginal ones. There is evidence that rent seeking and corruption are common in the collection of market fees, issuance of trader licenses, and allotment of shops.
Market failure is attributed to treating strategic natural resources almost as a free goods (water and forestry) meaning the important social costs (environmental or damage cost) and benefits are left outside producers and consumers budgets or are one of those unaccounted social costs, meaning a cost being incurred but cannot be assigned to anyone. A good example is irrigation water, still perceived as a free good to be provided by the public sector (canal water), our recent analysis indicated that irrigation cost in 1926 was 45 percent of overall cost structure of typical rice growing farmers compared to less than 1 percent as of today, such underpricing results in waste and environmental degradations. Like electricity and gas, only donor dictated policy would rationalise the water price.
The other case is the irrational use of pesticide, which has implications on environments and commodity competitiveness. Where pests and weeds can affect the crop productivity, conventional control mechanisms sometimes affect the resource base and negatively affect the crop productivity in the long run. In Pakistan, excessive and indiscriminate use of pesticides has affected the natural ecological balance in different agro-ecological zones; a financial and economic cost often unaccounted for. The world is moving towards conservational agriculture and organic farming and our farmers are not aware of these opportunities, though large part of Khyber-Pakhtunkhwa and Gilgit-Baltistan regions are organic farming by default.
In summary our agriculture or farming system is caught up in a vicious cycle of low investments > leading to low productivity > creating low business orientations > resulting in low value addition > meaning low profit margins and low income > and so it is difficult to get out of this poverty trap. We need to come up with innovative ideas that can bring the farming sector out of this vicious cycle and below we have tried to outline a few options.
Under this performance backdrop, a broad strategy framework is outlined below. First, it is a fact that the agriculture sector is a risky enterprise with inherent price and volume risks. The goal of such a policy option is not necessarily to maximise the growth of production in any particular sub-sector/commodity but to create the necessary and sufficient conditions for the agricultural sector/farmers to adjust to a more competitive environment. The production structure as well as the agro-processing industry and inputs delivery system should be allowed to adjust rapidly to changes in domestic/foreign market conditions (output and input) and technologies, through changes in cropping patterns and farm structure as opposed to sticking with few crops as has been the case. This adjustment capacity requires sound management information systems, flexible rural factors (labour, land, water and finance) as well as a competitive agribusiness sector, adequate infrastructure, technology development, and most importantly, more human capital (education and training). Such a strategy would lead to faster agricultural growth, largely through adjustments in the output mix toward higher-value products, which should result in higher total factor productivity. The generic elements of this broader strategic framework are presented that can form the basis for provincial level policy formulation.
Create enabling environments with policy and legal reform. Before drafting new laws, there is urgent need to formulate agriculture policies (agri-business and marketing, seed, extension, public-private participation in agriculture, etc) and building capacity of core young staff with focus on agri-business and value-addition. Key areas of legal reforms are needed in land titles, seed corporations, breeder rights, produce markets and contract farming for small farmers. Redefining or eliminating the roles of food department, Passco, TCP and other government-supported interventions. A transparent and cost-effective system needs to be put in place for maintaining operational and strategic reserves and then let the private sector, with good regulatory framework, do the job. In our view, the most needed intervention is promoting communal storage at farm and village/district levels. Finally, issue of agriculture taxation is grossly confused with income tax, one fails to understand why a person earning certain income bracket can be exempted, agriculture or any other sources. If everyone who earns above a minimum amount needed to live a decent livelihood is to be taxed, this will give a tremendous boost to the badly needed fiscal space for rural infrastructure development such as feeder roads or agriculture roads and agro-processing.
Productivity enhancement and need to link small farmers to the markets. Enhancing small farmers' productivity through technical package and capacity building and creating financial and market linkages. A privately or community-owned storage facility (warehouse receipt system) can be linked to a bank which can pledge stocks and advance loans to the farmers treating them as collateral. These storage facilities can solve three big problems: taking farmers out of middleman domain by providing viable credit options, increasing the farmer's income and linking him to the market and bringing price stability to the market. The long supply chain would be reduced to bring about a cost reduction that can be passed on to the consumers who also bear the high cost of purchasing these basic commodities.
There is also need to decentralise research to provinces and according to ecological zones, it is time to beef up commodity-specific research and its linkages to extension.
Preserve natural resource base not only for us but also for future generations. For water, the supply enhancement policy is costly and time-consuming. So much can be done (based on thirty years of policy advise/experience of Dr Mahmood in most water scarce regions of the world) to preserve and rationalise what we have, of course such a policy prescription does carry large amounts of project kickbacks. As water scarcity will grow agriculture has to use less water to produce more, it is more important to enhance water productivity than yield. A prudent policy would be to improve productive efficiency (more crops per drop); and to improve allocative efficiency (more income per drop). Each option has tradeoffs in terms of saving water. An integrated approach where water conservation (drip irrigation, conservation agriculture with water saving campaign) along with appropriate water pricing resources is needed. There is also need to move towards full cost pricing of natural resources like water, forestry and fishery, otherwise, like natural gas and electricity, sheer scarcity will dictate change.
Reduce reliance on comparative advantage and strive to create sustainable competitive advantage. Each province is endowed with climatic conditions to produce commodities that carry huge comparative advantage. The prerequisite to improve the competitiveness in the international markets is the quality. However, a lack of modern infrastructure for cool storage, grading, post harvest treatment and transport facilitates, periodic gluts occurring in markets, and the lack of capacity to store fruit and other perishables undermine the supply of quality products. The translation of this comparative advantage into competitive advantage requires large investment in market development. The legal framework that impeded private investment must be changed to enable the agricultural sector to fulfil its export and growth potential. A private-public partnership is needed to attract much needed investment in the agro-industrial sector.
Crop diversification and value-addition. We keep devoting bulk (55 percent) of the areas to low value high water consuming crops. This rigidity in cropping pattern is also attributed to our price support mechanism that encourages farmers to stick to traditional cropping pattern and be risk-averse. This, along with poor marketing infrastructure and management keeps our agriculture as traditional and subsistence. Agricultural supply chains in strategic and high-value crops are very fragmented, with a high number of intermediaries. In contrast, agricultural supply chains in developed countries are well integrated/co-ordinated where large companies have an interest in all levels of operation, including input supply, storage, and transportation. A high level of integration leads to more control and less risk in the supply chain. If we want to enhance income and reduce poverty, we need to incentivize small farmers to adopt non-traditional crops (oilseeds and legumes), organic farming and other high value crops by linking them to the market through value chain approach.
There are two areas of reforms, first, the need to provide a better market access to farmers, especially small farmers; the present market chain dominated by middleman (arhti) results in long and inefficient supply chain affecting adversely the producers and consumers. Hybrid value chains that create social and economic value for low-income consumers, business partners and social partners, is one option that needs pilot work in Pakistan.
In the crop sector, E Choupal (a Meeting Place) is one such hybrid value chain business model that is quite successful in addressing farmers' issues in India. Other than disseminating customised information on farmer and risk management, it is providing relevant and real time information on commodity prices, local weather and news. It supports supply chain for farm inputs by screening for quality, seeking demand aggregation for competitive prices and efficient logistics. By providing direct marketing channels for farm produce, it reduces transaction costs and offers better value through traceability. It also lures financial service providers offering products such as crop insurance, health and life insurance to the farmers. The E Choupal Value proposition is based on low distribution cost, wide reach, high credibility, increased product penetration, right price for the consumer, and high visibility - sum it up as low cost last mile in the business model. It also takes an intelligent first mile with focus on the targeted consumer, product endorsement, education and awareness on product usage and benefits and more importantly a process of brand building at low cost and better understanding of the rural consumer.
In the livestock sub-sector, Pakistan is struggling to come up with a business model that solves the problems of low animal productivity due to poor animal feed, in adequate quantity of fodder and water, lack of good management and animal health problems. Good animal resource base is available with large number of milk animals, large number of farm and non-farm households involved in milk production. Over time, the growing supply and demand gap and any significant increase in milk production or supply will be absorbed. The present business model does not provide incentive to investors to support productivity enhancement, as the producer is free to sell his output where he fetches a better price.
The role of standards and of quality management with regard to the products supplied by the value chain to markets, and the issue of co-ordination and governance in the value chain, so as to reach a higher level of efficiency in the system is important.
Lure investment in agriculture though public-private partnership. There is considerable scope to attract domestic and foreign investment in agriculture. Public-private modality has not been explored to its potential as agro-processing industry and rural roads development is needed, but expensive and relatively risky, for the private sector to go alone. As indicated above resource mobilisation through agriculture taxation can be best used through public-private partnership modality for critical sectors in rural development. Livestock and horticulture sectors are few other examples where Pakistan can attract investment if right incentive is provided.
On the international front, Saudi Arabia recently formulated a policy under King Abdullah, which calls for investment abroad to enhance mutual food security. Both Sindh and Punjab carrying huge comparative advantage in livestock and fodder production (fourth largest in the world), investment from Saudi Arabia or other Gulf countries in this sector can improve its competitiveness in both the domestic and export market. The potential can be gauged as the output from one of the kingdom's major dairy herds; 13,500 litres of milk per head over a 305-day yearly cycle. That is approaching twice the European yield at 8,000 and 10 times the low of 1333 in Pakistan. Halal meat is another niche market where Pakistan can make considerable inroads. It is suggested to undertake a detailed value chain analysis of the commodity, a very useful tool for initial screening of the commodity from an investment point of view.
(The writers are consultants for the OIC/ICCI on agribusiness and enterprise development initiatives. Dr Mahmood is a retired FAO Senior Policy Officer from the Regional Office in Cairo. He advises governments, UN Agencies Donors and NGOs on Agriculture and Water Policy Issue. Aeyesha Gulzar is an Enterprise Development Expert, focusing on Hybrid value chain creation and social entrepreneurship through public-private partnerships. Both work at Apna Arsh Pakistan-Center for Sustainable Development)