API offers analysis of domestic, int'l commodity-specific policies: APD chief

Following are the excerpts of an interview with Abdul Rauf Chaudhry, Chief of Agriculture Policy Division, Agriculture Policy Institute, Ministry of National Food Security & Research, Government of Pakistan:
BR Research: What is the mandate of the Agriculture Policy Institute?
Abdul Rauf Chaudhry: API is a government institution whose mandate is to analyse domestic and international commodity-specific policies, conduct studies on emerging policy issues in the crop and livestock sectors, and come up with policy measures and recommendations for the government to improve efficiency, equity and export-competitiveness of agri-commodities. API promotes co-ordination and collaboration among national research institutions and also with the international organisations.
In a nut shell, API acts as an analyst of government policies on producers, consumers, processors and exporters of the agri-commodities. Formulation of agriculture policy proposals for major crops, eg wheat, cotton, sugarcane and rice paddy, is central to the organisation's functions. To conduct in-depth analyses to formulate such proposals, API regularly undertakes annual crop surveys and organises meetings of the API's Standing Committees on major crops. These committees solicit the viewpoints of growers, traders, industry, research & planning departments & procurement agencies of the federal & provincial levels.
BRR: Clearly, the government's intervention in the Agri-commodity markets runs deeper than just policymaking. Why has the government's footprint in these markets continued to increase over time?
ARC: If you compare agricultural products with industrial products, you would see why government intervenes in the agri-commodities market. Industrial production happens under a controlled environment, and is not specific to time or season. Agricultural commodities, on the other hand, are season-specific. Every crop has a set time for sowing and harvesting. In the case of wheat, the six-month crop's produce floods the market in a very short span of time. Almost half of the produce is marketed, while the rest is consumed round-the-year among farming households and also settled as labour.
The government has to intervene because within a few weeks, 10 to 11 million tons of wheat arrives in the market. Small growers cannot retain their produce due to storage constraints, and therefore they cannot wait longer. Moreover, they have to liquidate their investment in the crop - which is often financed through borrowed means - in a timely manner to make arrangements for the next season crop. So they bring all their marketable supplies, which create sort of a glut in the market. If the government does not intervene, prices would fall substantially, and the small growers would be at the mercies of middlemen and commodity traders. The latter would then purchase the produce at low prices, indulge in hoarding, and end prices would spiral in the end. This would create a double whammy of producer and consumer exploitation.
So, the objective of the government intervention is price stability and to safeguard the interests of growers. This system is applicable in many countries through the means of support prices.
BRR: Do you think that the Support Price regime is actually helping the small growers?
ARC: We have done calculations and we found out that higher support price does lead to increase in production, through increased acreage as well as improved yields. In 2009, the government raised the support price from Rs625 per maund to Rs950 per maund, to mitigate shortage fears through incentivizing wheat plantations in the country. That jumped the production from 21 million tons to 24 million tons.
The Support Price is basically a minimum guaranteed price which the growers need to have knowledge of prior to the sowing time so that they can make their crop plantation decisions and allocate acreage accordingly. In Pakistan, at one time, the four major crops, grams, oilseeds, and some vegetables, all under the support price regime. In 2000, the government decided to focus on only the major crops. Later, in part due to pressures from the multilateral agencies, the government got out of the market, albeit partially, as it allowed the private sector to lead the rice and cotton commodities market. These two markets appear to be doing well because of their linkages with international markets and prices.
In the sugarcane market, the government never really had large intervention. It only used to set an 'indicative price' which the mills set as benchmarks, and this is still the case. In 2002, the government decided that the support price regime will only be for wheat, because it is a staple food and the country has to be food-secure. For the rest of the crops, like sugarcane, rice and cotton, government would only set an indicative or intervention price which is calculated by the API and incorporated by the provinces. In the case of rice and cotton, international prices are reflected in indicative prices.
BRR: What are your thoughts on the issues in wheat procurement?
ARC: For the last three years, state procurement has been very aggressive, and resultantly, the carry forward wheat stocks have been between three to four million tons. Maintaining such large amount of stocks is a costly affair, and runs into billions of rupees. We did a calculation a while back which showed that holding one million tons of wheat costs around five billion Rupees per year to the exchequer.
BRR: It is not sustainable for the government to keep running its wheat procurement operations, given the worsening financial & storage capacities. Why cannot the government allow the private sector to play active role in the wheat market?
ARC: Government is afraid that food security would be in jeopardy if the private sector is allowed to procure wheat. The incidences of hoarding and over-pricing, which are adequate for a situation to graduate to crisis level, deter any such decision to be taken. However, various committees formed by the government have recommended retaining buffer stocks of one to two million tons, and leaving the rest to the private sector. Every year, the decision in this regard is deferred to next year and the provinces cannot agree on this either.
Our country's wheat requirements are upto 23 million tons. We are self-sufficient in production and have had exportable surplus for the past three years. Passco retains the buffer stocks, and provincial food departments release to the flour mills and this system is somehow going on. The government wants to make the staple food abundant in supply, so it procures so much that no amount of hoarding can play havoc with the flour prices. However, it may not be financially viable to spend so many resources on procurement. On every 40kg of wheat procured, there are incidental costs of around Rs200 per annum.
BRR: In its policy analyses, API also recommends the support price and indicative prices. Please tell us which factors do you take into account while arriving at those prices?
ARC: There are seven to eight factors involved in calculation of a crop's support price. Major factor is always the cost of production, which includes the costs incurred at every stage till crop harvesting. Depending on local production and stock levels, the import and export parity prices of the commodities are looked at. Inflation-adjusted real price is also taken into account. The relative profitability factor for competing crops on the field is also ascertained. Then international commodity outlook is also factored in, as to whether the commodity would be in surplus or not and what has been the trend in the stock-to-consumption ratios.
The priority for these factors changes every year. For instance, after the food crisis of 2008, the import parity price took the centre stage while determining wheat's support price in 2009. In subsequent years, since Pakistan has been surplus in wheat, the export parity price was looked at vis-à-vis raising the support price and feasibility of exports produce. The cost of production comes next.
In the case of rice, export parity price is the number one factor taken into account because around 60 percent produce is exported. Since we were surplus in cotton uptil 2005, export parity price used to factor in back then. Now we are net cotton importer, so import parity prices come under in consideration.
Though these are all numeric estimates, at the end, the policy analyst's judgment prevails. We summarise our findings and forward to the government whose prerogative is to raise the prices or keep them unchanged.
BRR: Wheat exports were infeasible for most part of 2011 due to pricey local wheat, and then support price was raised again by another Rs100 per maund late last year. Why did API recommend an increase in support price last year?
ARC: The main reason was to allow for sustainable production of wheat, because the inputs had doubled in price. Our estimates showed that the share of major inputs in cost of production had increased in recent years due to rising input costs. For instance, in wheat's cost of production, fertiliser's share had risen upto 25 percent, diesel 21 percent, irrigation upto 10 percent, land preparation 8-9 percent, harvesting and thrashing 17 percent, and land rent 24 percent. Per acre cost of production came around Rs32000, and with an average yield of 27-28 maund per acre, the cost of production came around Rs 1,032 per maund. A support price of Rs 1,050 per maund just covered the cost.
It must be noted that cost of production is an imputed cost. It is based on opportunity cost, and includes costs of inputs such as family labour, livestock usage, farmhouse expenses, and financial cost of funds invested ine crop.
About Abdul Rauf Chaudhry
Abdul Rauf Chaudhry has worked for over 29 years in the government sector, in organisations like ZTBL and later in Ministry of Food and Agriculture. He has a M.Sc. (Hons) in Agriculture Economics from University of Agriculture, Faisalabad and MS Agri. Dev. Economics from ANU, Canberra, Australia.