Lately, farmers around the country are agitating over shrinking margins in the sector. The story is simple - output prices are heading south as globally commodities are under stress whilst lack of fiscal space to subsidize inputs is pushing input prices north.
The issue has persisted for months and the community is trying to lobby policy makers for some breathing room. Ironically, the government increased gas prices for fertilizer producers. Subsequently, they passed on (more than actual) impact to the farmers; further squeezing their margins.
BR Research attempted to find the input costs of cotton and wheat for farmer; to ascertain the truth behind their complaints. The problems are of different nature for each crop and have to be dealt with accordingly. In the case of cotton; the fall in international prices is the root of all the trouble. The output price Pakistan's farmers are getting on cotton is half of what they earned in FY11. And thats got them riled up.
The cotton price in market today is around Rs4500 per maund. The average yield per acre is roughly 25 maunds and out of each maund; 13 kilograms of cotton are produced. The rest is cotton seed which is priced at half of cotton lint. Based on these assumptions; the per acre revenue from cotton is Rs78,000, at present. This is significantly lower than the average revenue per acre of Rs114K, over the last five years. Simply put, cotton farmers revenues have reduced to two-thirds.
Input prices make this tale even gloomier. The usual use of fertilizer is a bag each of Urea and DAP for an acre of cotton. In FY05, the cost of fertilizer was five percent of revenues. By FY15, it has risen to eight percent. In the current fiscal year; after the recent revision in Urea prices, this proportion is expected to rise to ten percent of revenues.
That is not a good indicator as higher fertilizer prices amidst low output prices may compel farmers to use lesser fertilizer and compromise yields. By comparison, the Urea price for farmers in India is less than a quarter of prices at home. This implies that not only do Indian farmers use more fertilizer and acquire greater yields they also earn higher margins.
The comparison of yield can be evaluated from the fact that in early 2000s; both countries were producing around 12-13 million bales (170kg) of cotton. After the introduction of BT cotton in 2002-3, Indias cotton production has grown consistently. In 2014, that country produced 38-39 million bales. During the same period, Pakistans output was virtually stagnant at the same level as the past decade; at 12-13 million bales. Indias yield per hectare increased from 300kg to 565kg over the last ten years. Besides, their farmers are clearly finding cotton crop a profitable avenue as they continue to harvest more and more of it, each year.
Alas, the story in Pakistan is exactly the opposite. In value addition, Indian has moved ahead briskly in spinning and weaving sectors. On the way, it has not only taken some of Pakistans share of exports to China; it has exported to Pakistan too.
While the plight of Pakistani farmers worsens; India has announced another $15 billion in subsidies on fertilizer. By comparison, the $200 million subsidy offered in Pakistan, is mere peanuts. The pressure of the IMF has compelled an increase in gas prices for urea. Earlier in 2012, the government imposed GIDC on gas input for fertilizer. In 2011, the government imposed 17 percent GST on fertilizer.
In FY11, the cotton prices were at an all-time high and there was no GST on fertilizer and GIDC on fertilizers input. Fertilizer cost was a mere three percent of the cotton farmers revenue. Today it is 10 percent. By adding all the other costs; labour (around 30% of revenue), diesel and pesticides (5% of revenue), it is evident that the average farmer makes Rs38,000 per acre on cotton crop. The opportunity cost of land is around Rs15,000 per crop. After deducting this, the farmers income is reduced to a mere Rs18,000 per acre. This tally does not include any other costs that farmers may have to contend with. The capital cost of tractors and other machines are also apart from this total. Incorporating these costs may lead to a situation where many farmers are simply breaking even.
That is a shame! What remedy does the government have? Should it impose a support price on cotton, similar to that offered on wheat? In that case, it would simply pass on the buck to end consumers who would have to bear the burden of all taxes accrued on the way. A better option may be direct subsidy to farmers and restricting the ability of fertilizer manufacturers to extract abnormal profits from farmers.
A summary has been sent to the Prime Minister for an intervention price of Rs3,000 per 40-kilo of seed-cotton, to ensure procurement of lint cotton and direct subsidy of Rs5,000 per acre. If approved this will surely pull farmers out of the hot water for now. But the fear is that this measure may end up with a similar fate to that of wheat.
In case of wheat, the support price of Rs1300 per 40kg is at a premium of about 30 percent to prevailing international prices as well as the support price in India. There are surplus stocks of a few million tons from the previous harvest which were supposed to be exported. Despite a subsidy of $100 per ton; there has been no export of wheat over this period. The governments procurement agencies have also gone stoic and many farmers are stuck with a harvest which they can't sell. The support price has become irrelevant.
Based on the support price, the input cost of fertilizer is more than 20 percent of the revenue per acre revenue for wheat. The optimal use of fertilizer is two bags each of Urea and DAP. However, since the price that farmers are able to earn presently is low; chances are high that many farmers will use less than the optimal amount of fertilizer. Even those that are able to sell at the support price cannot even cover the cost of land. In other words, there is no way these farmers are opting for optimal usage of fertilizer or pesticides.
How much can the support price be increased to cover ever increasing input costs? Land is becoming expensive; prices of fertilizer and pesticides are rising. There have got to be some other ways to support the agri economy.
The livelihoods of farmers are at stake. One may wonder that Indian farmers earn better margins and yet we hear occasional news stories of farmers suicide from that country. The backup which Pakistani farmers have, is livestock. However, the policy makers better not rely on that to keep farmers from extreme steps. The government would do well to come up with better ways to support this all-important backbone of the economy.