One of the key components of government strategy to stabilise economy for sustainable high economic growth is to fully utilise potential of agriculture sector by boosting productivity, increasing value addition and providing essential inputs such as certified seeds, technology, fertilisers and irrigation water to growers at reasonable prices.
This would be possible through massive investment in farming and sub-sectors of agriculture and managing marketing of agri-commodities to benefit growers in the wake of uncertainties about commodity prices in domestic and international market. Prices of agri-commodities that skyrocketed during the last fiscal year in international and domestic market have decreased.
Around 30.0% to 35.0% fall in wheat, rice, maize and edible oil prices during the past few months, starting from July, in international market, has been recorded. Support price fixed for rice at Rs 1500 per 40 kg by the government has been difficult to maintain in the market after harvesting. It has gone as low as Rs 900 per 40 kg. Price of edible oil has also declined by 35.0%.
The government has intervened and provided a loan of Rs 25.0 bn to PASSCO to stabilise the rice market. Ginners are stocking cotton for high profits and are waiting for intervention by TCP. These market realities will determine crop productivity, pattern and investment trend at least in short term perspective.
Government gave a quantum increase of 52.0%, from Rs 625 Rs 950 per 40 kg in support price of wheat at the start of sowing wheat crop to compensate growers for high cost of inputs that raised production cost to around Rs 670 per 40 kg in Punjab, to meet a target of 25 million tons and discourage smuggling to bordering countries.
It is feared that the target might not be achieved because of late sowing, around 40.0% shortage of irrigation water and fertilisers. In Punjab, according to official figures, 63.0% and 40.0% less fertilisers were used for Kharif and Rabi crops respectively against a target of over 0.75 million tons. It is likely to yield low output of wheat per acre.
It is feared that growers might not get the support price for wheat, as has happened in case of rice unless government intervenes timely to procure wheat for its stock. Much will also depend on price of wheat in international market. October rate of wheat in global market was recorded around $375 to $400 per ton that is Rs 1100 to Rs 1200 per 40 kg. It is still higher than the support price of wheat fixed by the government.
A further fall would not work in favour of domestic market and growers. Increase in support prices by the government is certainly reassuring for growers but it alone can't handle production, marketing and reasonable return to growers despite being the largest buyer in domestic market. Other market players and investors are to be taken on board to successfully exploit potential of agriculture sector.
Informal lenders, arhtis, play an important role in sustaining agricultural productivity. According to an estimate, they meet around 75.0% credit needs of farming community annually, particularly of small and medium growers. Investment by public and private sector estimated by some of the analysts at 100.0% increase on year-to-year basis is required to address shortage of inputs and to give right impetus to agricultural growth.
It would be viable only if return on investment is to the satisfaction of investors. In the midst of falling prices of commodities in international and domestic market and increasing discount rates, managing prices of agri commodities in domestic market and luring investment, is crucial to implementing government strategy of giving boost to agriculture sector. It is unlikely to be without snags.
INVESTMENT IS REQUIRED IN THE FOLLOWING AREAS TO:
-- Construct water reservoirs for adequate supply of irrigation water, particularly at the time of harvesting Kharif and Rabi crops.
-- Establish strong and commercially viable network for providing certified seeds of various commodities and fertilisers at competitive prices.
-- Stabilise market soon after harvesting when prices tend to tumble down because of glut in market and market manipulation by investors and middlemen.
-- Construct commodity and cold storage facilities.
-- Provide farm credit to growers, particularly to small and medium growers.
-- Research on seed and soil development and transfer of technology for better yields of crops and value addition.
-- Introduce corporate farming to have an encompassing approach to farm production.
-- Introduce crop insurance to allay fears of farmers and to cover risk.
Investment in agriculture is a "gamble" from investor's viewpoint because of vagaries of nature, uncertainties of domestic and international markets, inadequate agriculture policies and support price of wheat, rice, cotton and sugarcane, comparatively low profit yields and higher risks and administrative bottlenecks.
According to International Food Policy Research Institute, "farming in developing world is full of market failures and does not always respond to prices signals. Governments often intervene with unhappy results." The government will have to step in more vigorously to allay fears of growers and investors.
Construction of water reservoirs needs huge investment of billions of USD. Construction of Bhasha dam alone is to cost $12.6bn by 2016. Joint venture between public and private sector is a far-fetched idea as yet. Government will have to borrow huge loans from multilateral donors WB and ADB for investment.
Inputs for agriculture sector have sufficient scope for investment. According to an estimate around Rs 750 billion need to be invested annually to meet demand of fertilisers, seeds, pesticides, diesel and machinery. They remain in short supply and wanting in quality because of under investment and limited agriculture credit provided by public sector banks.
Commercial banks not only charge high interest rate of more than 15.0% but are also reluctant to enter into agri-market in a big way. According to the Governor SBP, "commercial banks accord low priority to agri-credit and it is only 4.0% of total debt portfolio of the sector."
Fertilisers have a market of around Rs 200 billion; certified seeds, Rs 50 and pesticides, Rs 20 billion. Certified seeds, third important element of inputs for better yield, are used by only 20.0% farmers against 80.0% to 100.0% used in advanced countries. Around 650 companies are in business. They are not providing satisfactory services to growers.
Seed market needs monitoring and regulation. Practice of marketing sub-standard seeds, fleecing and duping growers would have to be controlled effectively. The same holds true for fertilisers and pesticides. Agriculture credit system needs revamping. SBP oversees flow of credit to farming and non-farming sector in rural areas.
Target for rural credit for current fiscal year is Rs 200 billion out of which Rs 100 billion are consumed by agri-industry and Rs 100 billion are left exclusively for farming sector against its requirement of Rs 750 billion. Shortfall of around Rs 550 billion is made by the middlemen who charge a high interest rate of around 30%. The SBP plans to increase agriculture credit to Rs 500 billion by 2011. It would be still insufficient; the SBP needs to increase this projected limit.
Corporate farming with the help of multinationals, is an untapped area that has potential for investment and answer to many of the problems faced by agriculture sector. It can help boost per hectare yield of all major crops that is nearly half of developed countries. For example, national average of wheat yield is 2.5/tons/hectare compared to 4.0 tons/hectare of Australia and 4.45 tons/hectare of China.
The government will have to play a proactive role to attract investment from multinationals, domestic, ME and Gulf states investors. Investors from ME and Gulf states would be willing to invest to ensure food security for their citizens and benefit from the opportunity. Corporate investment in farming will also be conducive to attract investment in value addition in sub-sectors like dairy products and livestocks.
Government's initiative for insurance of crop loans through NBP and NIC would address many concerns of farmers, particularly big farmers, in the wake of around 40.0% shortage of irrigation water, less availability of fertilisers and other hazards in farming. This should give confidence to big and medium growers who have the capacity to pay premium.
The NBP has earmarked Rs 37 billion for current fiscal year to provide insurance coverage to around 0.3 million growers, commencing from Rabi crops. NJI is also chipping in the initiative. The scope of investment in agriculture sector either by the public or private sector is limited despite huge requirement because of liquidity crunch faced by the government and a tight monetary policy that has hiked commercial interest rates to around 20.0%.
Private sector has stayed away from making big investment in well defined areas of farming sector over the years. Public sector will have to show a way to private investors to invest in agriculture sector notwithstanding the bumpy road that might lie ahead. That is where real challenge for the government, financial sector, investors and other stakeholders lies.