WHY ARE WE PAYING SO MUCH FOR FOOD?

I may not be an expert in understanding the nuances of food economics, but I am infinitely better informed than the self proclaimed agro-economists who aimlessly discuss on television, the rising prices of onion and pulses, as the season may be, and invariably take a stand that best suits their political masters. I say so because in the journey your food takes from the farm to the plate I am present at both the ends. As a small time farmer I am struggling to keep my farmland economically viable and as a food consumer I am feeling the burning hole in my pocket! It is very much akin to being squeezed in a vice, and I shudder to think what would have been my plight if farming was my first profession.

It was onions a few months back, and it is pulses now, why do we have these cruel spikes in their prices? Our farmlands are shrinking and we have not yet made up our mind about genetically modified food. The last green revolution and white revolution occurred decades ago. Since then what substantial have our agricultural scientists done? Our doctors have got rid of polio, our space researchers have sent a mission to Mars, our Defense scientists have created indigenous missiles and nuclear devices, but what have we achieved in the field of agriculture of late? Who are the new Swaminathans and Kurians?

India is experiencing high rate of economic growth in the last two decades but the growth has been coupled with high rate of food price inflation. The growth has been very uneven across sectors with agriculture remaining very sluggish. The increase in per capita income has significantly increased the demand for food but agricultural production has failed to keep pace with the growing demand. Like the price of any other commodity, agricultural price is also a market outcome and demand and supply in the market play an important role in the determination of price. The market imperfections can create distortion in the functioning of the market and influence price by controlling supply.

 A typical agricultural marketing channel ‘from farm to plate’ is: Farmer – Local assembler – Central wholesaler – Retailer – Consumer. The retail prices are determined nearly in a perfectly competitive market situation. However, a few traders dominate in the wholesale market both as buyers and sellers. They act as the bottleneck of the marketing process. Vegetables are perishable and cannot be hoarded infinitely, but pulses can be very easily. But even these market imperfections can influence the price temporarily but it cannot sustain price rise for a long period if there is no actual shortage. There may be seasonal variation also in the prices of agricultural commodities. Prices are low in harvest season and high in lean season. No doubt malicious elements are in play sometimes, but such a sustained and long term price rise is not caused by corruption.

The demand for food items is increasing at a very high rate following a steady increase in per capita income. Higher disposable income has also changed the pattern of consumption. the pressure on prices is more on protein foods like pulses, milk and milk products, egg, fish and meat and vegetables indicating the shift in consumption pattern from cereal based diets to protein based diets due to rise in income. Naturally, there has been a mismatch between the growing demand and the actual production.

So why is there a slump in agricultural production? India lacks 3 major resources to sustain its population – Hydrocarbons (Oil / gas), Water and   Land, and guess what these are the three resources that are most crucial for sustenance of agriculture! Manufacturing, energy and service industry are competing with agriculture for land, water and human resources which has driven up the price for all of them. Price for agricultural land and labor has gone up leading to increased opportunity costs of agriculture.

The problems which agricultural sector is facing today are:
A. The rising cost of cultivation: Even with his own land the cost of cultivating paddy and wheat have gone up by 15 to 20% and this is across the board – seeds, water, manure, farm labour, diesel, farm equipments and gadgets and electricity.
B. Concentration of power in Mandis: Farmers can mostly sell their produce only to registered traders in primary mandis, which are governed by the Agricultural Produce Marketing Committee Act — a model law whose jurisdiction lies with individual states. Most crops are grown in a few states and then dispatched countrywide. In each of these states, a handful of mandis handle most of the trade and set reference prices. In onions, for instance, most of the surplus comes from Maharashtra and Karnataka. And the reference mandis in Maharashtra are Lasalgaon and Pimpalgaon. Local political bigwigs control these mandis and generate their party fund from them.
C. Trading of food grains: the depreciation in the rupee makes imported fertilizer more expensive and also makes exports more attractive. In the last three years, agro exports, notably non-basmati rice and wheat, are up.
D. Speculator trading of commodities and market regulations: Speculators in commodities trading are jacking up prices by hoarding vegetables specially onions! A law to remove the monopoly of local hoarders and cartels who never allow farmers to sell their produce to the market directly is being implemented in some states now.
E. Transport and distribution: Nothing is more disheartening than seeing stocks of wheat rot in the open in the railway yards of Punjab, when people in rural Orissa and Andhra are starving to death. According to various reports on climate change, the country is expected to face more frequent floods and droughts in the future. This will increase the occurrence of supply shocks.

To contain the prices of potatoes and onions (which together account for 39% of the vegetables produced in India), the government maintains a price stabilization fund which will be used to support govt. interventions in market for managing prices. Prices of all other vegetables are likely to follow the demand and supply mechanisms prevalent in local markets.

Agriculture requires a huge investment package from the government and F.D.Is can help. They will bring about an overall diversification of the agriculture sector and encourage research and this will have a big impact. With our historic bias towards the cereals sector unfortunately sectors such as vegetables, livestock or horticulture and fisheries have not got enough support from the government policies. We are yet to see the big wave of growth within these sectors.  Food packaging, food storage, food transportation, maintaining cold chains are areas where F.D.I will be truly beneficial. With more food available everywhere the prices will fall.