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The Decade Ahead Of Low Farm Prices: Are India And China Ready?

The Elephant and the Dragon cannot afford to ignore the threat.

06/03/2017 2:35 PM IST | Updated 07/03/2017 8:51 AM IST
Amit Dave / Reuters
Farmers carry saplings in a paddy field on the outskirts of Ahmedabad, India.

Despite rising population and affluence, food is likely to be abundant and relatively cheap until 2026, say the latest long-term projections by the US Department of Agriculture. On the flipside, farmers across the world will have to cope with low prices and may struggle to book profits, unless weather plays truant.

With the largest number of hungry and poor, and dependence on world markets for basic food items, the likelihood of steady prices should be welcome news for India and China—among the world's fastest growing economies. But their farmers potentially face a death knell. Since India is a net agricultural exporter, the fortunes of the Indian farmer are closely tied to global prices of rice, soyabean, maize, cotton, dairy, meat, fruit, wheat and sugar, and the US dollar. A strong dollar dampens commodity prices. At the same time, oilseed and pulses farmers are directly affected by cheaper imports, which will grow with rising domestic demand.

Farms are dividing with each passing year and losing viability while crop prices remain below the full cost of production over extended periods of time.

For the governments in both countries, low crop prices are a political headache because they affect rural livelihoods, and widen the urban-rural divide. India wants to double farmer incomes by 2022. In China, the per capita income of urban households was 2.72 times that of rural households in 2016, according to the National Bureau of Statistics.

India's National Sample Survey of Farm Households 2013 found that 63.5% of farm households depend on crop cultivation for primary income. Since two-thirds of the farms are under one hectare, cultivation provides 1% to the family kitty. With no option but to depend on elusive non-farm income or the moneylender, half the rural families are below the poverty line. In West Bengal, Uttar Pradesh, and Bihar, the monthly income is routinely below monthly expenditure. The average outstanding loan per family across India in 2012-13 was ₹46,945. There have been two droughts since. If the crisis of low prices currently facing India's pulses farmers, for example, spreads to other crops, rural misery will widen.

What is the policy roadmap to overcome the handicap of low agricultural prices? From announcements in China's 2017 No 1 Document, and India's budget 2017-18, within the same week, three trends stand out.

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Structural supply-side reforms to boost productivity and crop diversification

Both countries want structural supply-side reforms to boost productivity and crop diversification on smallholder farms. China wants to increase safety, efficiency and competitiveness of high-value crops that cater to diversifying diets through focused research and innovation hubs, while encouraging eco-friendly growing practices and vigorously controlling water usage. It is replacing support prices with direct payment to farmers, starting with corn, in order to boost rural spending and credit offtake. Bulging stockpiles and yawning gaps between domestic and international prices motivated Chinese authorities to allow prices to fall by as much as 30% over the last several years for cotton, soyabean, rapeseed and corn.

Unless we find ways to generate higher demand from domestic and overseas consumers, stop artificially depressing prices through policy, create a safety net for farmers... agriculture cannot prosper.

India will invest in crop insurance and irrigation to further drought-proof farming. It will continue pushing adoption of soil health cards for precision agriculture.

Relying on growth engines such as dairy and livestock farming to diversify incomes

In India, income from livestock has increased its share in total income of a farm household from 4% to 13% between 2003 and 2013. China is also emphasising non-food crops such as castor, medicinal herbs, social forestry and alfalfa, rural tourism and food processing. Yet, wheat and rice remain top priority for food security.

Focus on market institutions and market-based tools to ensure farmers get best price

China is seeking rural land reform which separates farmland ownership rights, contract rights and operating rights, allowing farmers to earn more by transferring their land rights to individuals or conglomerates. It wants reverse migration, new business models, new agricultural businesses and service providers to "optimise the industrial structure in the countryside." India wants to integrate primary and secondary markets, and promote contract farming.

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Crop diversification, higher productivity and market-based tools are necessary. But the unaddressed policy challenge here and now is that farms are dividing with each passing year and losing viability while crop prices remain below the full cost of production over extended periods of time. Farmers don't have the wherewithal to invest in productivity or diversification.

Unless we urgently find ways to generate higher demand from domestic and overseas consumers, stop artificially depressing prices through policy, create a safety net for farmers so that they have maneuverability, and re-visit our approach to land fragmentation, agriculture cannot prosper. The social cost in terms of health and nutrition, education, infant mortality, urban migration, and inequality will be exorbitant. After recognising the need to double farmer incomes, the Elephant and the Dragon cannot afford to ignore the threat from low farm prices. As always, speed will be of the essence.

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