WHEN LEADING newspapers and popular journals use certain words, the academic world takes cognisance. Most new words that have gained acceptance in recent times can be traced to the world of IT and cyberspace, itself a relatively new word. But my bet is that the word, which will hit the headlines in the next few years, is Agflation: inflation that is limited primarily to the agricultural sector. Thus, we are likely to witness an interesting scenario where most manufactured goods and services will see the per-unit cost going down on account of standardisation and commoditization for mass markets; but for a change, the prices of agricultural goods will rise. This is in marked contrast to all forecasts and trends estimated by the FAO till very recently.

 

During my Mc McNamara Fellowship year, when I was working on the future of agriculture and agribusiness organisations in South Asia seven years ago, the accepted wisdom was that farmers would have to produce more crop units per acre to survive and compete. Not any longer. The current issue of the Economist (December 8-14, 07), John Vidal’s lead article in Guardian, (August 29) and briefing papers of the FAO and ISIS (Institute of science in Society), London, suggest a reversal of the declining trend of food process in real terms, which marked the period 1974-2005.

 

As the controversy regarding wheat import prices gains currency in our own country, it is important to note that since the first quarter of the current year, wheat prices have almost doubled and every other crop – maize, milk and oilseeds have recorded a steep rise. Rice is an exception to this trend since the coarser varieties are neither traded internationally nor used as animal feed. However, when the procurement prices of wheat go up in response to the global price, the rice-producing states of India (and elsewhere) will exert pressure on the political economy to seek inter-crop parity between wheat and rice.

 

What are the reasons for this steep increase in prices? There are four clearly identifiable factors at play, though they are also inter-related. The first of these is the heavy subsidy that the US government is offering for the production of ethanol. This year’s bio fuels will take up to 35% of the maize harvest in the US and the assured market signals farmers to switch from other crops. Secondly, had the oil prices not touched the roof, the pressure to seek alternate fuel would not have been that pronounced and the transition   to bio fuel would have been gradual. The unequal competition between the well-to-do motorists and the much larger numbers of the under-fed people in the world may drastically influence the quantum and the end-use price of production not only in the developed countries, but also in the developing and the less-developed countries of the world. The third relates to the higher costs of inputs – whether it is chemical fertilizers or GM seeds and farm equipment. As agribusiness firms integrate their operations, they find that more money is to be made, not in agriculture per se, but in the services and inputs related to core production, the management of harvest and value addition in the post-production phase. Unlike the raw farmhand who works all over the world on ‘minimum wages’ the service providers are professionals who charge ‘market rates’ and this adds up to the cost.

 

Last but not the least is the increasing shift in the consumption habits of people on account of rising affluence and the ability to stock up more food. As incomes rise in China and India, people prefer a more animal protein-rich diet in place of the traditional predominantly vegetarian or vegetarian–rich diet, implying thereby food grain diversion, for, it takes up to eight Kgs of corn to get one kg of meat. Having identified the causes for the imminent rise in the price of food grains, a caveat will be in order. It is not necessarily a bad deal for the farmer. Higher prices make it possible for the US and the EU to cut farm subsidies without hurting incomes. This will give some leeway to the stalled Doha round negotiations on agriculture. Moreover, the distribution of poor is disproportionately higher in the rural areas of the poorer countries. Higher prices could lead to higher capitalisation in agriculture and increased public spending in this sector.

 

The World Bank and the IFPRI think with the freeing up of agricultural trade, the prices of commodities that are produced in labour intensive (poor) countries will rise and they will become more competitive in the global export market. It is estimated that the poor get three times as much extra income from an increase in farm productivity (at constant prices) as from equivalent gains in manufacturing and services.

 

India’s food grain production targets for the five years (11^th Plan period) include raising food grain production from 209 MT to 337 MT (1.61 times), oilseeds from 16 MT to 58 MT (3.6 times) and pulses from 14 MT to 30 MT (2.14 times). These targets can be met only when clear price signals can be given by the CACP over the next three years so that farmers are convinced that ‘agflation’ is not a passing fad, but a long-term factor in the agricultural scenario of the country. Next week we shall take up the possible strategies that farmers should adopt to maximise their gains from ‘agflation’ and to ensure that the increase in the output process is not negated by an even higher increase in input costs!