V Shunmugam
The Financial Express, Dec 25, 2008
(http://www.financialexpress.com/news/making-sense-of-the-global-agricultural-commodities-meltdown-paradox/402679/2)
As the nations competed with each other, it was the notion of ‘self-sufficiency’ that drove their food policy. Subsequently, as the economic boundaries melted down during the globalisation era, it was the paradox of agricultural commodities that haunted the trade negotiators and policymakers. This paradox in agricultural commodities becomes all the more critical to countries like India where a larger segment of the population and the economy depends on the income generated from it with less opportunities to either increase their income levels or diversify employment avenues.
Prices of agricultural commodities like wheat, rice, soybean and palm oil have dropped significantly. It is relevant to find out what this paradox holds for Indian stakeholders.
This will definitely not hold any ground for many of our large agricultural commodities as we are neither dependent on the export markets nor on imports except for edible oils and pulses to a major extent that it can make a dent on the economy or its stakeholders.
However, it would affect exports in terms of value realisation by the exporters, which would have its impact on the domestic markets as they would be easily outpriced in the export markets. Given that agricultural commodities constitute about 10% of the national exports and our exports constitute about 17% of national GDP, one can loudly proclaim that it would have least impact on the economy.
The current meltdown would have its impact on the producers of exportable commodities. They would be partially supported by continued higher domestic prices depending on the kind and level of trade barriers that might exist, though.
As the current meltdown gets passed on to the consumers as the case may be with commodities such as pulses, it would definitely relieve the current pressure on the part of the policymakers and shift their current focus from inflation management to keeping the growth momentum in their policy measures. The thin line that the policymakers would tread under the current situation would be that the meltdown should not affect the agricultural producers in the country but will be good to the economy and its stakeholders if that can be passed on to the consumers.
Thanks to the continuing trade barriers to agriculture in most of the commodities, growers of most agricultural products would be comfortable with the insulated markets except for highly export oriented agricultural product categories such as spices where meltdown pressure has the possibility of affecting economic fortunes of the growers.
Though the current meltdown in agricultural commodities could be due to cyclical reasons, the fact that producers in most developing or less developed countries face inflexible costs would prove to be a double whammy if it is passed into the domestic markets. That is not enough an argument to make a case for either continuing with the existing trade barriers in agriculture or domestic support for agricultural producers.
Where does this lead us to? Should the policymakers go ahead with agricultural trade liberalisation and reduce the domestic support? If so, what should we do to keep intact the business of farming? It leads us to think of a market mechanism that can better predict the future prices of both their inputs and outputs that allow them to make decisions, and at the same time to take advantage of it.
This represents risks that would exist in the industrial economy as well, but is managed by them sharing these risks with participants in the derivatives market who are willing to take it or by forward managing their demand and supplies with flexibility built in their business. A well developed commodity exchange with sound regulation, strong market infrastructure, trading on agricultural commodities and a well developed information system to support its price discovery process would go a long way to keep farming a profitable enterprise and at the same time help the consumers take advantage of the global meltdown in agricultural commodity prices.
The Financial Express, Dec 25, 2008
(http://www.financialexpress.com/news/making-sense-of-the-global-agricultural-commodities-meltdown-paradox/402679/2)
As the nations competed with each other, it was the notion of ‘self-sufficiency’ that drove their food policy. Subsequently, as the economic boundaries melted down during the globalisation era, it was the paradox of agricultural commodities that haunted the trade negotiators and policymakers. This paradox in agricultural commodities becomes all the more critical to countries like India where a larger segment of the population and the economy depends on the income generated from it with less opportunities to either increase their income levels or diversify employment avenues.
Prices of agricultural commodities like wheat, rice, soybean and palm oil have dropped significantly. It is relevant to find out what this paradox holds for Indian stakeholders.
This will definitely not hold any ground for many of our large agricultural commodities as we are neither dependent on the export markets nor on imports except for edible oils and pulses to a major extent that it can make a dent on the economy or its stakeholders.
However, it would affect exports in terms of value realisation by the exporters, which would have its impact on the domestic markets as they would be easily outpriced in the export markets. Given that agricultural commodities constitute about 10% of the national exports and our exports constitute about 17% of national GDP, one can loudly proclaim that it would have least impact on the economy.
The current meltdown would have its impact on the producers of exportable commodities. They would be partially supported by continued higher domestic prices depending on the kind and level of trade barriers that might exist, though.
As the current meltdown gets passed on to the consumers as the case may be with commodities such as pulses, it would definitely relieve the current pressure on the part of the policymakers and shift their current focus from inflation management to keeping the growth momentum in their policy measures. The thin line that the policymakers would tread under the current situation would be that the meltdown should not affect the agricultural producers in the country but will be good to the economy and its stakeholders if that can be passed on to the consumers.
Thanks to the continuing trade barriers to agriculture in most of the commodities, growers of most agricultural products would be comfortable with the insulated markets except for highly export oriented agricultural product categories such as spices where meltdown pressure has the possibility of affecting economic fortunes of the growers.
Though the current meltdown in agricultural commodities could be due to cyclical reasons, the fact that producers in most developing or less developed countries face inflexible costs would prove to be a double whammy if it is passed into the domestic markets. That is not enough an argument to make a case for either continuing with the existing trade barriers in agriculture or domestic support for agricultural producers.
Where does this lead us to? Should the policymakers go ahead with agricultural trade liberalisation and reduce the domestic support? If so, what should we do to keep intact the business of farming? It leads us to think of a market mechanism that can better predict the future prices of both their inputs and outputs that allow them to make decisions, and at the same time to take advantage of it.
This represents risks that would exist in the industrial economy as well, but is managed by them sharing these risks with participants in the derivatives market who are willing to take it or by forward managing their demand and supplies with flexibility built in their business. A well developed commodity exchange with sound regulation, strong market infrastructure, trading on agricultural commodities and a well developed information system to support its price discovery process would go a long way to keep farming a profitable enterprise and at the same time help the consumers take advantage of the global meltdown in agricultural commodity prices.
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