Agriculture Today May 2009
V. Shunmugam[1]
Often farmers are thought of as producers whose production process involves a minimal and stable cost, and hence any rise in the prices of agricultural commodities is looked at by many to be in favor of the farming community without any consideration for the cost increase that the farmer would have faced in the light of increasing cost of other goods and services that he would consume either in his production process or for own wellbeing. Only a few, especially those from the policy making domain and academics close to economics of agriculture, would know that there is a strong input-output relationship (either directly or indirectly) that exists between agricultural and other commodities. More directly, these goods and services refer to those starting from production and marketing of agricultural inputs to those involved in marketing of these agricultural commodities. For example, a rise in crude oil prices, as was witnessed worldwide during the first half of 2008, would have made a small contribution to the farmer’s production cost due to the use of diesel in his tractor or pump. However, a larger contribution to the cost increase would be constituted by the rise in his marketing costs (directly – transportation).
Long supply chain is another deficit in our agricultural marketing system that rubs salt on the already bruised farming community, eating a lot into their margins – requiring a series of institutional and policy reforms in agriculture to tune the marketing efficiency in agricultural commodities. Ignoring that, an attempt has been made here to look at the simple terms of trade (TOT) between agricultural commodities and metals (as shown in the table below) i.e. proportionate amount of agricultural commodities that would be needed to produce a given amount of metal. Though our farmers are not constant consumers of metals in their daily life or production processes, this does affect the transportation cost of other agricultural commodities and inputs that they consume to be in the production process. Hence, it is a litmus test to see how the markets for agricultural commodities move unconnected with prices of metals.
A look at the numbers compiled from 2005 reveals that TOT had slightly been favorable to agriculture. As the financial boom progressed during the next two years, it is the metal commodities which have reaped gains and, thus, left the agricultural commodities way back in comparison – as is evident in the deteriorating TOT numbers during 2006 and 2007. However, with the financial meltdown and dwindling stock levels, increased industrial use of agricultural commodities (such as biofuel) during these years led to a turnaround in TOT in favor of agriculture during 2008. Globally also, TOT between agricultural and metal commodities did improve during 2008, passing on its partial effect into the Indian markets as well. The turnaround in TOT at the global level has not been as pronounced as in India, though many agricultural commodities are financially traded globally contrary to what critics might believe. More so, this interconnectedness between metals and agriculture commodities in India has deteriorated during both the burst years and the boom years unlike the normal years and the global experience where both the commodities are financially traded.
The remarkable turnaround in TOT during 2008 could largely be attributed to the longer lag-effect of the metal prices on agricultural commodities and the continued increase in the administered prices of several agricultural commodities, besides a marked decline in the stock levels of several agricultural commodities. Key lessons from TOT movements during the last five years indicate that:
- there is a strong need for closer integration among the markets for agricultural and other commodities
- there has to be increased integration with the global markets through improved trade liberalization to get the pass-on effect into the food economy
- there has to be a market-oriented, transparent food stocking policy to insulate producers and consumers effectively from violent fluctuations in TOT, and
- more importantly, a series of policy and institutional reforms would have to be introduced to improve agricultural marketing efficiency in favor of producers and consumers.
Often farmers are thought of as producers whose production process involves a minimal and stable cost, and hence any rise in the prices of agricultural commodities is looked at by many to be in favor of the farming community without any consideration for the cost increase that the farmer would have faced in the light of increasing cost of other goods and services that he would consume either in his production process or for own wellbeing. Only a few, especially those from the policy making domain and academics close to economics of agriculture, would know that there is a strong input-output relationship (either directly or indirectly) that exists between agricultural and other commodities. More directly, these goods and services refer to those starting from production and marketing of agricultural inputs to those involved in marketing of these agricultural commodities. For example, a rise in crude oil prices, as was witnessed worldwide during the first half of 2008, would have made a small contribution to the farmer’s production cost due to the use of diesel in his tractor or pump. However, a larger contribution to the cost increase would be constituted by the rise in his marketing costs (directly – transportation).
Long supply chain is another deficit in our agricultural marketing system that rubs salt on the already bruised farming community, eating a lot into their margins – requiring a series of institutional and policy reforms in agriculture to tune the marketing efficiency in agricultural commodities. Ignoring that, an attempt has been made here to look at the simple terms of trade (TOT) between agricultural commodities and metals (as shown in the table below) i.e. proportionate amount of agricultural commodities that would be needed to produce a given amount of metal. Though our farmers are not constant consumers of metals in their daily life or production processes, this does affect the transportation cost of other agricultural commodities and inputs that they consume to be in the production process. Hence, it is a litmus test to see how the markets for agricultural commodities move unconnected with prices of metals.
A look at the numbers compiled from 2005 reveals that TOT had slightly been favorable to agriculture. As the financial boom progressed during the next two years, it is the metal commodities which have reaped gains and, thus, left the agricultural commodities way back in comparison – as is evident in the deteriorating TOT numbers during 2006 and 2007. However, with the financial meltdown and dwindling stock levels, increased industrial use of agricultural commodities (such as biofuel) during these years led to a turnaround in TOT in favor of agriculture during 2008. Globally also, TOT between agricultural and metal commodities did improve during 2008, passing on its partial effect into the Indian markets as well. The turnaround in TOT at the global level has not been as pronounced as in India, though many agricultural commodities are financially traded globally contrary to what critics might believe. More so, this interconnectedness between metals and agriculture commodities in India has deteriorated during both the burst years and the boom years unlike the normal years and the global experience where both the commodities are financially traded.
The remarkable turnaround in TOT during 2008 could largely be attributed to the longer lag-effect of the metal prices on agricultural commodities and the continued increase in the administered prices of several agricultural commodities, besides a marked decline in the stock levels of several agricultural commodities. Key lessons from TOT movements during the last five years indicate that:
- there is a strong need for closer integration among the markets for agricultural and other commodities
- there has to be increased integration with the global markets through improved trade liberalization to get the pass-on effect into the food economy
- there has to be a market-oriented, transparent food stocking policy to insulate producers and consumers effectively from violent fluctuations in TOT, and
- more importantly, a series of policy and institutional reforms would have to be introduced to improve agricultural marketing efficiency in favor of producers and consumers.
[1] Author is Chief Economist with Multi Commodity Exchange of India Ltd., Mumbai. Views are personal.
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