Price Transmission Across Value Chains
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BY: Simla Tokgoz and Fahd Majeed, IFPRI

 

With a growing population and uneven income distribution despite economic growth, achieving and maintaining food security is a critical goal for the Indian government. The government has introduced a large number of policy frameworks through which to achieve this goal, creating a unique and highly regulated environment in one of the world’s largest agricultural markets.

Most recently, the National Food Security Bill (NFSB) of 2013 was put in place to reform the existing Public Distribution System (PDS) and expand its outreach (GAIN, 2015a). NFSB is geared towards expanding food security for a wider range of households. Its focus on food grains implies that a larger stock of food grains will be purchased by the Food Corporation of India (FCI) than before. The Minimum Support Price (MSP) is one supply side tool used by the Indian government to support farmers’ incomes and reduce the volatility of the supply. MSPs are announced before planting. Rice, wheat, and coarse grains are procured by FCI as well as by state agencies for the PDS. Consequently, MSPs serve as more than a price signal for farmers’ planting decisions and establish a certain level of income security for the farmers.

We focus on rice and wheat, as these constitute a large part of the calorie consumption by Indian households. The largest producers of rice (on average) are West Bengal, Uttar Pradesh, Punjab, Andhra Pradesh, Odisha, Bihar, and Chhattisgarh states (GOI, 2015). Similarly, the largest producers of wheat are Uttar Pradesh, Punjab, Madhya Pradesh, Haryana, and Rajasthan. Wheat production is concentrated in just a few states in the northwest, with Uttar Pradesh producing 32 percent and the top five states producing around 85 percent of all wheat in 2011-12 (GOI, 2015). Rice production is less spatially concentrated, with the top seven producing around 60 percent and the top fourteen states producing 95 percent of India’s rice. Similarly, procurement for wheat takes place mostly in the top five states (particularly Punjab, Haryana, and Madhya Pradesh), whereas rice procurement takes place throughout India in major rice producing states.

Rice farm harvest prices received by farmers in the top producing states have generally been below or close to the MSP (GOI, 2015). This may be attributed to the high concentration of production in these states, delays in government procurement, and higher crop quality control. Very rarely does farm price received by farmers go above MSP. In states with lower production, prices seem to stay around the MSP. Prices in Punjab and Haryana are skewed upwards due to premium Basmati, with prices substantially higher than MSP, which account for a large portion of the rice crop in these states (GAIN, 2015b).

For wheat, farmers in the two largest wheat producer states (Uttar Pradesh and Punjab) generally receive prices lower than MSP since the food price crisis. While most of the wheat in Punjab is procured at MSP, the farm harvest prices on average stay below the MSP. States like Madhya Pradesh produces higher quality wheat and therefore observes prices higher than MSP. In other words, while MSP may serve as a price signal for farmers, they are not consistently binding in larger markets. However, farmers in states that have smaller wheat production are consistently getting prices above MSP, with very few exceptions.

 

Source: GOI (2015). Government of India, Directorate of Economics and Statistics at the Department of Agriculture and Cooperation, “Agricultural Statistics At a Glance 2013”. 

 

Source: GOI (2015). Government of India, Directorate of Economics and Statistics at the Department of Agriculture and Cooperation, “Agricultural Statistics At a Glance 2013.” 

MSP for all commodities have increased over the years. The most substantial point increases in MSP have been in the 2007-08/2008-09 and 2011-12/2012-13 seasons, the first of which was a response to the international food price crisis that reached a peak in the 2006-2008 period and negatively affected Indian consumers. Farm-level crop prices rose and farmers received higher local prices relative to MSP, despite MSP being increased in response to the crisis. Other measures included restricting exports of common rice, increasing export tax and adding a minimum export price on basmati rice, and significantly decreasing the import tariff for wheat (Yu et al., 2011). Whether these trade policy measures helped Indian producers is debatable. MSP was substantially increased again in the 2011-12/2012-13 marketing years as a response to the Indian domestic prices, which had continued to rise despite the world markets being normalized (Tandon and Landes, 2014).

In 2007-08, MSP for various crops increased between 94 and 30 percent (from 11.65 to 2.05 Rupees per Kg). Rice increased by 32 percent (Rupees 2.05 per Kg) and wheat by 33 percent (Rupees 2.50 per Kg). Between 2004-05 and 2014-15, MSP for common rice had increased by 143 percent (Rupees 8.10 per Kg) and for wheat by 127 percent (Rupees 8.20 per Kg). While there was a higher increase of MSP in coarse grains, oilseed, and pulses, it was not enough to stave off the decline in production of these commodities. Farmers mostly leaned towards rice, wheat, maize, sugarcane, and cotton area expansion, possibly because there was a market for these beyond FCI procurement. While income growth among Indian consumers is shifting their consumption patterns towards vegetable oils, meat, fruits, vegetables, and dairy products, MSP for these products do not exist and therefore cannot capture this change in domestic demand, creating market distortions. This can be eased by providing MSP for some of these commodities, making it easier for farmers to switch to new crops.

While not all farmers in all states receive MSP, comparing MSP to wholesale prices gives us a view further down the value chain. In the wheat market, wholesale prices have mostly stayed above the MSP (IndiaStat, 2015). The highest markups in states that are not big producers of wheat such as Tamil Nadu, Karnataka, and Andhra Pradesh indicate possibly transportation costs and high traders’ margins. Wholesale prices for larger producers fell below the MSP during the international food price crisis but tend to have wholesale prices close to the MSP indicating a higher level of competition. Overall, both wholesale prices as well as MSPs have gone up; MSP has doubled between 2003-2004 and 2011-2012. Wholesale prices have gone up around 75 percent to 1121 Rupees per 100 Kgs in Uttar Pradesh and up 82 percent to 1125 Rupees per 100 Kgs in Punjab in the same period. Wholesale prices for states where large quantities of wheat are not produced have had a more varied increase.

Sources: IndiaStat (2015) Available at http://www.indiastat.com/default.aspx. GOI (2015). Government of India, Directorate of Economics and Statistics at the Department of Agriculture and Cooperation, “Agricultural Statistics At a Glance 2013.” 

Note: Wholesale price for wheat has not been adjusted for quality or type of wheat. 

As rice is produced in most states and a wide range of qualities are reflected in wholesale prices, the relationship is not too clear. MSP is not always binding and prices for larger states such as West Bengal and Uttar Pradesh are substantially below the MSP. (For a more detailed discussion on the relationship between wholesale price, farm price, and MSP for various crops, see Chand, 2012.)

The difference in what consumers pay and what producers obtain for the same crop shows that improvements in the value chain of agricultural crops are necessary in India. Marketing of agricultural products seem to remain fragmented. In addition, there are economies of scale that can be realized by improving transportation infrastructure, enabling better access by farmers to crop price information, and more efficient use of inputs.

 

References

Chand, Ramesh, and Shinoj Parappurathu. "Development Policies and Agricultural Markets" Economic and Political Weekly 47.52 (2012): 53-63.

GOI (2015). Government of India, Directorate of Economics and Statistics at the Department of Agriculture and Cooperation, “Agricultural Statistics At a Glance 2013”

IndiaStat (2015) Available at http://www.indiastat.com/default.aspx

GAIN (2015a). Attaché Report. "National Food Security Bill Becomes Law" GAIN Report, no. IN3105 (2013).

GAIN (2015b). Attaché Report. "Grain and Feed Annual" GAIN Report, no. IN5027 (2015).

Tandon, Sharad, and Maurice Landes. Coping Strategies in Response to Rising Food Prices: Evidence From India. No. 189793. United States Department of Agriculture, Economic Research Service, 2014. <http://www.ers.usda.gov/media/1702554/err177.pdf>

Yu, Tun-Hsiang, Tokgoz, Simla, Eric Wailes, and Eddie Chavez. "A quantitative analysis of trade policy responses to higher world agricultural commodity prices." Food Policy 36.5 (2011): 545-561.

Photo credit:flickr (Neil Palmer/CIAT).