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Wheat, cotton and sugarcane policy

Implications and policy recommendations

By Dr. Khalid Mushtaq
June 18 - 24, 2001

Like many developing countries, in recent years the government of Pakistan has initiated a series of policy reforms with the major objectives of attaining self-sufficiency in wheat and sugarcane production, ensuring exportable surpluses of cotton, and improving farm incomes. The fixing of higher (guaranteed) output prices is the main policy instrument that is used to meet these objectives. The liberalization of agricultural input markets such as those for fertilizer and water is the other main policy with the objective to increase efficiency of input use and to reduce government expenditure. The government has almost completely deregulated fertilizer prices, and the subsidy has been withdrawn. Due to a lack of proper operation and maintenance, irrigation efficiency is decreasing and the government is concerned about the pricing of irrigation water to farmers so as to meet operational and maintenance costs of the canal system.

In a country like Pakistan where agriculture plays an important role in the overall economic development of the country, knowledge of farmers' responses to production incentives is essential. From such information, we can assess the effectiveness of existing price policies and form a basis for developing others. Hence, it is worthwhile understanding the relationships governing farmers' responses to policy changes in these sectors. Furthermore, in terms of agricultural policy implications, both the level and the composition of production are major concerns of agricultural policies. In order to formulate an appropriate price policy, a basic understanding of farmers' response to price changes is required. By keeping this in mind an effort is made to give answers to some of the issues raised above.

The Effect of Pricing Policies

Our results show that farmers in Pakistan are responsive to output and fertilizer prices. The estimated positive own-price, and negative cross-price and fertilizer price elasticities provide some insights into the effectiveness of government policies towards the sector. A price change in single crop effects the production of other crops in two possible ways depending on whether crop production is competitive or complementary. A price change not only affects the allocation of land and other resources for that particular crop but also changes the land allocation of other crops. The impact of changes in the prices of different crops on the acreage allocation between these crops could help to determine an integrated structure of agricultural prices necessary for achieving an optimal crop-mix.

Our results for wheat show that wheat acreage is unresponsive to own price and supply cannot be increased by increasing its support price. In contrast, an increase in the prices of cotton and sugarcane have significant negative effects on wheat acreage. The government's current practice of setting the wheat price, under the assumption that it is the sole rabi crop and does not compete with the other (kharif) crops, should therefore be reviewed. An alternative strategy for increasing wheat production could be to develop late sowing wheat varieties so that wheat sowing and cotton harvesting do not coincide.

Cotton acreage is responsive to changes in own prices. However without trade barriers, cotton supply cannot be increased increasing its support price because domestic and world prices, since late 1980s, are equal. But, given the comparative advantage and lower water requirements of cotton compared with sugarcane, a carefully designed price support for cotton and sugarcane which favours the former could increase wheat production and promote more efficient water use.

Sugarcane acreage is responsive to own price and existing support prices make it profitable. Sugarcane's support price is determined each year, as with other crops, on the basis of it being a 12/18 month crop and on the average costs of production; this ignores ratoon sugarcane which is the main reason for its profitability since sowing costs of production are saved. Thus, in fixing sugarcane's support price, the possibility of it being a ratoon crop should also be considered, and price support should not be at comparable rates to wheat and cotton as has been the case hitherto.

The results also indicate that it is inappropriate to formulate a price policy on the basis of a single crop in isolation since any change in the supply of one crop has effects on other crops acreages and yields because it does not take into account the cross-effect on the production of other crops. Therefore, on the basis of these cross effects, there is a need to develop a systematic and comprehensive approach on which price policy should be based which can aid government priorities for agricultural support. In particular, own- and cross-price elasticities suggest that prices can be an effective way to increase acreages under these major crops.

The Effect of Fertilizer Pricing

Our results also indicate that high fertilizer prices has a negative effect on the supply of all major crops. This suggests that low fertilizer prices may enhance production of all these crops. Subsidising the fertilizer price may be one way to increase crop output but if the additional demand created by subsidising an input cannot be met by enhancing input supplies, as now is the case for fertilizer in Pakistan, this results in shortages and additionally, it will cause disturbances in the distribution system. Therefore, the emphasis should be given to providing sufficient quantities of fertilizer rather than to providing fertilizer at subsidised rates and this can be achieved by promoting competition among private suppliers. The open market mechanism can improve the access to input supplies, timely input availability, as well as timely application.

The Effect of Technology

Our results indicate that technology and irrigation in particular are important non-price factors in explaining acreages and yields. This implies that to achieve the set goals (self-sufficiency in food production, produce an exportable surplus and increase farmers' income) the major thrust could be on technological improvements (i.e., development of irrigation schemes, raising productivity through the introduction of further HYVs, improvements in production technology and practices, education and, extension) and infrastructural development with the price policy playing an important secondary role.

The author is Lecturer, Department of Agricultural Economics, University of Agriculture Faisalabad, Pakistan