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Wheat, cotton and sugarcane policy
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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fertilizer prices, and the subsidy has been withdrawn.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
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