The news from the farm has been almost uniformly bleak over these past few years. Agricultural growth has been anaemic, food prices have been sluggish and we have been inundated with horrific stories about mounting rural debt and farmer suicides.
Will the situation finally start improving this year, as production and prices of farm produce rise?
Let’s consider cotton, the one crop that has led to so much farmer grief. In its new report released this month, the Prime Minister’s Economic Advisory Council says the ministry of agriculture expects cotton production to increase by a modest 1% in 2007-08. But then it adds: “However, estimates of the Cotton Advisory Board, which are considered to be more accurate by trade and industry, had placed this year’s output at nearly 31 million bales, an increase of 9% over the last year.”
The more recent estimates of a domestic cotton crop are only slightly lower—30 million bales. Of course, this jump in production alone will not help distressed farmers if prices stagnate or fall. Sugar farmers are in precisely this sort of mess—surplus production and weak prices. But there could be better news for India’s cotton farmers. Global prices of cotton are close to their four-year highs.
And there is a story here. US farmers have been cutting back on cotton production and moving to more lucrative crops such as corn and soya bean. Demand for both has been very strong and their prices have soared skywards over the past three years. In a bid to cut dependence on imported oil, the US government has lavished subsidies on corn-based ethanol and helped push up corn prices. Growing demand for meat, especially in China, has pushed up the prices of soya beans, which are fed to cattle and pigs.
The result: Acreage under cotton has shrunk in the US by almost 30%, according to trade journal Farm News, as farmers there have used their land to grow crops such as corn and soya bean. According to another estimate, the US will plant 9.9 million acres of cotton this year, the lowest in more than two decades. Global cotton supply is likely to grow by a very modest 1% this year. Thus, demand for cotton from textile mills is likely to be more than this year’s global output. Prices could head further northwards.
All this could help distressed cotton farmers in the killing fields of Maharashtra’s Vidarbha region and elsewhere. Here’s a quick back-of-the-envelope calculation. Cotton output increases by 10% this year. Prices too are up 10%. The income of the average cotton farmer could thus rise by one-fifth this year. The relief provided by higher cotton prices could be far larger than anything the government can come up with through a budgetary relief package.
There could be repeats of this story in other crops as well. Overall, this is expected to be a far better year for farm output. The agriculture sector is expected to grow at 3.6% this year, compared with the initial estimate of 2.5% and the actual growth of 2.7% in the previous year. While this is still far less than the 6% growth we saw in 2005-06, let’s not forget that the jump in farm output that year was from the low drought-ridden base of 2004-05, when agriculture did not grow at all.
At the same time, prices of various grains and food items have been soaring globally. The Indian government has also increased support prices for grain. Once again, higher production and prices could help farmers. A new research report by investment bank Credit Suisse says that investors can benefit from this trend. “The current situation is an unprecedented one for Indian farmers. With global prices soaring, due partly to cyclical and partly to secular factors, free market forces are forcing the procurement prices of key crops to rise by a hitherto unforeseen…30%-plus year on year in India as well.”
But it’s not good news all around in the villages. Only around one-third of the rural population produces surplus food. The other 70% has to buy food to meet its needs.
This majority could feel the pinch. India does control prices of food items that are sold to the poor through the public distribution system, but the poor still have to buy their vegetables and milk from the open market. The consumer price index for agricultural labourers, which is heavily weighted with food items, has been growing at close to double-digit levels this year. It is unlikely that rural wage rates have grown at the same pace, which means that real incomes of the rural poor could be under immense pressure.
These are policy tangles that governments all around the world will have to deal with in the coming years. The food price shock will affect different parts of the population differently, depending on whether a family buys or sells food. But there is little doubt that higher farm output and prices could do a lot to assuage farmer distress in India—and perhaps lead to a long overdue revival in rural demand in the coming quarters.
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