Agricultural price policy: Some thoughts

The impacts of agricultural prices on the rest of the economy should also be vetted. GON must take notice of the cost of industries that rely on agricultural raw materials, wages and laborers

Prices of agricultural products are indispensable for farmers since they determine their incomes. Buyers are no less influenced by these prices, be they consumers, industrialists or exporters. As incentives for lifting production and sagacious allocation of resources, there is the social attention entailed in them.

In promoting a national price level, it is crucial to rule out prices that are precipitating at a rapid tempo as well as prices that are plummeting to their minimum levels since both of them have deleterious consequences. A noteworthy upsurge   in agricultural prices detrimentally influences consumers, industries as well as the development programs. Low income consumers in Nepal expend a significant portion of their incomes on food grains and on other products of agro-industries. A hike   in the price of the consumer goods will act as a supplement to the labor costs of industries, resulting in cost-push inflation.

Plunging prices are symmetrically detrimental. Incentives to producers are curtailed or even made to disappear. Farmers produce for their own consumption and an exiguous quantity for sale in the market. The position is worse in case of small farmers who are coerced to undertake distress sales to meet their fixed obligations. Plummeting prices thus curb the output of agricultural produce, lessen the marketed surplus, and pauperize the weak farmers. Additionally, by reducing the purchasing power of farmers, these prices lead to a nose-dive in the demand for industrial commodities.

In Nepal, there has been an unceasing climb in demand for agricultural commodities, with soaring demand for food items. Ergo, the prices of certain goods go   higher than that of others. The rise in demand has been imputed to a slew of factors such as the population growth rate, expansion in money supply, increment in incomes and export promotion of agricultural products. In other words, the demand increases emanated from three sources, namely, for consumption, for industrial use, and for exports. The upswing in each of these was disparate exercising alternating effects at different periods of time and on different agricultural commodities.

A number of instruments have been deployed by the Government of Nepal (GON) to attain the objectives of agricultural pricing. One of them is the minimum price support scheme for maize, paddy and wheat. Under this mechanism, support prices are established yearly. These prices are fixed on domestic costs of production and prices hovering in border markets. These are the minimum prices farmers are to be paid for food grains purchased by public sector entities, such as the Nepal Food Corporation. Nonetheless, the support price scheme has had a limited role for the Government enterprises have been incapable of purchasing the required amounts of paddy and wheat from the farmers when the market price dipped below the minimum. The unavailability of a smooth commercial movement of food grains from the Terai to the deficit regions has made it recondite to devise and execute an apposite agricultural price policy.

Nonetheless, if certain reflections are accorded foremost precedence by GON in determining the optimal level of agricultural prices, most of the aforementioned difficulties can be abated. The first and foremost is the impact of the selected level on agricultural production. The price level should serve as incentives to producers to deploy apposite technology and optimize production. The structure of prices, that is, relative prices of various agricultural products, should be given due importance.

The impacts of agricultural prices on the rest of the economy should also be vetted. While verifying the price level, GON must take notice of the cost of industries that resort to agricultural raw materials and wages to laborers who expend a bulk of their salary incomes on food articles. Consumers in general and exporters in particular who are allured by some preferential exportables also play a vital part.

The terms of trade between the agricultural sector and the non-agricultural sector are another prominent element. This takes into perspective the prices that the agricultural sector fetches and the prices that it has to pay for agricultural inputs such as chemical fertilizers, pesticides, electricity, and for the consumption goods. This aligns agricultural to non-agricultural sector in a way that there is a rational two-way flow of income into the former and that of expenditure into the latter sector.

If the aforesaid suggestions are properly consolidated by the GON, certain beneficial results will appear. In the first instance, agricultural prices will be able to muzzle the market imperfections which emerge primarily due to competition with the manufacturers.

Farmers, for example, are too many, too scattered and almost totally unorganized as compared to manufacturers. A comprehensive price policy can do a substantial negotiation rectifying these distortions in the market structure, and accordingly in prices, by allowing them to mirror the demand and supply factors. Accruing from these signals will also be the desired production, cropping patterns, remunerative income to the farmers, and assured supply of essential products to the farmers.