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Resource centre on India's rural distress
 
 

Your food is not cheaper yet, but wait a while -Harish Damodaran
-The Indian Express

* Have global agri-commodity prices fallen? By how much?

They have. The Food and Agricultural Organisation's latest Food Price Index (base: 2002-04 = 100) of 192.3 for October is down 6.9 per cent compared to a year ago, and 19.1% below the all-time high of 237.7 reached in February 2011. Prices of commodities such as corn, wheat, soybean, sugar and palm oil traded in international futures exchanges are today 13% to 21% lower than their corresponding levels at this time last year.

* Are prices falling in India?

In some cases. Sugar is retailing lower than a year back, so are chana dal and most edible oils from soybean and sunflower to palm and groundnut. We are paying less for onions and tomatoes, and probably even for eggs and chicken. But these price reductions are not of the kind one would expect in an apparently global commodity bear cycle. In fact, prices of rice, wheat, other dals (arhar, urad, moong, masoor), potatoes and milk have probably only gone up in the last one year. So, while the FAO global Food Price Index or commodity futures at the Chicago Board of Trade may have declined sharply, official consumer food inflation in India was 7.67% in September. That figure may dip when the next consumer price index data for October is out Wednesday, but we are still far away from experiencing any real fall in retail food prices.

* So, exactly why aren't the food bills of Indian consumers getting smaller?

To begin with, agriculture markets aren't as perfect as financial markets for currency, stocks and bonds - where price adjustments and information flows are faster and seamless across the globe. Agri-commodity markets are fragmented, and that leads to huge price differences within the same country or even between neighbourhoods. Also, supply adjustments to high prices/demand happen relatively slowly: buffalo calves and palm trees take up to four years to grow and start yielding milk or oil-bearing fruits. The global crash happening now is essentially the outcome of the supply response to the price peaks of 2011-12, helped further by benign weather and bumper harvests worldwide this year. We should give some time for the effects of global prices and supply response to play out in India.

* How long should that be?

Transmission of global price signals is the fastest in crops that are widely traded in international markets: corn, wheat, rice, edible oils, sugar and cotton. It is less in commodities less traded (not even 50 million tonnes of the world's 700 million tonnes annual milk output gets exported as powder, butter or cheese), or where production and consumption is concentrated in particular countries (such as pulses in India). It is even less in products such as vegetables, where there isn't much scope for large-scale imports of potatoes, onions or tomatoes. In general, tradable commodities are more amenable to domestic price declines in a bearish global market than non-tradables. In the latter, domestic supply response is what works. We have seen it in onions where high prices last year have encouraged farmers to produce more. Prices have dropped as a result.

* But shouldn't we be paying less for at least wheat and rice?

The main reason is minimum support prices (MSP). The government has fixed the MSP for this year's wheat crop at Rs 1,450 a quintal or $ 236 per tonne. The MSP has been raised despite world prices (at which wheat can be exported from India) falling from $ 320 to $ 220-225 per tonne over the last year. The government's MSP-cum-procurement policy impedes effective transmission of global prices into the domestic market.

* Why is the government doing that? Shouldn't consumers benefit when international prices are down, as in the case of petrol and diesel?

Agri-commodities are a little different because India has some 130 million farming households, as against a mere 2 million in the US. Indian governments, therefore, have to be as sensitive to the interests of producers as of consumers when it comes to food. MSP-based procurement has served as a tool for protecting farmers from open market prices falling during harvest-time. In the long run, however, it makes sense for the government to shift to direct income transfers and crop insurance as a means to support farmers. An income policy, wherein all farm support is given as a lump-sum amount on a graded per hectare basis, can benefit producers without distorting the process of price discovery through market forces.