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Fair price of crops and poverty alleviation: What did we miss?

Mabroor Mahmood | November 23, 2020 00:00:00

The farmers who ensure our food security still remain largely neglected — Photo: Collected

During the last two years, I was privileged to write for the Financial Express’s Anniversary Supplements where I focused on the issue of fair price of crops for the farmers. In 2018, my first article titled “In Quest of Fair Price for Farmers” was published where I tried to lay an argument for more government intervention in the crop marketing system in order to ensure fair prices for the farmers.

I argued that under the free market system, it is not possible to ensure sufficient return for the farmers from their cultivation just by relying on market forces. Providing empirical evidence, we showed that during the last few decades, the rice farmers in Bangladesh lost their bargaining power and the market power of intermediaries, particularly of the rice millers and the retailers, increased quite significantly.

So if the trend persists, the farmers will not benefit from any major price hike of crops in the future, if it happens. In order to reverse the trend, the government has to intervene in the crop marketing system the way it is done in India through the operations of Regulated Markets.

In 2019, in my second article titled “A ‘Mega Model’ to Ensure Fair Price for Farmers”, I described a comprehensive model named “Bangladesh Accelerated Poverty Reduction Model (BAPRM)”, which proposes that the government should build large warehouses-like Crop Sales Centres all over the country to help farmers store their produce after harvest and eventually sell them to various parties with the help of a mechanized trading system.

Ideal Approach to Poverty Alleviation in a Low-Income Country where Farmers’ Well Being will be at the Centre of all Attention

Each Crop Sales Centre will be connected with each other through licensed market intermediaries named “Market Specialists” whose primary responsibility will be to transport crops from one centre to the other to ensure market integration. Such centres will be open to both wholesalers and retail customers so that farmers can directly benefit from any price increase in the market.

The main objective of the model will be to empower the farmers so that they can take price advantage and raise or lower their prices depending on the market conditions. This model also aims to reduce the market power of intermediaries so that the distance between farmers and the consumers is shortened.

Our proposed model is an enhancement of already functional Regulated Markets in India and is more effective than Modern Terminal Markets, which was proposed to be implemented in India during the last few years. Similar Indian styled Regulated Markets also operate in Pakistan under the banner of “Agricultural Produce Markets or APMs”, although in a less efficient manner.

Both these articles are available online.

In this third part of the series, we are going to describe how ensuring fair price of crops is connected to the aspect of poverty alleviation of the country.

Our argument is very simple. A person remains poor when he does not have enough money for living. If he earns so little that is not sufficient for meeting his food expenses, schooling of the children, healthcare of the family members, then the person becomes compelled to search for alternative means, such as begging, for meeting his daily needs.

In other words, if a profession is not able to provide sufficient income to the person, then the person becomes poor. If he faces such a situation, then the only alternative he has is to switch to a better profession that can provide him the necessary means for living.

If a Teacher is not able to run his family with his income, then he will be compelled to leave the teaching profession and switch to another profession with better income opportunities. The same goes for a doctor, an engineer, a designer, an architect, and the list goes on.

In our society, the people in these professions are respectable and are considered well off just because their professions are able to provide them with sufficient income with which they can even save a lot of money after meeting all their daily expenses.

The same is true for the farmers.

Farmers sow seeds in the land, use fertilizer, irrigate, grow crops, and then sell the crops to the market. If the farmer has only this thing to do for living, then in order to run his family and meeting all his daily expenses, the price of crops in the market should be always sufficiently high so that the farmer can generate some profits.

If the profit continues over and over again during subsequent harvesting seasons, then after a certain period of time, the farmer would have some decent surplus that can be utilized for further investments that can generate more profits for him. This is the way the farmer would be able to come out of poverty.

Now if a country is full of farmers and their only source of earning is growing crops, then the country’s overall economic well-being will be largely dependent on the state of the profitability of the farmers.

If most of the farmers are not able to generate profits from their cultivation, then the country will remain poor and vice versa. Therefore, in order to alleviate poverty for this country, the Government should focus on the well-being of the farmers above all other aspects. In other words, farmers should be the centre of all attention if this country wishes to prosper economically and alleviate its poverty over time.

Now what happens, if the farmers continue to make losses in their cultivation?

If such a situation persists, then as stated earlier, the farmers will be compelled to leave their farming profession and join another profession that might have higher income earning opportunities.

Since rural areas in low income countries are largely dependent on agriculture, switching to another profession is possible if only they migrate to another location, which has more income earning potentials. Urban areas are such locations where a large section of people live and there are demands for day labourers, rickshaw pullers, street hawkers, cleaners, etc.

So the farmer who was one day a proud skilled professional having unique knowledge of how plants grow eventually become unskilled workers just because the market was not able to provide enough return of investments for farming.

Therefore, in order to alleviate poverty from a country whose economy is largely dependent on agriculture if should first pay attention to the income earning potentials of the farmers.

If the market is not able to provide them with sufficient return, then the Government should intervene in the market so that the farmers stay in their profession generating enough return for meeting their daily needs.

In other words, for such a country, ensuring “Fair Price of Crops” through an appropriate mechanism should be placed in the centre stage for ensuring long-term economic development.

With the term “Fair Price”, we mean the price that is sufficient to cover all the production costs and ensure a reasonable profit that would be meaningful for the farmer to help him stay in the profession and continue his farming efforts year after year.

The variables that directly impact the element of “Fair Price” are the price and availability of raw materials, such as land, seeds, pesticides, irrigation, fertilizer, etc., training, research, infrastructure, communication networks, availability of markets, etc.

On the other hand, the variables that indirectly impact “Fair Price” are healthcare, education, political system, Government administration, governance, fiscal and monetary policies, external policies, etc.

We are illustrating this relationship in the diagram presented in the next page.

In order to assess the trend of poverty reduction, the country in question should regularly assess the real income and profitability of the farmers to determine whether the targeted policies and strategies are impacting the lives of the farmers positively or negatively. If the negative impact is visible, then the causes of such a negative impact should be identified and corrective actions should be undertaken.

Now the question remains: Is this approach of poverty reduction an alien concept and something completely new? Not at all.

If we analyze the poverty reduction strategies all over the world during the last few decades, we will see the similarity in thinking and approach. To prove this, we are providing below some snapshots of relevant references that show a similar approach was also undertaken by different global institutions and countries that tried to address poverty in the like manner.

As we all know, the World Bank’s main purpose was to alleviate poverty from all over the world. This grand institution was established with a mission to alleviate poverty from the poverty-stricken countries with the help of rich nations. The flow funds, grants, loans, etc. for various poverty reduction programmes to the low-income countries were cornerstone strategies of the World Bank to alleviate poverty during the last few decades.

The approach of poverty reduction of the World Bank can be readily recognized from the texts of the World Development Reports (WDR) that the Bank started to publish almost every year since 1978. In the very first WDR, the following statements appear:

“….. Of the more than one billion people in the Low-Income countries of Asia, about half live in absolute poverty. Four large countries. Bangladesh, India, Indonesia, and Pakistan contain about two-thirds of the world’s absolute poor. The main reason for the stagnation in the living standards of the Asian poor has been slow economic growth.

In these predominantly rural economies, the key to alleviating poverty is to accelerate the growth of agricultural incomes, because the majority of the populations and of the poor live in rural areas and earn incomes directly linked to the growth of agriculture. The growth of nonfarm incomes in rural areas (from rural services and ancillary manufacturing activities, for example) also depends on the pace of agricultural growth.”

In Page 43, the report states,

“Marketing and distribution is another area in which the small farmers are handicapped. This is particularly true in the case of products which must be processed relatively quickly to avoid spoilage. Generally, the small farmer does not have the physical or financial capacity to hold his produce off the market at the time of peak supply. The trader or processor who can purchase at those times stands to benefit substantially. In addition, procurement is often a monopoly in a specific area, further reducing the ability of the small farmer to obtain a remunerative price.”

This is to note that during the publication of this report, almost 91 per cent of Bangladesh’s population lived in rural areas and 59 per cent of country’s gross domestic product (GDP) was sourced from agriculture. The corresponding numbers for Pakistan were 73 per cent and 32 per cent and for India, it was 78 per cent and 47 per cent respectively.

In 1982, the main theme of WDR was “Agriculture and Economic Development”.

In Page 4 of the report, it states, “One point emerges very clearly from the diversity of experience of the developing countries: rapid growth in agriculture and in GDP go together. Where the pursuit of industrialisation the favored target of planners in the 1950s and 1960s has been successful, agricultural progress has not been sacrificed. Success in agriculture strengthens and helps sustain the momentum of the whole economy. Of equal importance is the contribution of sustained agricultural growth to the reduction of poverty……………………..The balance of interests between producers and consumers is the central issue of agricultural policy, and one governed by pricing structures. In the pursuit of goals other than agriculture’s development, developing-country planners have often tilted their pricing policy against agriculture and paid a heavy price in lost agricultural growth. Incentives to farmers to invest and produce is a key stimulant to agricultural growth.”

In Page 47, the report cites the examples of China where farmers received additional price support from the Government during the years 1977-1980. The Government price support to the farmers was raised by 20-30 per cent during this period and the results were remarkable.

The growth of food-grain production was close to 5.0 per cent a year, while the growth of output of cotton was 23 per cent in 1979-80 and for Oilseeds, the growth was as high as 92 per cent between 1977 and 1980.

The report also highlights the same aspect of the pricing policy of crops and its direct links with poverty reduction in many other sections. It indicates how much the World Bank gave importance to the issue of fair prices for the farmers to ensure long-term economic development of low income agriculturally-dependent countries.

However, this focus on the return of the farmers started to slowly fade away over years. In 1990, the World Bank once again published the Report with the theme “Poverty”. In this report, the issue of pricing of the crops and the return of the farmers did not appear as prominently as it used to be in the previous generation of reports.

After a decade in 2000-2001, the World Bank published another report with the theme “Attacking Poverty”.

In this report as well, we have observed that the causes of poverty have been discussed with ambiguous references of the issue of return of the farmers.

For example, in Page 34, the report highlights the causes of poverty that include items like lack of income, sense of voicelessness, vulnerability to adverse shocks, etc. but a clear direct mentioning of the profitability of the farmers and its links with poverty reduction was more or less missing.

As we all know, during the last few decades, the World bank exercised a considerable influence on the policy making process of low-income countries like Bangladesh. Therefore, it will not be unfair to assume that the World Bank’s philosophy of poverty reduction greatly influenced the minds of the policymakers who were directly involved in formulating various development plans of the country.

After gaining independence in 1971, the Government of Bangladesh first published its Five-Year Plan in 1973 where the growth of agriculture was given the paramount importance. By that time, most of the people in Bangladesh were living in rural areas and agricultural income was the main source of earning for the majority of the population.

The first generation of planners in Bangladesh adequately addressed the issue of farmers’ income and wrote section after section on how fair price can be ensured for the farming community.

They not only highlighted the importance of forming cooperative societies of farmers, but also addressed the need for establishing storage facilities and warehouses throughout the country so that farmers can keep their harvests and take advantage of higher market prices.

In Page 140 of the document, it says, “In order to ensure better price to the growers, storage facilities at different marketing centres will have to be built. Moreover, in view of the planned projection of increased jute output, storage capacity will also have to be expanded.”

The report also highlights the importance of forming a new entity called “Warehousing Corporation”, which will be entrusted the responsibility to construct warehouses for storing crops for the benefit of farmers.

Besides this, there were also recommendations for forming an Agricultural Price Commission – a Government body that will periodically assess the conditions of the farmers and determine the procurement prices for crops on a regular basis.

The issue of fair price of crops and its links with rural-urban migration appeared in a more pronounced manner in the Fourth Five Year-Plan of the country during 1990-95.

In Page X-1-7, the report states, “In order to build a sound agricultural economy, emphasis will be placed on three basic foundations: a productive technology package, efficient delivery services, and remunerative and stable market prices. Emphasis would be placed on policies for maintaining adequate terms of trade for agriculture to ensure profitability of agricultural production in order to reduce unnecessary migration of rural people to the cities and promote establishment of production relations needed to sustain development impetus, ecological balance and social justice.”

For highlighting the aspects of fair price of crops, the planning document, most probably for the first time in Bangladesh’s history, incorporated a table where data of returns of farmers on different rice varieties was presented.

The data shows that between 1984-85 and 1988-89, the ratio of Harvest Price to Total Cost of Production decelerated for most of rice varieties, indicating gradual erosion of profitability for rice farmers. This is consistent with our findings illustrated in Article I published in the Financial Express in 2018.

But unfortunately like the World Bank WDRs, the focus on return of the farmers also gradually faded away in case of Bangladeshi planning documents.

After one decade in 2005, the Government of Bangladesh produced “Poverty Reduction Strategy Paper” popularly known as PRSP, which was the culmination of efforts amongst the Government and the World Bank and the IMF involving various stakeholders in the country.

In order to determine the right strategy for attacking poverty, the policy planners undertook a “Bottom-Up” approach for determining the true causes of poverty and formulate appropriate strategies that will improve the economic conditions of the population.

Like previous planning documents, the report also highlights the trend of decelerating profitability of the farmers but fails to address the issue in a more detailed manner highlighting the causes of the problem and offer potential remedies.

In Page 89, the report says, “Low profitability of HYV rice culture and most other crops diminishes the competitive strength of Bangladeshi farmers, three-fifths of whom cultivate less than an acre of land on average. Fertilizer-rice price ratio has increased over the years. The higher price of material inputs relative to price of outputs makes crop production a low profit activity. Irrigation and human labour account for most of the production costs. Net return from family labour engaged mainly in crop farming is too low for it to provide adequate sustained livelihood.”

The report, however, does not provide details why such low profitability prevails and how to overcome this situation. Identification of the problem is there but diagnosing it with the causes of the problem and providing a pragmatic solution is largely missing in the document.

After surveying a number of Five-Year Plans of the Government of Bangladesh, it appears to us that the focus of the Government slowly shifted from a farmer-centric approach to an economic growth-driven approach over decades.

It seems to us that our policy planners largely assumed that faster economic growth is the solution and if such a high growth can be attained, all other problems will be automatically solved.

But we have clearly shown in Article I published in 2018 that for farmers, such a growth driven strategy did not work well.

In Sixth Five Year Plan during FY2011-15, the issue of the prominence of market intermediaries appears but while proposing a solution, the report does not state anything other than forming cooperatives.

In Page 13, the report states, “In the existing agricultural marketing system of Bangladesh there are many middlemen active in different stages of marketing chain. As a result, on one hand the producer does not receive fair price for their agriculture product, on the other the consumer also has to pay extra price. In order to ensure fair price for both the growers and final consumers through a competitive market environment, it is necessary to reduce the number of middlemen from the marketing chain. In this context, formation of cooperative for the growers and construction of special growth center only for the actual growers could be a way out of this problem.”

Again determining the root causes of the problem and providing a step-by-step solution is missing in the document. It seems to us that the policy planners assumed that market should be left to operate freely and the problems, whatever they are, will be corrected automatically. But this has definitely not happened.

End Note: Bangladesh had to pay a heavy price for shifting its focus from a farmer-centric development approach to an economic growth-driven development approach. During the last few decades, the rural-urban migration accelerated, making the cities like Dhaka one of the worst livable cities in the world.

Despite the growth of agricultural output over years and attaining self-sufficiency in cereal production, which is a commendable achievement, the low profitability of farming compelled highly-skilled farmers to leave their valuable profession and join classes that require no apparent skills.

Many of these farmers also had to leave the country for joining the labour forces in the Middle East for cleaning the streets in hot deserts. In terms of value erosion, such a loss of skilled human resources is innumerable.

Despite being a delta with extremely fertile cultivable land, Bangladesh’s achievement to make the agricultural sector internationally competitive is far from reality.

Bangladesh’s export of agricultural products is mere USD 862 million, whereas India’s export in the same category is as high as USD 38 billion, even more than Bangladesh’s total exports. On the other hand, Pakistan – another neighbouring country in South Asia, fetched USD 4.3 billion from agricultural exports only.

This is to note here that qualitatively USD 1 of agricultural export for Bangladesh is more valuable than equal amount of ready-made garment (RMG) export, because unlike RMG exports, agricultural exports mostly use local resources. Thus the internal value addition in the agricultural sector is much higher compared to the RMG sector.

Both these neighbouring countries could attain such remarkable achievements just because they were consistent in keeping the focus on agriculture and tried to assist the farmers as much as possible with the necessary price supports along with all other required inputs so that they generate enough return from their profession.

Ensuring fair price for the farmers was listed as a priority item in the planning documents of both of these countries even during 1960s, and they continued to support the farming community by forming Agricultural Price Commissions, storage facilities, regulated markets, etc. so that farmers get sufficient return from their harvests. Whereas forming an Agricultural Price Commission is still a dream for Bangladesh despite repeated recommendations put forward in subsequent planning documents since the independence.

Both Pakistan and India, despite showing remarkable progress in the agricultural sector, still have room for improvement in ensuring fair price of crops by correcting infrastructural weaknesses and improving operational efficiencies of their respective crop marketing systems. Our proposed model can act as a reference for making such necessary adjustments.

But for Bangladesh, the current state is quite disappointing. The storage capacities that we currently have are all publicly owned and are used only for Government stocks. These are not open for the use of our farmers.

The entire crop marketing system is dominated by market intermediaries, who are exercising considerable influence on setting the market prices. During low demand, they keep the prices so low that is not sufficient to even cover the production costs for the farmers, and during the high season, they make super normal profits leaving the farmers exploited.

Most importantly, unlike Pakistan and India, the overall culture for a more regulation in crop marketing is not there in Bangladesh. Therefore, quick implementation of any modern model for ensuring fair price of crops would be complex and time consuming.

The issue of fair price of crops repeatedly appeared in Bangladesh’s national media year after year during the last few decades. I recall when I was a university student back in the 1990s, one such news coverage triggered my thinking that eventually contributed to the development of a mega model that we proposed last year to address the problem.

However, the issue did not attract attention of the Government high-ups until very recently. I also don’t recall any major event that happened during the last few years where the subject was discussed in much details.

But surprisingly all the solutions had been written down in a detailed manner in our planning documents since our independence. Noted international poverty experts also frequently visited our country on numerous occasions. Our celebrity Economists having high influence on the Government machinery regularly interacted with their Indian and Pakistani counterparts. But still we failed to address the very issue that matters for millions of our farmers!

Now the question remains: What did we really miss? Why couldn’t our development planners maintain their focus on farmers’ well-being?

Unfortunately, we don’t have the answer.

Mabroor Mahmood is Founder, Ideas for Development (IFD), a virtual think-tank. [email protected]

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