Food grains import, production and market price: A different view

The Financial Express published on January 31, 2014 an article titled Food grains import: Puzzling at first sight. The writer of the article argued that import of food grains might cause decline in the production of food grains such as  rice and wheat. He added that as long as higher price is due to the higher cost of production, price of domestically produced food grains such as rice and wheat is unlikely to come down unless the cost of production comes down. As a consequence, farmers may switch to alternative crops production and this may create the hazard of being dependent on the foreign food grains supply. He also mentioned the monopoly business of syndicates and how they distort the free play of market and market prices. The important point is that the writer is very concerned over the decline of the production of food grains because of the lower price competition stemming from imported food grains. He conjectured that if  the cost of production doesn't change and remains high causing higher price for domestic food grains, then the decline in the production is likely to happen.
We, on the other hand, argue that food grains import should be seen as a corrective step that should have been welcomed before. As for the production decline, we reason that decline of the production will be marginal. What is more worrisome is not the decline of production, but rather the failure of the production to decline. We argue that if the production declines due to such food grains import, then we can see it as a one more corrective step that would shake our market to move in the right direction.  
IMPORT OF FOOD GRAINS AND MARKET PRICE: As we have said repeatedly in the recent times, the domination of middlemen or syndicates doesn't lie anyway in the hands of syndicates or middlemen. It has become our habit of thinking that middlemen are like dishonest and omnipotent monopoly actor who can manipulate the market whatever the way they want. Such kind of reasoning can't be supported at all from any logical point of view. When market malfunctions, the domination of middlemen is a must no matter who are there and who hold what power. But when market functions well, the domination of middlemen must fade away no matter how much omnipotent they are. In a recent article, in The Financial Express, titled Paddy Price Dilemma we have  shown that over the time the difference between the just price of  paddy and actual price of paddy that farmers fetch will increase if our agricultural base and structure don't make the proper transition. Such time-series-based projection easily shows why blaming middlemen is irrelevant. Rise of middlemen is a natural response that has emerged from the present agricultural base and structure of our country. It would not be daring to say that if we fail to correct our agricultural base with time, many more troubles will arise in the future and the price difference will keep rising too. From this front, we can justly welcome the import of food grains, and it can be expected that such monopoly power will be tamed by such measure as people will make substitution of higher-priced rice for lower priced rice. The writer of the article, Food grains import: Puzzling at first sight, also supported this point of view.
But what if middlemen and syndicates reduce price in such a way that they transfer such price cut directly on the shoulders of farmers offering them still a lower price? This is very much a realistic concern given the nature of the corrupt market operation. Now the dilemma is two-fold: First, we can't certainly welcome food grains import because it may cause a worse effect forcing farmers to accept a very low price. Second, we should welcome such import because it may curb the monopoly power of syndicates and middlemen. But we would show in the analysis below that even if the first outcome is more likely to happen, we would better welcome such importing decision.
IMPORT OF FOOD GRAINS AND THE DECLINE OF PRODUCTION: Now, the question is: Is it possible that food grains import will cause decline in the production of domestic food grains such as rice and wheat? The writer of the article titled Food grains import: Puzzling at first sight speculated that it would cause the decline. We argue that the decline in the production will be marginal and insignificant. To find the answer to this question, we needn't go far. We just need to analyse our agricultural production system.  First, in a country, in which production is carried mostly by small farmers who have very small degree of income diversification or almost no other source of income, such decline is unlikely to happen.
We can give a very vivid example that this scribe witnessed in his own eyes how farmers form expectation about prices of agricultural corps that they cultivate and how current market price can change their future expectation. In the year 1997, farmers in our village witnessed a very depressed price for agricultural products including rice, wheat, cabbages, and cauliflower. Even the farmers in our village dumped the crops but didn't carry them to market to sell because they were unable to recoup the cost of transportation after selling crops. Again in 1998, the farmers faced the similar situation. But what was more astonishing, the farmers continued production as if the expectation about future price of agro products didn't enter their supply function, and production, especially of rice, didn't decrease significantly. This is very peculiar about our agricultural production system. Due to conventional family-based small-scale farming, future market price doesn't systematically enter into the expected revenue function and the supply function of the farmers in our country. This is very strange and absurd characteristics of our economy.
Second, considering land variety and farmers' ability to switch to crop varieties, we can argue that the decline in the production of rice will not happen. The instance of 1997 supports this as well. Why farmers in that year didn't reduce their production of rice despite the depressed price of rice they faced. One of the most important factors along with the conventional family based farming constraint is that crop switching is often a risky venture and needs the ability to handle such risk. For example, in 1998 in our village only some farmers ,who were large farmers, switched to mustard oil production seeing the depressed rice price but those who were relatively small farmers didn't do such. Switching to crop variety is often not a feasible option for small farmers because such undertaking requires a historical evidence of expertise in cultivating such crops and also the ability of carrying out the risk of crop failure. That's why small farmers didn't even switch to alternative crop production. However, even the big farmers allotted a very insignificant portion of their total cultivable lands for paddy cultivation to other crops such as mustard oil production. This appears very much puzzling. Yet, it is not puzzling at all. Farmers are not only constrained by the lack of risk-bearing ability, but also by the land variety that constrains the cultivation of crop varieties. In fact, in our village farmers in those years could switch to cultivation of other crops instead of cultivating paddy if lands were much suitable for producing different crops. To give another example, in the year 1997 when farmers saw a very depressed price of cabbages, cauliflower and potatoes, next year a significant amount of people switched to cultivation of different crops such as different kinds of vegetables including spinach, carrot, even green chili. Even the small farmers did so significantly. They were able to do so not because they had expected a lower price trend in the year 1998 for cabbages, potatoes, and cauliflower but the lands in which they cultivated cauliflower, cabbages, and potatoes gave them enough room for switching to the cultivation of various crops. Also, in those years, only big farmers, who had the capacity to store potatoes or pumpkins and also the ability of sustaining spoilage from storing, allotted some lands historically used for paddy production to joint production of potatoes and pumpkins. But the effect on the total production was also insignificant since farmers could cultivate paddy on the same plots after harvesting potatoes and pumpkins. And they used the joint production of potatoes and pumpkins as the primary crop and rice as secondary crop. Therefore, considering all of these angles we reason that recent food grains import will not cause significant decline in the rice production.
FOOD GRAINS IMPORT AND ITS EFFECT ON THE DOMESTIC ECONOMY: While the writer of the article titled Food grains import: Puzzling at first sight was concerned with the decline of production, we are concerned with the failure of the production to decline. In fact, if the production doesn't decline in response to such food grains import, then it is a matter of much worry and concern. A fall in the production due to such imports is very much desirable outcome and would help to bring market somewhat to the correct direction. But we fear that such decline would hardly occur. This is the big problem in our country. This indicates that our economy doesn't absorb the shock and such lack of shock-absorbing capacity indicates a very weak, feeble, and unorganised market economy structure. Our expectation is that if such import causes a decline in the production, then such decline would bring some long-term benefit for the country. First, we illustrate why such decline will not occur by formulating and analysing the characteristic of the expected revenue function and the supply function for a rice producer. See the details in the box:
Now, consider the corresponding supply and expected revenue function of a rice producer in our domestic economy.
In the above supply function, x incorporates all the constrains that include risk-bearing ability, family-based farming constraints, constraint of the cultivation of crops variety, etc. These factors are not responsive to market price and they will remain as static as they are unless a change in the agricultural structure happens. See the box below:
Therefore, we can expect a horizontal supply curve described by the above supply function for our domestic rice producer which is drawn below:
In the above figure, supply(S) and price at different time (Pt) are measured respectively on the vertical and horizontal axis. The heavy black horizontal line shows that supply of rice is not responsive to market price; in fact, it is almost price neutral. Supply of rice is responsive to the variables jumbled under x. If there is change in x, then we can expect a change in the supply of rice otherwise not. As an example, an alternative supply curve is drawn which is shown by the dashed horizontal line above. This horizontal line shows that the variable x has changed and now it is x0 instead of x. This change in x has caused the supply decrease where the change in x has been in the unfavorable direction. On the other hand, the supply function S1 shows that supply depends on the expected future price given the present, past, current, imported rice prices along with the cost of production. This is the pure supply curve for a producer operating in a pure market economy. As we have argued above, if  market doesn't absorb the shock, then supply will not respond to market price and as a result production will be redundant and more than what is required by market forces. This is shown in the above figure. At price Pt-1 the equilibrium market supply should be OS2 but the actual market supply is OS1 and the difference [OS1-OS2] is the measure of the redundant supply and this happens due to the inability of our market to absorb the shock, and this inability is due to supply being the function of x not of prices. The implication is that in our economy there is no current sign of changes in the variables lumped together under x. Therefore, we can rationally expect no significant decline in the production of rice as a result of import of food grains or rice.  However, the desired result should be a decline in rice production and this unfortunately will not happen given the nature of the supply curve of rice in our country.
Since we speculate that crop production such as rice would hardly be affected by food grains import and the effect of switching to alternative crops production on the production of rice would also be insignificant, we expect that such failure of the production to decline will impose a depressing pressure on rice prices. Though it can be expected that middlemen will be forced to reduce the price they fetch by monopolising market, ultimately reduction will adversely  affect farmers. The reason is that, on the one hand, middlemen will reduce prices but they will reduce prices to such an extent that their monopoly profit remains unchanged. This is possible if they can transfer the price cut due to foreign competition on the shoulders of farmers in terms of offering them still a lower price and this is what would, in fact, happen. Now, if such depressed price effect sends some signals to our economy, after then we can expect something to happen but this would take time.
THE PUZZLE OF FOOD GRAINS IMPORT: Import of food grains seems puzzling not because it will reduce production of domestic food grains such as rice but because the production of domestically produced food grains will not decline even after the import of food grains, as we have shown above. Moreover, we have projected a depressing price effect on the domestically produced food grains where the effect will fall directly on the shoulders of farmers while keeping others such as middlemen or syndicates as well off as before. Now, given such a condition what should we do: should we hail import of food grains or not? Even after taking into account the projected decline in domestic food grains price, we would welcome such decision. The reasons are: (1) such food grains import can be seen as an experiment to watch over how it helps to correct market price by inducing competition. (2) Depressing price effect, if continues for a long time, would send a signal to our economy not by reducing production but by forcing suppliers of inputs to adjust to the prevailing market price. We rationally expect that such response will come though it will take some time.
Md. Jamal Hossain writes from the University of Denver, USA.
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