Paddy price dilemma: An alternative view

The Financial Express on January 24 carried an editorial titled 'Rising cost of paddy production' which dealt with the problem of low prices of paddy. The editorial argued that rising cost of production, along with low selling price, is a big threat to the farmers. It lent support to a farm economist's suggestion that the government should procure at least 1.5 million tonnes of paddy to provide succour for the farmers.
We strongly argue against such prescriptions. The reason is that the agricultural sector needs long-term solution and it is not the task of the government to ensure just price for farmers. Even though such action is desirable, it is acceptable only as an instrument that is applied when extraordinary circumstances arise. Second, the rising cost is not a threat to the farmers. Rise of the production cost is a problem when farmers don't get the price that gives them enough room to recoup the rising costs along with handful of profits. Whatever the trend of rising cost is, it should be a secondary issue in this respect. In fact, the main problem is hidden elsewhere which is giving rise to all of these problems. If we don't correct such problems detecting the right source, then no matter how much we blame the government and make it responsible, the problem will never get corrected. In this short article, we will try to show where in fact the real problem lies and what the cure is.
PADDY PRICE: COMPARATIVE BARGAINING VIEW: To understand the lower paddy price problem, we need to understand the comparative bargaining power and how it helps to determine and establish a just price in market. What is comparative bargaining power in this instance? Comparative bargaining power is a special economic power that springs from some economic factors belonging to specific economic entities. Understanding of this definition is very critical to the whole analysis that we will expound here. The definition itself contains two important facts: (a) economic factors giving rise to special economic power and (b) economic entities that retain such special economic power.
First of all, we need to identify the economic factors that give rise to special economic power which is, in fact, the comparative bargaining power. We have identified the following key factors that determine the special economic power or comparative bargaining power of specific economic entities: (1) size of economic operation of specific entities, (2) degree of income diversification, and (3) risk taking capacity or risk bearing capital. If one closely analyses the above three factors, one will see that the first factor already incorporates all of the characteristics of the rest of the two factors. That means the degree of income diversification and risk taking capacities are dependent on the size of economic operation. So, if we analyse the implication of size of economic operation, it will be sufficient for us.
In the article titled 'Farm size and arbitrage: Transition to large-scale commercial paradigm' in the January 08 issue of The Financial Express, we argued that price difference is negatively related to farm size. In fact, this negative relation embodies the concept of comparative bargaining power. The hidden truth is that curve is downward sloping with respect to farm size because of different degrees of bargaining power associated with different sizes of farms. The larger the size, the greater the bargaining power and smaller the price difference and vice versa. We can continue expanding on the example of potatoes production given in that article just replacing rice for potatoes as follows:
In the above figure, price difference between the just price and the actual price (Pj-Pa) is measured on the vertical axis and the farm size on the horizontal axis. The negatively sloping straight line is shown as the measure of comparative bargaining power of specific economic entities which are here farmers. It shows that the larger the size, the smaller the price difference, and smaller the farm size, the larger the price difference.
This graphical illustration blatantly depicts that market price gets distorted when size of operation of economic entities are very small. For example, in the above figure a hypothetical situation of our country is shown in which price difference is very high or P1 and farm size is very small SF1. Now using this theoretical framework, we argue on the following issues:
(A)    IRRELEVANCE OF RISING COSTS: As argued above, rising costs problem is not much relevant to the current paddy price dilemma and it should not be anyway a problem. The reason is that if the size of farms is large, no matter how much and to what extent the supply of fertilisers and other factors of production are interrupted, farmers' normal profit and production will not be hampered anyway. To give one concrete example, let's imagine that due to political or other reasons, famers had to procure fertilisers at a high price and by the time they reap or harvest their corps, price of fertilisers have already come down to the normal level. So, harvested paddy comes into market when price of fertilisers is already at the normal level. Therefore, market may exert pressure on the farmers to sell paddy at the normal production costs. But this is not possible since he had already procured fertilisers at a very high cost. In this instance, his comparative bargaining power will determine whether he will sell at current price or sell later. If his size of economic operation is large, then he must have a high degree of income diversification portfolio and significant amount of risk-taking or -bearing capital. Therefore, he may decide to sell paddy later storing the supply of paddy for some time. But if his size of economic operation is very small as it is indicated in the above figure at the farm size level SF1, his degree of income diversification will also be very small and so is the risk-bearing capital. In this case, he has no choice but to sell at the current lower price. This simple example shows why rising costs of production doesn't have anything to do with paddy price problem. Whether farmers will be able to fetch a just price or not depends on their comparative bargaining strength which in turn depends on the size of their operations, and this is true irrespective of the degree of the rise of costs of production.
(B)    GOVERNMENT INTERVENTION: People often give prescription that to ensure the just price for farmers the government should play a significant role in market. This prescription in most of the cases is a very ambiguous and misleading prescription. It is a common belief that active market role by the government will ensure the just price for farmers. We rather say that such active market role, as prescribed by people, will induce not only to put public energy and resource in wrong direction but also waste of such resources. This is a flawed recommendation and it can't be sustained anyway by sufficient reasoning. We argue that no matter how much government tries to ensure the just price for paddy producers, situation will get worse day by day unless it is corrected at the right point. And the right point is depicted in the above figure.
The government can play some active roles in some extraordinary circumstances but it can in no way ensure the just price for farmers except offering a very short-term and fleeting solution which, from a long-term perspective, is not desirable at all. Using some empirical estimates, we will give a projection below, and this projection will reveal this cruel truth: As the days will pass, the need for government intervention will increase and at the same time, price difference will increase creating a big dilemma for the country if the problem is not corrected at the source.
EMPIRICAL ESTIMATES: CROSS-SECTION PROJECTION: In the earlier article, titled 'Farm Size and arbitrage: Transition to large-scale commercial paradigm', we specified regression model in which we regressed price difference against the migration of people from rural to urban areas and total production accounted by large farms. In other words:
This simple regression model predicts that as amount of total production accounted by large farms decrease, the price difference increases and vice-versa. On the other hand, as more and more people migrate from rural to urban areas, the price difference increases and vice-versa.
Now, the question is: can we predict whether the price difference in our country over the time will increase or decrease? Yes, we can and the answer is given below.
TIME SERIES PROJECTION: The time series projection is principally a derived one from the above theoretical analysis and framework. Due to lack of real data, we can't replicate the exact time series result here. But what we can do is that we can give a projected line for price difference based on the theoretical estimates given above. We predict that price difference in our country will increase over the time and it will show upward rising trend.  A hypothetical picture can be like this:
In the figure below, time is measured on the horizontal axis and price difference on the vertical axis. The rising line FG shows the upward rising trend of price difference over the time. In the figure, OF is taken as the price difference for the present time or 2014. The time series projection tells us that by 2017 the price difference would rise to OE. That means over the time farmers will be deprived of just price more and more if farms' size doesn't increase. The surprising matter is that even if farms' size remains constant over time, the price difference will not remain constant; it will continue rising over time and this is the biggest dilemma.
This time series-based projection shows the fallacy of the government intervention. The reason is that if the government pursues such a policy for long time, the government itself will be caught in a dilemma since whatever kind of activist policy it adopts to ensure just price for farmers, it will not be able to bend the upward rising price difference trend curve to slope downward. If this is true, then we argue that the government should pursue different policies rather than just carrying out time-to-time government purchase. Such policy in the future will prove extremely futile and waste of public resources, and the government should soon avoid adopting such measures and take a long-term vision so that market itself gets corrected. One point should be repeated in this instance that it is not the task of the government to ensure just price in market and it should not also be so. Market itself will offer just price if it works well. Government assists in making market work better, but that doesn't anyway mean that it should tighten its grip to carry out the market operation. This governmental policy is utterly unproductive and undesirable. But if our government continues exercising such unproductive policy, it will soon turn into a sick economic policy which will simply add salt to the injury.
Md Jamal Hossain writes from the University of Denver, USA.
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