In the post ‘Paving the road to hell with agricultural productivity’, my colleague Sachin wrote about the new policy study we both have got onto. Our observation as Sachin states is:
Focus on increasing agriculture productivity as an intervention in alleviating poverty across the less developed and developing countries, particularly of Africa and Asia has had reverse effect of pushing people further down into economic crisis.We begin a small study this week where we explore the consequences of large agriculture programs which are focused on increasing agricultural productivity of farm sector, for a variety of staple crops, cash crops as well as horticultural crops. The increase in productivity is treated as end in itself. Whereas, in practice, the productivity rise is not realized as increased income for the farmers but works adversely works on pushing the prices of that crop further down. What is proposed is that increased agri productivity will lead to increase in income of the farmers. In practice, what happens is that the increased flow of agri-produce in the market pulls the price down and neutralized the gain of the producer….
And after describing what is the problem in this approach he adds on that:
… development sector programs in agriculture, domestic as well as international agri-commodities trade and poverty are linked very closely and in a direct fashion.
To be able to make a case for this argument, we need to look at the three aspects that have been mentioned above in more details. In this post I look at the issues with present argi-commodities trade situation that contributes to the problem.
A little history of why and how Agri-Commodities trade begun:
All producers, produce their commodities so that they can meet their own needs by using part of the produce and selling the remaining of it to make money that will allow them to buy other commodities and services of their need. Over the centuries this producer- consumer transaction has become more nuanced and complex with different layers of institutions and individuals distancing the producer from the consumer. All of this started in the interest of the producer in the early 1840s in USA, where farmers used to load their grains on barges and send it up a river to Chicago market. If they did not find buyers or if the prices were too low, they would dump their grains in the river rather than transport it back, as the losses they incurred there tremendous. To address this came Chicago board of trade. This helped the farmers trade virtually across geographies and in time ( also known as futures). All of these mechanisms was to reduce the risk a producer bears.
Situation of farmers in Asia and Africa today
This has translated beneficially to the farmers in the developed nations. But the lesser developed and developing nations still grapple with the issues the American farmers faced in the 1840s. Farmers in India even today dump their produce instead of transporting as that would mean a heavy loss to them in certain periods of the year. The situation has not improved yet. But the same produce within few weeks time appreciates in price upto 400%. And the farmer never realizes the profit from this appreciation.
The reasons for such losses are -
- Due to better technologies agricultural production has increased. This has lead to trends of longterm price fall and short term price instability.
- Demand of agricultural commodities has reduced due to slower population growth.
There have been enough initiatives nationally and globally to address these two issues regarding the agri-commodities trade that have failed in the past, to count a few:
- Diversification of products vertically into more value added products and horizontally into non-agri products was tried out. But this had limited impact, as to do both ways of diversification other supporting infrastructure, standards and mechanism need to be in place.
- Due to donor thrust on deregulatory and liberalizing, government spending and desire to intervene in these markets have gone down. This has made the position of the produce only weaker than what it earlier was.
- There have been attempts at supply management through national and global mechanisms. While nationally the state marketing boards were good at providing ancillary services, they failed at their main job of price setting,quality management and in providing it all efficiently. Internationally commodity agreements were made in 1970s and 1980s to maintain physical buffer stock to influence world price. They did maintain prices for a while for few agri-commodities, but these agreements eventually collapsed. That was largely due to withdrawal of support from consuming countries, due to difficulties involved in influencing price especially in an environment where supply expansion brought about by increased agri-productivity and limited financial resources.
- Along with supply management complementary international initiatives that made financial transfers to national governments as a compensation for fall in commodity prices and therefore export earning. But these had little impact as these were response post a crisis (ex-post), another drawback was, they imposed conditions and had strict eligibility requirements. All of this made this effort turn out to be of little use in addressing the “commodity- crisis”.
- Another shot at addressing commodity crisis was by changing the focus of the donors towards market based risk management tools like derivatives and insurances. These instruments still have limites use in lesser developed and developing countries sue to the cost associated with them.
I will write more of what has gone into agri-commodities trade nationally and internationally as a followup to this post. But looking at what has been done in past, it looks like the interventions have tried to only address the symptoms of the problems associated with this space and not uproot the problem itself.
 Eleni Gabre-Madhin: A commodities exchange for Ethiopia
Rethinking Tropical Agricultural Commodities, DFID