Sky-high Fortunes For Combating Ground-low Prices: A Case For Agricultural Processing

Sky-High Fortunes for Combating Ground-Low Prices: A Case for Agricultural Processing

Santhosh T Varghese Lecturer in Economics Government College, Malappuram Affiliated to Calicut University, Kerala

http://www.santhoshtv.in http://www.alwayseconomics.blogspot.com http://www.facts-unmasked.blogspot.com

[Paper presented at the annual meeting of Rotatry Club, Kanjirappally, Kerala, India on 30th of August, 2006]

First of all, I would like to thank Mr. Theyyachan and family for the daring decision to invite a person like me to an august gathering like this. Furthermore, I would like to appreciate the Rotary Club for setting aside valuable time for serious discussion even in the midst of an otherwise relaxed ambience like this. Since the freedom to choose the topic has been given to me, I became thoughtful as to decide the subject matter on which I have to talk. My training in economics motioned me to zero in on the economic aspect of whatever subject I may choose eventually. By and large, all of us including me, one way or other, belong to agricultural families and live in a region characterised by agricultural activities. Hence I decided to select an issue from agricultural sector. In this way I resolved to highlight some economic aspects of high price realised for natural rubber.

The Period of Plenty and the Upcoming Scenario For the last several months or so, we are experiencing very high prices for natural rubber (Around Rs.70 per Kg as on 30-08-2006). Some may argue that,

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given the loss incurred due to the long period of slump in rubber prices starting from late 2001, this high price is only just enough to cancel out the pervious losses. At the same time we are well aware of the downside of this upward movement of the prices. Everyone knows that price will not remain like this for ever. It will eventually climb down and when it would happen is the only thing to be known. For this much, one need not get expert advice from any economist or a market analyst. In short, we all know that price will not continue like this for ever and move in a cyclical manner. Media is abounding with the stories of agricultural crisis especially from the Waynadu district. And we also experienced the burnt of it, some years back when the natural rubber price nosedived to Rs. 22 or so. I recollect that, during that period when I was working at the Department of Economics, St.Berchmans College, Changanacherry, I submitted a presentation on a topic titled as ‘The Crash of Cash Crops’. Now I am talking about exactly an opposite issue! Anyway, along with this, consider the tailspin in Vanilla prices that happened from its captivating levels of Rs 2000 per kg for raw Vanila beans to Rs. 200 per kg or so and the crisis through which the Vanilla farmers are currently getting through. This is a situation that everybody wants to by pass. How we could circumvent this impending crisis hence must become an issue to be discussed seriously. Admittedly, learning appropriate lessons from past experiences is the building block for future fortunes.

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The Paradox of Low Price for Farmers and High Price for Manufacturers We often experienced the contrast of farmers getting low prices where as the manufacturers whose use these agricultural products as raw materials realise high prices. John Kenneth Galbriath, the celebrated American economist and the former US Ambassador to India, put forwarded an explanation for this paradoxical situation. He pointed out that farmers are facing ‘Perfect Competition’ where as the manufacturers are facing ‘Monopolistic Competition’ and hence the price differential. Perfect Competition is a market situation where the sellers do not have any control over the price because of the existence of very large number of sellers. Hence it is difficult to form farmers’ organisations to lobby for remunerative prices. On the other hand, Monopolistic Competition is a market situation where the sellers enjoy total control over the price due to the presence of only few number of sellers. They can easily form producers’ cartels and can even influence government and policy making. In addition to it, the farmers are dealing with products that are highly perishable or having small shelf-life. Hence they are compelled to sell their products at whatever low prices prevailing in the market.

The Way Out A two-folded strategy can be adopted to deal with this situation. Firstly, farmers’ organisations can be formed to lobby effectively for appropriate government interventions for getting remunerative prices. Secondly, we can take steps either to increase the shelf-life or decrease the perishability of the agricultural product or adding value to the product with a view to increasing the bargaining power of the farmers. 3

The first strategy has already been taken, for instance “InFarm”, but could realise only very limited benefits. Moreover, the formation of “InFarm” brought about a handful of controversies. This result is not an unexpected one from an organisation that is supposed to represent the interests of a large number of farmers and is quite typical to any organisation like this. It is quite natural that the interests of the leaders of these types of organisations often get in conflict with the interests of the members. In economic theory, this problem of conflict of interests between leaders and members of a big organisation is called as “principal-agent problem”.

Thus the ray of hope lies in the second strategy of increasing the shelf-life or value addition of the agricultural products. This is a virgin pathway yet to be explored at least in our country. Thus we reach the dynamic terrain of agricultural processing.

The Terrain of Agricultural Processing Generally speaking, agricultural processing means the processing of agricultural products that will result in value addition, increased shelf-life etc with a view to increasing the bargaining power of farmers which is essential to reap remunerative prices for their products. For instance, activities like making RSS-1 rubber sheets, latex processing, bitumen processing etc. Thus agricultural processing will help framers either to realise good prices even in a situation of adversity or to minimise the number of burn marks resulting from falling prices. Admittedly, these activities involve more participation and engagement from the part of farmers. Furthermore, it requires collective action in many situations. Above all, in a bountiful period like this people tend to take leisure rather than worry about the future downturn.

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But it is wise to ‘make hay while the sun shines’. At least a part of the increased income from the present high level of prices should be set aside for engaging in processing activities. Remember that only during a period of plenty that we can afford investment in activities like this.

These processing activities may need more labour but labour deficiency could be dealt with by resorting to labour saving techniques or the judicious blending of labour and technology. Remember that all the present labour saving tools and machines that we presently use like cutting machines, nifty gadgets, excavators etc are the inventions out of desperate need to confront acute labour shortage in Western countries. It is said that “think big is good but act big is foolish”. Anyway I submit these ideas for your consideration. I conclude with the words of visionary industrialist Jamshedji Tata. “Nothing worthwhile could ever be achieved in this world without deep thought and conviction”.

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