Price Crashes in Agricultural Commodities: A Global Phenomenon

Policy Research and Consulting

Price Crashes in Agricultural Commodities: A Global Phenomenon

June 13, 2018 Uncategorized 0

Commodity price fluctuations are more than just a demand-supply mismatch. While in India, the production is mostly unplanned, markets may or may not have the capacity to absorb all of the produce, leading to decline in price.  Farmers have been known to sow crops based on last season prices. More often than not, it leads to excess production and thus oversupply. The monsoon has played its part in bumper harvest for 2 consecutive years. The general production cycle of crops contributes to the steep crash during harvest months, Sept-Oct and April- May. Farmers are often forced to sell their produce well below MSP and suffer unequivocal losses during these months. Research indicates that production of vegetables in off season results in significant increase in farm income. However, due to unfavorable agro-climatic conditions, the farmers may resort to increased usage of pesticides. In such a scenario, extension services have proven to balance the use of pesticides by farmers.

The fluctuations are not only seasonal but also artificially created by market forces as the price discovery mechanism is inherent with flaws. The trade cartels have been notoriously famous for rigging prices and exploiting farmers. Traders provide network to facilitate the movement of commodities between farmers and processors.

The government procures wheat and rice on MSP but there is no such provision for perishables like tomatoes.

International Trade Affecting Commodity Prices

Price fluctuations are sometimes more related to the commodity prices in the international market rather than the domestic output. The World Bank expected the agri commodity prices to remain stable in 2018 owing to adequate production and supply, but it does not reflect the Indian situation where bumper harvest lead to crashes so steep that many the farmers are forced to abandon their crops, especially tomatoes and other perishables. The country recorded a bumper harvest of pulses amounting to 23 million tonnes in 2016-17. While annually India consumes about 22-24 million tonnes of pulses, the domestic production was enough to cater to the domestic demand for pulses. Even then, the government allowed import of 6 million tonnes during that year adding to price woes of the farmers. In another similar move, the government has released import quota of 1.5 million quintals for tur dal from Mozambique on May 21st, 2018 whereas, pulses are trading below MSP in the market. This untimely decision will hurt farm incomes further as the prices are expected to fall owing to the lower cost of imports. Farmers are holding stock of about 6 million quintals which they are no selling as the prices.

While price crash is a global phenomenon as each country has to protect its farmers’ interests through policies to combat massive fluctuations and speculation in the commodity market prices.

Farmer’s Share in the price to end consumer varies greatly for each country. While in Vietnam it ranges from 35% to over 60% depending on the commodity, even in a country like Nepal it can be anywhere between 57% to 69% for commodities like paddy, wheat and mustard. This is disheartening as in India, with more resources and development, farmer are barely able to get 30% of the retail price.

Measures to Deal with Price Volatility in Other Countries

Some developed countries have measures in place to ease the price woes of farmers. EU union for instance had multiple instruments to under the Common Agricultural Policy like –

  • Intervention buying
  • Export Subsidies and Variable levies on Imports.

In the recent times, however, their policies have evolved more towards making agriculture market oriented and less focus on governments’ intervention in the paly of market forces. Their policies are now more focused towards risk management, however the insurance schemes and related government programs have not been able to successfully bring the desired resultant change in the incomes of farmers.

Similarly, the United States have scrapped the old direct payment of subsidies to farmers and are concentrating on risk management programs to help farmers deal with crop losses and losses incurred due to plunging prices. This is carried out through following two programs –

  • Price Loss Coverage(PLC) programme to address sharp declines in commodity prices and
  • Agriculture Risk Coverage(ARC) programme to cover a portion of a farmer’s revenue losses when crop prices fall to 86% of the ‘historical’ benchmark.

Developing economies like Brazil and China have a different structure in place. Brazil has a price support mechanism in place wherein for commercial agriculture, this price support is distributed regionally by the government agency CONAB. Specific price support measures for large-scale farming include direct government purchases and financial support for storages.

The main instruments of the Chinese agricultural policy consist of minimum guaranteed prices for wheat and rice, and ad hoc market interventions for other agricultural commodities. The ad hoc market interventions are not implemented effectively as there could be huge regional disparities in the prices.

Solutions in the Indian Context

In addition to the current government practice of setting the floor price for non- perishable commodities like setting the MSP, there is a need for nationwide marketing extension for the farmers so that they can do production planning based in market intelligence and understand the quantity of their crop that can be absorbed in the market at remunerative prices. With a demand driven output, the market forces are likely to stabilize, though the challenge of trade cartels will remain unaddressed.  The government bans trading in specific commodities from time to time in order to check the widespread speculation and manipulation of the commodity prices.






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