Prices and Price Policy

Abstract

Agricultural price policy and analysis have a quite different context and requirements when associated with rapid agricultural growth as compared to slow-growth agricultures. Technology-based agricultural growth increases incomes of both farmers and the rural poor. The thrust of this chapter is that government subsidies to cereals output and input prices have a prohibitively high opportunity cost in foregone investment in agricultural growth. The rural poor may be driven into extreme poverty with long-term loss of productive capacity owing to rising cereal prices. In that case, intervention to assist the poor is a good idea, especially, as is often the case, if it is paid for by foreign assistance donors.

Annex 1: Calculation of the Effect of Increased Cereals Production on the Demand for Cereals

The Equations

Table 11.3 defines the notation used in the equations below as well as the stated coefficients.

Table 11.3 Definition of notation and coefficients in the equations

$$ \mathrm{P}=\mathrm{C}, $$

and

$$ \mathrm{Ps}+\mathrm{Pl}=\mathrm{C}\mathrm{s}+\mathrm{Cr}+\mathrm{Cu}+\mathrm{Co}; $$

where Cr = F (Ps)

At present, we show that Co is small, covering a standard item of feed, seed and waste. We also show that it has the potential to become large as demand for livestock products catalyzes rapid growth.

Our concern is with the details of each of the elements in the equation. These components are presented below.

Increment in Cereal Production , Tons

From the small commercial farmer (SCF):

$$ {\Delta \mathrm{P}}_{\mathrm{s}}=\left(\%{\mathrm{P}}_{\mathrm{s}}\right)\ast \left({\mathrm{P}}_{\mathrm{s}}\right) $$

(11.1)

From the large commercial farmer:

$$ {\Delta \mathrm{P}}_{\mathrm{l}}=\left(\%\mathrm{PI}\right)\ast \left({\mathrm{P}}_{\mathrm{l}}\right) $$

(11.2)

Increment in total cereal production:

$$ {\Delta \mathrm{P}}_{\mathrm{T}}={\Delta \mathrm{P}}_{\mathrm{s}}+{\Delta \mathrm{P}}_{\mathrm{l}} $$

(11.3)

These equations give us the annual increment of cereal production in tons, to be compared with the calculated increment in consumption. In the base case, the growth rate for cereal production is the trend rate of 6.6 percent for this set of cereals.

Percentage Increase in Income, Rural Non-Farm (RNF) Sector

$$ \%{\mathrm{I}}_{\mathrm{r}}=\Big(\left({\Delta \mathrm{P}}_{\mathrm{S}}\Big)+\left(\left({\Delta \mathrm{P}}_{\mathrm{S}}\right)\ast (0.7)\right)\ast (0.4)\right)/\left({\mathrm{C}}_{\mathrm{r}}\ast 1.2\right)\ast (1.25) $$

(11.4)

The overall result is sensitive to this calculation and is used in Eq. 11.9. The driving force behind this equation is the percentage increase in RNF income from the expenditure by the SCF from increased cereal and other agricultural production on the RNF sector. This is applied to calculating the increase in cereal consumption for the rural non-farm sector.

Growth in Human Consumption of Cereals

The following equations partition the growth in human consumption of cereals among three cereal consuming sectors. The sectors have very different income elasticities and base consumption of cereals. Those differences drive the results. For each sector, total consumption increase represents the sum of increased consumption from population growth and from income increase.

From the small commercial farmer sector:

From population growth

$$ \Delta {\mathrm{C}}_{\mathrm{sp}}=\left(\%{\mathrm{P}}_{\mathrm{S}}\right)\ast \left({\mathrm{C}}_{\mathrm{S}}\right) $$

(11.5)

From income growth

$$ \Delta {\mathrm{C}}_{\mathrm{s}\mathrm{i}}=\left(\left(\%{\mathrm{I}}_{\mathrm{S}}\right)-\left(\%{\mathrm{P}}_{\mathrm{S}}\right)\right)\ast \left({\mathrm{C}}_{\mathrm{S}}\right)\ast \left({\mathrm{n}}_{\mathrm{s}}\right) $$

(11.6)

Total

$$ \Delta {\mathrm{C}}_{\mathrm{sT}}=\sum \Delta {\mathrm{C}}_{\mathrm{sp}}+\Delta {\mathrm{C}}_{\mathrm{si}} $$

(11.7)

From the rural non-farm sector:

From population growth

$$ \Delta {\mathrm{C}}_{\mathrm{r}\mathrm{p}}=\%{\mathrm{P}}_{\mathrm{r}\mathrm{x}}\ast {\mathrm{C}}_{\mathrm{r}} $$

(11.8)

From income growth

$$ \Delta {\mathrm{C}}_{\mathrm{r}\mathrm{i}}=\left(\left(\%{\mathrm{I}}_{\mathrm{r}}-\%{\mathrm{P}}_{\mathrm{r}}\right)\right)\ast \left({\mathrm{C}}_{\mathrm{r}}\right)\ast \left({\mathrm{n}}_{\mathrm{r}}\right) $$

(11.9)

Total

$$ \Delta {\mathrm{C}}_{\mathrm{rT}}=\sum \Delta {\mathrm{C}}_{\mathrm{rp}+}\Delta {\mathrm{C}}_{\mathrm{ri}} $$

(11.10)

From the urban sector:

From population growth

$$ \Delta {\mathrm{C}}_{\mathrm{u}\mathrm{p}}=\left(\%{\mathrm{P}}_{\mathrm{u}}\right)\ast \left({\mathrm{C}}_{\mathrm{u}}\right) $$

(11.11)

From income growth

$$ \Delta {\mathrm{C}}_{\mathrm{u}\mathrm{i}}=\left(\%{\mathrm{I}}_{\mathrm{u}}-\%{\mathrm{P}}_{\mathrm{u}}\right)\ast \left({\mathrm{C}}_{\mathrm{u}}\right)\ast \left({\mathrm{n}}_{\mathrm{u}}\right) $$

(11.12)

Total

$$ \Delta {\mathrm{C}}_{\mathrm{uT}}=\sum \Delta {\mathrm{C}}_{\mathrm{up}+}\Delta {\mathrm{C}}_{\mathrm{ui}} $$

(11.13)

Human consumption total

$$ \mathrm{CT}=\sum {\mathrm{C}}_{\mathrm{sT},}{\mathrm{C}}_{\mathrm{rT},}{\mathrm{C}}_{\mathrm{uT}} $$

(11.14)

Surplus over human consumption

$$ \mathrm{O}={\mathrm{P}}_{\mathrm{T}}-{\mathrm{C}}_{\mathrm{T}} $$

(11.15)