Despite record production forecasts both at home and abroad, foodgrains crisis continues to haunt Indian and international markets. And explanations linked to the spike in population growth, diversion of land for bio-fuels and spurt in demand from accelerated developing countries backed by higher purchasing power suddenly seem vacuous and simplistic.
The forecast for 2007-08 for India predicts an output of 227.32 million tonnes of foodgrains, more than 10 million tonnes over the previous year. The latest estimates are for the crop year ending in May, which takes into consideration the winter crops of wheat, mustard and rice, which are yet to be harvested.
Announcing the estimates, P. K. Mishra, Agriculture and Co-operation Secretary to the Government, said that all major crops including wheat, rice and pulses were likely to have an ‘all-time record production’ this year. And this record production comes close on the heels of another record last year, when foodgrain production in the country touched 216.1 million tonnes.
The closest to this was 212.9 million tonnes in 2001-02. Why is it that, despite two consecutive years of record production, there was a dire grains shortage in the market, leading to a price spiral and precipitating supply-push inflation in the economy — fuelled mainly by rising prices of foodgrains, edible oils, fruits and vegetables? The reasons seem to lie in the contagion effects from international foodgrains shortages, gripping the global markets.
Contagion effect?
Things are rapidly transforming in the international markets as well. Despite pervasive shortages and spiralling prices, leading to food riots in some places, foodgrains production at the global level is also slated to climb new highs this year. In its first forecast for 2008, the FAO has predicted that global cereal production is expected to increase by 2.6 per cent to a ‘record’ 2,164 million tonnes this year.
Following significant expansion in plantings in the major producing countries, the bulk of the increase is expected from wheat. “Should the expected growth in 2008 production materialise, the current tight global cereal supply situation could ease in the new 2008-09 season,” the FAO said. But much will depend on the weather. However, these positive predictions are not expected to curb the price spiral. Why?
The answer can be found in a variety of contributory causes, each linked to the other. The growth trends in the two most populous countries — China and India — have perked up, driving accelerated global economic momentum.
Backed by better purchasing power, this has generated fresh demand for foodgrains. This huge demand alone could ensure firmer price trends in the global grain markets.
Independently, there is also the large and growing population of China, India and the African countries, which is spurring fresh demand for grains. The world’s population is growing by 78 million a year, mainly from the poorer countries of Africa, East and South-East Asia, as well as India and China.
This means millions of additional mouths to feed every year. To the present population of 6.7 billion, the world is expected to add another 2.5 billion by 2050, taking the global population to over 9 billion people.
Meanwhile, the economies of several developing countries are changing gears and entering the fast lanes of economic growth — ensuring fresh demand for foodgrains, backed by better purchasing power. The days of low agricultural prices and subdued demand seem to be behind us. But the question remains whether the surging demand will perpetuate a supply crisis, generating a food crisis in the long term. This also does not seem likely.
Back under plough
The higher grain prices are expected to bring in small and marginal farm-lands with low productivity, mainly in developing countries, back under the plough. Once the prices stabilise at higher levels, these lands would prove cultivable despite their low productivity. The high prices would also prompt more of the rich, fertile and large holdings in developed world back into cultivation.
Huge agricultural potential of developed countries is still to be tapped for want of realistic policy measures and better returns. Several instances have been reported of the European Union extending subsidies to farmers in order to ensure that their rich and arable lands are left fallow. This was in order to ensure that huge stockpiles or ‘grain mountains’ were not built up, destabilising domestic and international food-grain prices.
The WTO had forced EU countries to abandon subsidised wheat and other foodgrains exports, the domestic prices of which were invariably ruling above global prices. In order to ensure best prices to its farmers, the next best way was to extend subsidies to its farmers to leave their land uncultivated — restricting unwanted pile-up of food and ensuring firm domestic prices.
Close to one decade ago, European Union Agricultural Ministers had agreed to take out of production 10 per cent of land used to grow grain and oilseeds, up from 5 per cent of the earlier year.
This was an attempt to lift prices and reduce the amount of money the EU spends to buy up surplus production. This move was expected to remove 3.7 million acres of rich agricultural land from production. But all that could change now.
During the past year, foodgrains prices are expected to have soared by 30-40 per cent. As the global prices hold firm, it may no longer be needed for some developed countries to subsidise their grains exports. It could also bring millions of hectares of arable land back into production. Backed by accelerated demand and better purchasing power, it would seem that the global price spiral in foodgrains and agriculture products is here to stay.
Better insulated
India, however, seems far more insulated from the global crisis than several of its neighbours. It is still relatively self-reliant in foodgrains production, barring occasional years of bad weather and natural calamites. The emerging global crisis is still mainly restricted to rice production — generally a tropical crop and the staple diet for the developing world.
While sounding more confident on the foodgrains production front, the FAO was far more circumspect in predictions about impending rice harvests. The FAO Senior Economist, Cocepcion Calpe said: “The international rice market is currently facing a particularly difficult situation with demand outstripping supply and substantial price increases. Higher rice production in 2008 could reduce the pressure but short-term volatility will probably continue, given the very limited supplies available from stocks. This implies that markets may react very strongly to any good or bad news about crops or policies.”
The problem with rice production does not seem to go away. It is estimated that global paddy production grew by one per cent to 650 million tonnes in 2007. But what is more worrisome is the fact that this would be the second consecutive year when rice production fell short of global population growth. The year 2008 is not expected to be very different with global production expected to grow by 1.8 per cent, or increase by 12 million tonnes.
But India can remain more sanguine about its rice crop. The country has emerged as a major exporter of rice in recent years. Instead, the planners face an imperative need to address food subsidy strategies. As foodgrains prices rise and stabilise, it would be good time revisit the subsidy regime.
The shift would have to be from production subsidies to the rich and well-off farmers to consumption subsidies for the poor and marginal populations. Then, the benefits of firm agricultural prices could be constructively tapped to augment a booming rural demand, nurturing the second phase of the India growth story.
