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Tuesday, Jun 18, 2002

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How the US subsidises its farmers

Harish Damodaran

THE prevailing system of foodgrain `marketing' in the country, wherein the Government declares minimum support prices (MSP) — which are hiked every year — and undertakes unlimited purchases through the Food Corporation of India (FCI) at these rates, has drawn considerable flak in recent times.

With MSP levels being set much above open market prices and resulting in the build-up of over 60 million tonnes (mt) of public grain stocks — around thrice the buffer requirement — there has been understandable misgiving over this policy, which is seen to be subsidising select well-off farmers in a handful of States.

The accumulation of inventories has, in turn, prompted desperate measures for their liquidation, including exporting the grains at below their cost of acquisition and close to the highly subsidised rates charged to below-poverty-line consumers. Roughly eight mt of foodgrains have been shipped out from FCI godowns in the last two years, upsetting the apple-cart of entrenched global traders, especially the US, Canada and Australia.

The root of all these distortions is believed to be the Government's unabashed appeasement of the `powerful' farm lobby through its open-ended procurement of grains (and, increasingly, oilseeds) at unrealistically high `support' prices. While this view may have its merits, it needs to be examined if the system of providing an assured market (and remunerative prices) for agricultural produce is unique to India. How different is it from, say, the existing farm support regime in the US — that veritable bastion of free trade?

It is significant to note that in the US, the Secretary of Agriculture is required by law to provide income and price support for 20 specified crops, including wheat, rice, feed-grains (corn, sorghum, barley, oats), cotton, milk (dairy), peanuts, sugar, tobacco, soyabean and other oilseeds. It is only in a few commodities — fruits, vegetables, meats, poultry, hay, etc — that no such explicit legislative provision exists. There is no similar legislative underpinning in India obliging the Government to support particular crops. Although MSPs are announced periodically, procurement at these rates is something the Government undertakes purely at its own discretion. And this is invariably a function of the political clout wielded by specific producer lobbies.

There is no such ambivalence in the US farm policy, where commodity price support is primarily through `marketing assistance loans' provided by the Federally-funded Commodity Credit Corporation (CCC). Under this, a farmer can take a CCC loan at the time of harvesting his crop. The loan sum is tied to a per-bushel or per-pound rate, on the lines of the MSP here.

Thus, if the loan-rate is fixed at $2.75 per bushel for wheat and the farmer markets 100,000 bushels of the crop (which he has to pledge as collateral with the CCC, while storing it himself), he can borrow up to $275,000. The loan has to be repaid over nine months, failing which the producer forfeits the pledged commodity to the CCC, which accepts it in lieu of money.

There are several advantages in this arrangement. First, the farmer is not forced to sell his crop at harvest time when prices are low. Sales can be deferred till realisations improve, enabling redemption of the loan. Second, the loan advanced by the CCC to the farmer is akin to the FCI procuring his grain at the MSP.

The difference is that the CCC, unlike the FCI, does not physically buy and store the produce. Instead, it extends a direct loan to the farmer, with the loan-rate fixed independently of open market prices. The market is left entirely to private players, and the prices are determined by the `usual' forces of supply and demand.

In recent times, the loan conditions have been modified to even avoid possible crop forfeiture and build-up of stocks with the CCC. This has been done by allowing redemption at less than the original loan-rate. If market prices are not high enough to facilitate repayment at the CCC loan-rate, the loan can be redeemed at the lower market rate. The difference is pocketed by the farmer as subsidy or `realised marketing loan gain'.

Besides marketing assistance loans, farmers are also eligible for `direct payments', which are also fixed commodity-wise on a per-unit rate basis. The recently passed Farm Security and Rural Investment Act of 2002 has further fixed `target prices' for each crop. If the sum of the loan rate for the commodity (or its 12-month average market price, whichever is higher) and the direct payment rate is below the target price, farmers will receive the difference as the `counter-cyclical payment rate'. The counter-cyclical payments are to be fully made "as soon as practicable after the end of the crop year".

What does all of this add up to? The Table gives the CCC loan and direct payment rates, the counter-cyclical rate and target prices of major crops fixed for the next six years. It can be seen that the target price per kg — which is what farmers in the US would effectively realise — comes to Rs 6.95-7.06 for wheat, Rs 11.34 for rough rice (paddy), Rs 10.44 for soyabean, Rs 5.02-5.07 for corn (maize) and Rs 4.90-4.96 for sorghum (jowar).

Compare these to the current `unrealistically high' MSPs (per kg) in India: Rs 6.20 for wheat, Rs 5.60 for `Grade A' paddy, Rs 8.85 for yellow soyabean and Rs 4.85 for all coarse cereals! The preceding article had referred to the average land-holding size in the US being 100 times that of India, making it conducive for large-scale mechanised farming and harnessing economies of scale.

Productivity yields too, are also much higher at 138 bushels per acre (8.7 tonnes per hectare) for corn, 39 bushels per acre (2.6 tonnes per hectare) for soyabean and 6,300 pounds per acre (7 tonnes per hectare) for paddy, against their corresponding all-India levels of 1.8 tonnes, one tonne and three tonnes per hectare. The lone exception, perhaps, is wheat, where average Indian yields, at 2.7 tonnes per hectare, match the American level of 42 bushels per acre, or 2.9 tonnes per hectare.

If, to the holding-size and yield advantage, one adds the benefit of higher effective support prices, the reasons for the manifold affluence of the average US grower relative to even the `powerful' Punjab-Haryana farm lobby, become amply clear.

This `triple advantage' (farm size, yield, price) manifests itself even in a product such as milk. India may be the world's larger milk producer today, with its output of 81.4 mt exceeding the 75 mt of the US. However, the former's production comes from 100 million-odds cows and buffaloes and 70 million dairy farmers. In contrast, the milch animal population in the US is around 9.1 million and the number of dairy farmers a mere 0.1 million!

Over and above this advantage of larger herd size and per animal productivity, US milk producers are entitled to a minimum price of $9.90 per 100 pounds, that is, around Rs 11 per litre, for the milk supplied to dairies. What is more, the 2002 Farm Act has stipulated a `target price' of $16.94 per 100 pounds or Rs 18.8 per litre. In the event market prices fall below this level, farmers would receive direct federal payments covering 45 per cent of the shortfall vis--vis the higher target price. By comparison, dairy plants in India typically pay Rs 9-9.50 per litre for the milk they source from farmers.

The distinctive feature of farm support programmes in the US is that they are `de-coupled' from the market. Whether it is marketing assistance loans or counter-cyclical payments made for each crop on a per-unit basis, the extent of support is independent of open market realisations.

For instance, spot prices of long grain paddy in the US are ruling at $3.55-3.85 per 100 pounds (Rs 3.8-4.2 per kg). This rate in the `private' market is lower than even the CCC loan-rate of $6.50, let alone the target price of $10.50! The farmer is independently compensated for the low market realisation through `de-coupled' payments that ensure a high support price, while preserving the sanctity of `market forces' and `free trade'.

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