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Updated: December 30, 2009 19:28 IST

Price vs non-price factors in agriculture

D. Murali
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When talking about agricultural production, undue preoccupation with the price effects of liberalisation distracts our attention from the more fundamental and dominant role of non-price factors such as inputs, technology, and institutions, cautions A. Vaidyanathan in ‘Agricultural Growth in India’ (www.oup.com).

The relation between prices and production is among the most extensively researched issues by economists in India, he observes. “During the 1950s, there was a raging controversy over whether or not market prices are at all relevant for production decisions of farmers producing mostly for their own consumption or for consumption within local communities.”

The author concedes that in theory, as agriculture gets increasingly commercialised, producers are expected to be more sensitive to prices and adjust the level and composition of non-land inputs, thus changing relative prices with a view to maximise net incomes.

However, recent studies at an aggregate level have shown but a weak relation between overall terms of trade and production growth, he adds. A caveat, though, with aggregated studies is that the focus is generally on total output rather than per hectare output.

Given that the limits to extending cultivation have been reached, the extent of cultivated land is unlikely to respond to price changes, and so any meaningful supply analysis has to focus on output per unit of cultivated land, Vaidyanathan instructs. While there are a few studies of the sensitivity of input and yield performance of specific crops to changes in their price (relative to competing crops) and prices of output relative to inputs, hardly are any on the relation between changes in relative output prices and relative changes in inputs and yields across crops, he rues.

“It is now generally accepted that prices play a much smaller role than non-price factors (especially irrigation, improved seeds, fertilisers, and agronomic practices). There are good reasons for the dominance of non-price factors over prices in determining the dynamics of agricultural production.”

An example that the author cites is of oilseeds and pulses, where prices relative to those of competing crops have shown a strong rising trend, even as production has not. “They cannot be grown everywhere and in all seasons. They are relatively low-yielding crops… The scope for increasing their area by reducing the area sown to other crops varies from region to region, depending on soil conditions, rainfall, and the availability of irrigation,” he reasons.

Whether or not such a shift is worthwhile depends not only on their prices but also on their yields, and costs of cultivation relative to those of competing crops, argues Vaidyanathan. “Improvements in varieties and other elements of technology and, therefore, the potential for increasing yields and reducing costs for these crops have been very limited compared to other crops. A contrasting case is that of wheat…”

Imperative read, in the interest of sustainability in food.

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