Sunday, May 27, 2012

The guaranteed price – Is it a win win situation for both parties?

In my blog entry yesterday I reported on how once farmers were given a guaranteed price for their produce, in this case corn of Rs35/kg they were able to produce a bumper crop, which for the first time made Sri Lanka a net exporter of corn. If this is a real life example then we must adopt it for other crops, especially if we can guarantee export at a quality and price the importer in the foreign country wants.

It is worth remembering that if the price in the local marketplace was higher than Rs35/kg, I wonder if our farmers would stick to the agreement or try and sell their produce elsewhere! Either way, it is a start and has proven to work and the farmer who grew this crop definitely wins hands down over the farmers who planted paddy.

It is also worth remembering that the fertilizer subsidy extends to all crops now and so the urea used by the corn farmers now costs Rs1000 a 50kg bag as opposed to the Rs4000 which is the world market price at which the government buys it to sell to these farmers. I would dearly like to know what the average use of urea was per 1000kg of corn. If it was two bags then this extra cost of Rs6000 must be added to costs to determine if the nation as a whole benefits as the 35,000 per effectively incurs an export levy of Rs6000 a tone. As today’s spot price in NY is Rs 33,000 for corn, then one wonders how beneficial it really is! We are effectively giving the exporter a subsidy of that amount. The flip side of this is would the farmer have grown this product if he had to pay full price for the Urea, an essential component input in the growth of corn as a little is put into each planting hole at planting to maximize weight and plant growth?

So, on the same vein if paddy farmers are guaranteed Rs35/kg for a quality paddy that will be used for export, then we again must take into consideration the fertilizer subsidy when counting the cost of export. In this case the per ton subsidy is greater as the fertilizer subsidy for rice is much greater as the same bag is sold for Rs350 to the paddy farmer and not Rs1000 as sold to the corn farmer.

When the Rs50B subsidy for fertilizer per annum is accounted for I wonder whether our calculations of the success are true!! It is something for the policy planners to think about when making rash statements of the success of this type of export. What if this subsidy is removed? Will the net benefit to the economy be plus? Only good paddy land will be cultivated and the surplus will not arise, and possibly give rise to shortages and price rises. Another interesting possibility for consideration. I really wonder if this sort of analysis is undertaken by the planners in making important decisions that affect the lives of ordinary people.