Support price for rice: Why many growers prefer to sell for less

Published: November 28, 2011
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Growers have decided to pick the low price on the open market over a ‘better’ offer by the government. PHOTO: CREATIVE COMMON

Growers have decided to pick the low price on the open market over a ‘better’ offer by the government. PHOTO: CREATIVE COMMON

Like some other sectors in our economy, agriculture too is distorted by input subsidies and support prices. The government’s interference, on pretext of powerful lobbies, reigns supreme and open market operations are absent. In this article I will discuss implications of support price for the rice crop which is currently being harvested. Instead of utilising macro-economic data let’s take a look at a true story of a typical small grower in Punjab.

Like every year, the populist government has announced support price for rice growers. This year the erstwhile PASSCO (Pakistan Agriculture Supply and Storage Corporation) has offered Rs1,200 to Rs1,250 per 40 kg to rice growers. To find it out for myself, I made a special visit to my village in Central Punjab, where my family members, all of them small growers, had not only harvested the crop, but also encashed it. Instead of selling to their benevolent government, they decided to sell their crop to the open market through an “exploitative” middleman. Outrageously, the open market offered them around 20% less than what the government had announced, but using their free will, the growers still sold!

The following story narrates in detail why many growers decide to pick the low price of open market over high price of the government.

When the government announces support price, it uses discriminatory methods to qualify certain growers by putting some conditions. The first condition is that the growers have to obtain a jute bag, called bar-dana, that is available only at government stores. In critical times however, as market fundamentals would predict, these bags vanish and are sold on the black market. The second problem is that even if these bags are available, they are not enough to cater to demand. Thus the growers either beg the inspectors to supply them sufficient bags or resort to agents to actually pay a commission to get these bags, which otherwise are “free”. They are “free” only as much as we want them to believe, otherwise they are paid by some of other tax payers.

The second condition is that once the lucky growers, who receive sufficient quantity of bags, are ready to sell their produce, they will need to form a queue in front of government stores. They can wait and see numerous large growers, who can influence government inspectors, overtake them and sell their produce. This process can take couple of days. In the meanwhile the lack of adequate storage is a constant threat to his produce.

This extends his trial to yet another, third condition. The government inspector will inspect the quality of produce and is authorised to reject the lot. Once this rejection is announced, the grower, who had painstakingly arranged the jute bag and had waited for a good couple of days, has to go back. This means that he will now bear an additional transportation and storage cost. If he is lucky on his way back, he finds a “self-interested” middleman, who offers him cash and purchases the produce, at a discount.

In the event the farmer is lucky enough to sell to the government, he won’t get paid right away. The government stores do not carry cash! The farmers get a receipt and get paid in a few weeks time.

An intelligent, self-respecting and business savvy grower, especially small grower, which is the case with 90% of our farmers, will always compare the out of pocket expense and the implied opportunity cost of resorting to the government support price. It is true that he is not literate by our standards, but he is very well educated about the economics of his livelihood. In fact, my typical farmer has already calculated an open market equivalent to support price. If the government price is Rs1,200, then after considering all the hassles mentioned above, the grower would be happy to sell his crop for Rs1,000, on ex-farm basis, against hard cash. Thus the open market keeps the prices under control and offer some respite to the struggling urban consumers.

There are several policy lessons from this true story. First, state intervention in commodity pricing, ostensibly done for welfare, is not only an economic but also political nonsense. A frustrated farmer in the presence of a support price is more belligerent than a struggling farmer in the absence of a support price. Secondly, when you curtail open markets, black markets emerge. The condition of carrying the produce in government provided jute bags should go. Thirdly, even the illiterate farmers can make rational and well-informed economic decisions, only if the all-knowing, benevolent government gets aside and vanishes.

The writer is founder and managing Partner of a research firm, Development Pool

Published in The Express Tribune, November 28th, 2011.

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Reader Comments (9)

  • Haider Hussain
    Nov 28, 2011 - 9:44AM

    I never knew these facts!!!! This is indeed a serious issue.

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  • waseem shah
    Nov 28, 2011 - 12:05PM

    A true story, I appreciate how easily going article it is as my family is facing such issues since long and found very difficult to explain who has no agricultural background.

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  • Sipra
    Nov 28, 2011 - 1:19PM

    I don’t agree. Even the coarse varieties like Kainaat & 285 are being sold at 1340 to 1350 per 40 kg. Fine Basmati rice is also on the higher side. If the small farmer is not bound to credit of Grain Market Traders then this market rate can be achieved easily by everyone.

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  • IMRAN TAJ
    Nov 28, 2011 - 3:30PM

    thats very true explanation regarding the sales at discount, Govt is responsuble as far as the procedures are concerned regarding thr submission of the rice bags

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  • hedgefunder
    Nov 28, 2011 - 3:50PM

    Very good article, a real eye operner for people like me who reside in europe.
    It shows that farmers have more common sense than the govt, and they certainly can add up as to the hassles and costs !
    What is surprising is the fact that Govt does not encourage or make it hassle free for the very people who grow the produce and generate majority of the country’s export earnings, as Pakistan is certainly not an industrialised nation that it can exports manufactured goods at competative prices, but it certainly has a strong agricultural base to make impact on export earnings due to the quality of the produce,

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  • Nov 29, 2011 - 10:51PM

    Dear Writer, Wonderful effort to highlight major route issue of our Agriculture Trade. Government is discouraging the farmers instead of providing them relief. PASSCO, TCP, and TDAP are working on nepotism policy which should be discouraged. Rice Export brings tremendous amount of foreign capital in Pakistan which is closely associated with rice farming. If our farmer is not happy, it will effects our growing capacity. India and Thailand is competing us in international market because of their cheap rates.

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  • Abdul Rahim Shad
    Nov 30, 2011 - 2:17PM

    I have gone through the article and found it based on all those true problems which a small farmer faces not only once but whenever he goes to Government stores for getting support price of his crop. I appreciate the effort to high light problems of a small grower, which may bring some change if some authorised organization takes appropriate step by either stopping this support price system to at least give benefit to the governemnt by saving money, used for support price or it will be made easy for all to get benefits from the purpose of support price. I appreciate your effort.

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  • haris mansoor
    Dec 1, 2011 - 9:16PM

    Excellent article. Its my good luck that you taught me EconomicsRecommend

  • kapil bansal
    Dec 31, 2011 - 5:53PM

    dear sir
    plz arrenge the price of rice latest year of gov.
    thanks

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