April is around and managers of the economy are busy in giving final shape to budget estimates for the fiscal year 2003-04. All sorts of proposals are being put forward from various sectors and sub-sectors of the economy.

One such weird proposal was to advise (or ill-advise) the government and the Agricultural Prices and Policy Commission (APCOM) to stop fixing flour prices of sugar-cane and abolish all subsidies (Dawn-EBR March 31-April 06, 2003) to throw “half the inefficient (sugar) mills out of business”, leaving only half of them to handle a sugar-cane crop of over 52 million tons.

The suggestion not only ignored the relation between the cost of production and the distance between the mills and cane crop plantation, it suffered from the fallacy that government’s programme to dispose of surplus stocks of sugar through the Trading Corporation of Pakistan (TCP) by procuring and exporting 300,000 tons of the commodity, was a subsidy to sugar mills. Government’s support to dispose of surplus stocks is, in fact, an indirect subsidy to sugar-cane growers and not to sugar mills. The idea of abolishing subsidy from sugar-cane also ignores the basics of agriculture economics.

In fact, supporting the sugar commodity market through the mechanism of buying surplus stocks at a cost higher than the prevailing prices in world sugar market and exporting them at prices below the cost, does cost exchequer/tax payers and sugar consumers to lose money in two ways: firstly when consumers buy sugar at prices higher than those in the international market, and secondly when surplus sugar is exported at a price lower than its domestic cost.

However, let it be understood that prices of almost all farm produce are supported through government action around the world, including developed countries like Japan, North America and European countries. In farmers’ support programmes, North America, the EEC and Columbia pay more than 20 cents per pound of sugar to the sugar-cane growers in subsidy and thus spend billions of dollars to support farm produce. Farm produce prices are supported for very valid and rightful reasons.

Most manufactured goods are priced first and then production is adjusted to expected saleable quantity; whereas by nature, farm produce are grown on the past year’s signals and then brought to market. The size of the crop is adjusted by variations in weather, water, pest attacks and other growing conditions. Prices of the farm products then reflect the size of the crop and relative elasticity of demand of the product. Prices of farm products having inelastic demand fall more than in proportion to the increased output, a phenomenon that brings total revenues smaller for a larger crop size than it would be for a smaller crop. Over the decades farm products are losers against the manufactured goods in terms of price parity ratio. General inelasticity of demand and deteriorating price parity ratio leave the farmers poorer though they might have harvested a bumper crop.

Farmers sow and produce “on the basis of past conditions, rather than on the basis of conditions at the time the crop will be ready for harvest”. Their production plans are also constrained with the suitability of lands to the crop; availability of farm water (which in Pakistan goes waste upto 40 per cent and is becoming scarcer day by day); farm credit availability and prices of other inputs.

These inputs include fertilizer, imported pesticides and diesel oil etc., prices of which are dependent on international phenomena and could spiral upward to any level - even double, in two/three years. Such a price spiral cannot occur in any of the farm produce whatsoever. The water crisis is deepening with every passing day as all the water management programmes have been politicized which has delayed planning and implementation to the detriment of agriculture beyond repair. In the absence of any integrated water management project, huge waste of water continues to the level of starvation of agriculture.

The above-mentioned factors cause severe cyclic fluctuations in farms output prices. Fluctuations in farm produce prices badly affect the farms incomes and rural economy. One big reason of rampant poverty in rural economy is that prices of agriculture produce fall at the time of harvest to a level where even cost of production can not be covered. Farmers cannot hold their produce for better prices because either they do not have financial or storage capacity or because of the very perishable nature of the farm products.

Fluctuations in farm output prices can be ironed out with advance planning and information to farmers. Ninety-eight per cent of all sugar beets in US are sold to sugar refineries under advance contract.

Exploitation of small farmers by investors and middlemen should not take place. Repeating the history of the stock exchange will only add to the miseries of small farmers and could destroy the whole network of our agriculture. Also, duplication of commodity exchange systems of developed countries will also not bear the desired results of justice and equity.

A second method of ironing out large fluctuations of farm produce prices is vertical integration of farming—upstream and downstream. For upstream integration mills should be induced to raise their own plantation as is done in most sugar producing countries. As the mills have access to more and better money, equipment and management resources, they can provide the needed support to rural economy by raising their own cane crop.

Confectionery industry has come of age. Export of candies and toffees to European, Asian and African markets are on the rise day by day. Better planning and concerted efforts in this direction can bear good results thereby utilizing a large proportion of more than 40 per cent unutilized excess installed capacity of the sugar industry. Pakistan being an agricultural country has an environment, conducive to augmenting its confectionery and jam jelly industry. Confectionery, jams and jelly export is not only a high sugar-consuming industry rather it is also a high value added food products segment.

A third way to smoothen prices and production of farm output is government action. To maintain a level of farm prices higher than free market equilibrium, floor prices are guaranteed. Subsidies on inputs and / or on produce or final products are allowed under the support programme.

Farm incomes need support from the governments not only in developing but in developed and industrialized countries as well. An icon of free enterprise and competition, the United States supports her $4 billion sugar industry by imposing duties and quotas on imported sugar. Consumers in the US pay three times the world sugar prices for their consumption.

Bad effect of seasonal variation in farm output prices is more pronounced in a country like Pakistan where over 44 per cent of total employment is generated by the agriculture sector, over 67 per cent of the population is attached with agriculture directly or indirectly, and agriculture has a hefty weight of 25 per cent in the total GDP of the country.

The variations in prices badly affect the not so good employment situation in rural areas and push the rural poverty level to on even higher mark. The proponents of withdrawal of subsidies should know that despite all efforts, emphasis and all sorts of concessions towards industrialization, agriculture is still the culture of Pakistan and a way of living of the majority.

The World Trade Organization (WTO) has put the regime of subsidies as a whole, including subsidies to agriculture on stake, without any consideration to peculiarities and oddities of any country. According to the WTO’s programme all subsidies shall be abolished by the year 05. The situation is more serious than is being generally perceived. The situation warrants integrated planning for the year 05. The wake up call should be taken very seriously. Modern technology and scientific development of plants and agriculture has solved the problem of food shortage and created a problem of food excess. Surplus production in food has threatened the farmer’s existence.

The WTO’s subsidy and support prices free regime will adversely affect the agriculture and people related to it. Advance planning to cope up with the emerging situation is direly needed. Suggestions listed below should be considered to alleviate the agriculture sector from its problems and save it from the adverse effects of WTO’s free trade regime:

1.The government and the State Bank of Pakistan (SBP) should ensure the due share of credit to the agriculture sector. All previous schemes and claims for enhancing farm credits have not borne fruits.The Governor, SBP, revealed last week that only Rs75 billion credit is available for farm sector. The credit should grow twenty times at least, to Rs1500 billion, keeping the agriculture share in the economy and its contribution to GDP, by the time subsidy-free regime of the WTO is implemented before year 05.

The financial system of the country is overflowing with liquidity; however, lenders still look for multinational clients because they basically lack farm credit management expertise. This lack of farm credit management expertise has on the one hand increased the poverty in the rural area and on the other left our financial system’s sustenance confined to urban economy only. A better farm credit plan should be devised and implemented through better training of the field force of financial institutions. Some of the feared losses could be written off against the poverty alleviation funds, as a well planned and properly implemented farm credit plan will definitely contribute to decreasing the poverty.

2. Agriculture price support system should be made responsive to the needs and contingent upon the changes in underlying circumstances and environment. In the case of sugar-cane support prices two mechanisms of APCom and Sugar-cane Control Act 1950 are operative. This duality creates ad-hocism in support prices management and disparity between the two sugar-cane-growing provinces. Support prices should be announced at least two months before the sowing season of sugar-cane i.e. not later than December for the next year, as sugar-cane is an 18 months crop when sown in February.

Support pricing should be based on better data analysis keeping all the economic factors like increase in prices of inputs and sucrose recovery etc. to protect the interest of all stakeholders equitably. It should be completely free from the regional and provincial politics and be institutionalized on accurately collected and properly analyzed data.The All Pakistan Sugar Mills Association and true representatives of farmers should be put on the APCOM. A mechanism to reward farmers producing high sucrose containing sugar-cane should be introduced.

3. According to a recent announcement of the Pakistan Agricultural Research Council, 223 new varieties of various crops have been developed and put on the market. These varieties include sugar-cane - hopefully with better sucrose yield and less water requirement. However, cane growers will be largely unable to benefit from these varieties until affordable and convenient farm credit, as mentioned above is not made available to them. Developing new variety seeds has never proved enough without a government role in strengthening seed management system through extension agriculture services.

Seed is the back bone of agriculture and the quality of seed can not be improved by the farmers or private entrepreneurs as both are handicapped by the paucity of resources and quick profit motives respectively. The All Pakistan Sugar Mills Association (APSMA) should be an active partner in the sugar-cane seed management programme. This participation will benefit the industry very soon and they will be able to utilize their 40 per cent idle capacity. Increased capacity utilization in turn will reduce the cost of production of sugar, as all low-cost sugar producing nations of the world have two common factors: better sucrose recovery and capacity utilization.

4. Sugar-cane Control Act 1950 also needs to be amended and updated to make it responsive to the changed environment. The act should specify and pronounce the start of crushing season. This year the earliest crushing in Sindh started on November 24, a delay of full one month. The situation was also very dismal in Punjab where the first mills starting crushing was Shakarganj on October 07 but all other 37 mills delayed the crushing for full one month. The average recovery remained dismally low at less than 7.5 per cent.

5. Besides vertical integration into confectionery industry, another avenue of disposing off surplus sugar stock is to improve the refining and sieving process. A better sieving system of sugar can produce iron-free sugar, which our pharmaceutical industry is obliged to import every year.

6. Yet another way of balancing demand and supply quantities could be through the increase in local consumption. Franchise beverage and aerated water bottlers sell millions of bottles to our markets annually.

7. Transportation of sugar-cane, road conditions and distance from the mills are important factors of sugar-cane cost and return to farmers. Sugar-cane cess collected from the farmers should be diligently spent on development of infrastructure in sugar-cane growing areas only.

8. APSMA should also undertake a study on productivity and cost relation between location and size of the mills. Such a study is expected to suggest relocation of a few sugar mills. This hard decision should be taken early and implemented before these mills turn into complete sick units where turning them around would be impossible.

9. Finally, water management programmes need to be seriously addressed with full political and economic force. An annual waste of 40 per cent of irrigation water is not something to be ignored. Besides water storage, lining of canals and watercourses should be an urgent task and be taken up immediately.