Вы находитесь на странице: 1из 13

Why do agricultural value chains fail?

Part (IV): Misaligned incentives

While the beginning of the fertiliser subsidy provides


incentives for farmers to apply fertiliser to increase the
yield, the latter part of the subsidy prompted them to
overuse
Introduction

Thursday, 23 March 2017

The prime objective of the policies towards agriculture is to


ensure sustainable agricultural production and food security.
Sustainable agriculture deals with economical, environmental and
social sustainability of the agricultural efforts while food security
is focused on accessibility, affordability and nutrition.

Governments have used many economic instruments to achieve


food security and sustainable agricultural production. Input and
output subsidies, technology transfer, access to technology,
access to finance, protection against local produce and price
controls can be identified as some of these major economic
instruments. These economic instruments have shown positive as
well as negative outcomes.

The probability of success in any economic instrument towards


the agriculture sector largely depends on the incentives. As
long as the economic instrument generate enough incentives for
farmers to be engaged the probability of it been successful
increases. The objective of this article is to highlight several
examples where incentives have played a significant role in the
outcome objectives of the economic instruments.

Organic paddy farming: Are there enough incentives to


adopt?

Until recently chemical based farming was the popular approach


to paddy farming. Fertiliser subsidies were used as an economic
instrument to promote the use of inorganic fertiliser where paddy
sector being the main recipient. Fertiliser subsidy significantly
contributed to the increase in agriculture production however it
leads to many negative externalities. The subsidy was very
significant where the fertiliser price was subsidised almost 90%.

Any farmer who is registered with the agrarian services


department and who was able to prove the ownership to land was
eligible to the subsidy. Over the years farmers were able to
develop very good relationships with the agrarian services officers
and were able to enjoy the fertiliser subsidy without any
significant hardship.

The Department of Agriculture had published fertiliser and other


chemical recommendations for paddy. However the easy access
to the fertiliser subsidy and the level of the subsidy provide
enough incentives for framers to obtain and apply more than the
recommendations. Therefore over time the average fertiliser per
acre went up.

While the beginning of the fertiliser subsidy provides incentives


for farmers to apply fertiliser to increase the yield, the latter part
of the subsidy prompted them to overuse. The overuse of
chemicals resulted in many negative environmental and health
externalities and the burden on the budget was also high.
Therefore the important question is why wasnt the fertiliser
subsidy removed/reduced? by the policymakers.

The incentive for policymakers to continue with the fertiliser


subsidy was obvious as it gave them the control over the electoral
votes of agricultural farmers. Therefore governments kept on
implementing the fertiliser subsidy despite they had enough
evidences to show that the subsidy is being overused and
creating economic, health and environmental negative
externalities.
Come to the present day, the fertiliser subsidy is being removed
and a coupon system is in action. The coupon system allows
farmers to buy the recommended levels of fertilisers and any
additional requirement is supposed to be met with organic
fertiliser. Therefore coupon system to a certain extent is meant to
encourage farmers to adopt organic fertiliser.

At the same time the current Government is geared towards


sustainable agriculture and has the largest organic cultivation
program in the recent history. Therefore it is possible to ask two
questions at this point:

(1) What is the incentive for a chemical farmer who works with
the coupon system to adopt organic fertiliser?

(2) What is the incentive for a farmer to adopt fully organic


agriculture?

As mentioned earlier the average fertiliser use per acre has


increased drastically over time. The coupon system is not enough
to buy the required fertiliser from the private market. Therefore
farmers are left with three choices:

(1) Buy the rest of the required chemical fertiliser using own
money

(2) Reduce the cultivation area according to the fertiliser amount


that is supported by the coupon system

(3) Prepare or buy organic fertiliser for the rest of the fertiliser
requirement.

There is a fourth option where farmers can fully convert their


lands to organic agriculture however that option has the least
incentives since it will take at least five years for a chemical-
based land to detoxify and stand as an organic cultivation. Let me
first give my rankings on the options that farmers have. It will be
done separately for commercial and subsistence paddy farmers.

Among the three options I argue that the most attractive option
for a commercial paddy farmer in terms of incentives is to buy the
rest of fertiliser using own finances. Here the fertiliser cost will be
reflected in the output price. This might increase the rice price in
the short run but with proper management of paddy storages the
price impact will be smoothened in the long run.

The next best alternative for the farmer is to supply the rest of the
fertiliser requirement through organic fertiliser. However the
profitability in this case will be heavily determined on the scale of
cultivation and the supply chain of organic fertiliser. This is
because large amount of organic fertiliser is needed for an acre.

Since the opportunity cost is high for an organic farmer to find


organic fertiliser compared to an inorganic farmer (who can easily
buy chemical fertiliser from the closest fertiliser outlet) they
might demand a higher price. However their profitability might be
low while competing with the inorganic paddy farmers (even
though they use organic fertiliser partly it will not attract a
willingness to pay similar to organic rice).

The third option is to reduce the cultivation area where the hit on
profitability is the hardest. Therefore yields least incentives for a
farmer. For subsistence framers the best option is to reduce the
cultivation area. Any other option will result in an additional cost.
For a subsistence farmer it could be cheaper to buy rice from the
market if needed rather than trying to produce by buying
fertiliser.

To answer the question on the incentives for a farmer to adopt


organic fully (these cultivations will be on land that are
marginalised, abandoned, willowed or with less chemical
concentrations) we need to look at the opportunity cost of
producing the organic paddy.
The opportunity cost of supply mainly comes from sourcing
organic fertiliser, seeds and labour. The conventional way of doing
organic agriculture creates very little incentives for a farmer to
adopt organic agriculture. Requirement of conventional organic
fertiliser per acre is close to one ton.

Farming practices in terms of land preparation, water


management and pest and disease management creates many
transaction costs. Organic farming is closely linked with traditional
paddy varieties and these seeds are hard to find and costly.
Therefore unless these opportunity costs are compensated the
incentives to adopt organic paddy farming are very low.
Recommendation here is to:

(1) Introduce an organic fertiliser that is more efficient and can be


commercially produced and sold at an affordable price

(2) Introduce less labour intensive farming practices and


introduce more mechanisation (mechanisation may generate
some disincentives and I will talk about that in the latter part of
the article)

(3) Introduce a seed program that will facilitate access to


traditional paddy or introduce high improved varieties to organic
paddy farming.

Interestingly the National Program in Toxin Free Food has


implemented these recommendations at pilot scale. Now the task
is to learn from the field experiments and scale things up.

Use of banned chemicals in vegetable and fruit production: Are


there incentives to reduce?

Use of banned chemicals in vegetable and fruit production has


drastically increased recently. There are enough evidences to
show that what we eat is not safe. Many awareness programs are
there at farmer levels as well as the consumer level to show the
health and environmental impacts of using banned chemicals.
However farmers have not reduced the use of these chemicals
and the consumers have not reduced the purchase. Therefore the
questions are:

(1) Why farmers keep on using banned chemicals

(2) Why consumers continue the consumption

The reason might be the misalignment in the incentives.

Fruit and vegetable cultivation is seasonal and there are storage


issues. Therefore for a particular fruit or a vegetable the supply
increases during the cultivation seasons and drops during the off-
season. In order to avoid the price decreases in the cultivation
season many farmers harvest late/early or try to store. Use of
banned chemicals therefore is high during these activities.

Overuse of chemical fertiliser is pretty much linked to the


cultivation stage. Overuse of fertiliser and banned chemicals
affects the healthy status of the produce and it is a quality
parameter. The market does not have enough instruments or
institutions to recognise the impact on the quality. Furthermore
there isnt a proper penalty system in place.

From a consumer point of view there isnt any recognised or


recommended ways to detect the banned chemicals and over use
of chemical fertiliser. Though there are popular norms in
recognising these, they are not sufficient enough. Institutional
structure is not strong enough to test and catch farmers who are
applying these chemicals and neither are they penalised.
Therefore a farmer does not have enough incentive to give up the
use of chemicals. Rather he has enough incentives to use them so
that he can avoid the price drops in the market.

Market prices do not reflect the quality since it is not easily


distinguishable. Hence all the farmers are better off using
chemicals as they wish. The recommendation is to impose a
system where quality can be easily detected. A penalty system
must also be in place. Once the quality detection systems are in
place the market will respond by allocating higher prices. This
issue is very prominent in the local fruit and vegetable value
chains.

Export value chains on the other hand are quality reflectively (for
the most part). For example the Good Agricultural Practices (GAP)
value chain has clear incentives to maintain quality. The value
chain only allows the recommended levels of fertiliser and other
chemicals. Farmers work very loosely with the agriculture
extension officers where it is essential to get recommendations on
any chemical applications.

Record keeping is also mandatory. If everything is up to the


standard a certificate is issued allowing the farmer to export his
produce. In addition a final checking is also done at the
quarantine centre to detect any banned chemicals. Therefore the
quality detection system is strong. If a farmer is caught with
banned chemicals his produce will not be allowed to export,
hence the penalty is also very strong. Price clearly reflects the
quality. For example one kg of bitter gourd will be demanded at
Rs. 40-100 at the local value chain while it is demanded at Rs.
250-300 at the export value chain.

While it could be easy to give recommendation to properly


incentivise the farmers, it is hard to incentivise the consumers,
especially the ones based on local value chains. In my view the
average local consumer is left with only three options:

(1) Find informal signals (appearance, smell, colour and texture)


that can detect the safe food

(2) Grow what you eat to the extent possible

(3) Stop concerning about the quality but reduce the


consumption.

Each and every option above comes with a different incentive


structure. For a consumer who has substantial knowledge on
agriculture and connections with farmers it is possible to identify
informal signals to detect quality. For an average consumer it is
hard to trust the informal signals and the probability of getting
deceived is high. Therefore incentives are low for an average
consumer to look for informal quality signals.

Grow what you can eat is about the opportunity cost. Sometimes
the opportunity cost of growing in terms of time, space, and fixed
and variable inputs might overweigh the willingness to pay for
toxic produce. In such cases the incentives are towards
consuming toxic produce rather than cultivating by yourself.

For some consumers the third option might give the highest
incentives. For example, there are consumers who have reduced
the consumption of fruits and vegetables that are famous for
using banned chemicals (e.g.: cabbage, capsicum, banana and
mango). For them the foregone utility in terms of reduced
consumption is lower than the opportunity cost of cultivation or
searching informal quality signals.

Machinery as a means of increasing efficiency and quality: Are


incentives aligned?

Technology transfer is another important method used by policy


makers to increase agricultural productivity, efficiency and quality.
Introduction of new machinery therefore play a very important
role in the agriculture sector. This can happen through
Government research institutes, trade or any other form of
cooperation between countries or through the private sector.
However, the ultimate recipient of many such machinery is the
agriculture small holder.

Quite often it is possible that these machineries are not affordable


for them. In such cases governments are to a certain extent
responsible in providing financial assistance. However it is quite
possible to see cases where the adoption of machinery is low
despite financial subsidies are offered. I will further explain this
using two examples I have come across during my own research
work.

Value chains that operates around export agriculture crops are


highly quality conscious. In most cases prices reflect the quality
parameters and straight forward mechanisms are established to
measure these quality parameters. In most of these value chains
quality parameters are achieved through the use of new
machinery.

The global pepper value chain is something that is highly quality


conscious however the one that we face mainly focus on threshed
pepper which is exported in bulk form. Therefore, it does not
provide many places for introducing new machinery. Yet threshing
is an operation that can be significantly improved by introducing
new machinery. Understanding the importance of this a subsidy
scheme was introduced to pepper small holders to purchase
threshing machines. Yet the purchase of machinery did not go up.
The reason is the misalignment of the incentives.

The majority of pepper from these smallholders went to India. It


was exported as a bulk product and there wasnt a price premium
based on whether the pepper was threshed using a machine or
feet. Therefore the market prices were distorted and did not
recognise the quality as a parameter. In such a case the
opportunity cost of taking a loan (which is subsidised) was higher
than using labour to thresh pepper. This would have been a total
different story if pepper were to be exported to a place where a
price premium exists for using machinery to thresh.

Another example is the use of machinery in organic paddy


farming. As mentioned before one of the main opportunity cost
component of producing organic paddy was the higher labour cost
associated with management practices. Organic paddy farming is
closely associated with traditional paddy varieties which most of
the time create limitation in introducing machinery for farming
practices.

As I mentioned earlier, the National Program on Toxin Free Food is


keen on introducing many new machinery to organic paddy
farming efforts. However this might not yield expected results
since there arent enough incentives for a farmer to invest in
machinery. Rather than reducing, the introduction of machinery
might increase the cost of labour. Therefore the recommendation
is to work with new improved varieties or to select traditional
varieties that closely resembles them.

Coordinated farming or working with crop plans: Are incentives


aligned?

In many cases agriculture produce attracts lower prices simply


because the market is flooded with over supply. This happens
since the cultivation efforts are not coordinated and large number
of farmers cultivates the same crop at the same time in different
parts of the country. In one of my previous articles I argued for the
community level crop development plans as a solution. The
solution was already in existence for paddy and the
recommendation was to extend it to vegetable cultivation as well.
However I did not go in to detail in explaining how that could be
affected when incentives are misaligned. Let me do that here.

Paddy is a homogeneous crop, therefore it is easy to implement a


coordinated effort. There are incentives in doing that such as
price bargaining as farmer organisation, irrigation water
management and sharing machinery and labour during planting
and harvesting. However vegetable cultivation is not
homogeneous since there are many different types. Fertiliser
requirements, farm management practices and pest and disease
management varies based on the vegetable type.
Farmers most of the time respond to market signals, mainly the
prices. However prices are distorted and largely being
controlled/manipulated by the wholesalers. Yet farmers respond to
that since they do not put much trust on the information and
recommendations they receive through the government extension
services. The advantage of participating in a crop plan is that
farmers can reduce the oversupply of a produce and attract a
higher price.

However if prices are distorted and controlled then there is no


guarantee that they would be able to attract a good price even
after taking part in a crop plan. Therefore if information
asymmetry becomes a major issues then the incentives for a
farmer to be a part of a community crop plan would be less. The
recommendation therefore is to equip farmer with as much
information as possible on the market. That will reduce the
transaction cost of information search and would allow farmers to
look for competitive prices in different locations.

Information asymmetry can be reduced through a strong ICT


intervention such as online pricing and online trading floors.
However the transaction costs of searching information through
online sources must be lower than of him looking for that
information through the usual intermediaries.

I am tempted to recommend the use of agricultural extension


services as a support mechanism for farmers to get accurate
market information but I have my doubts. I will explain my
personal experience here.

The GAP value chain is heavily dependent on the agriculture


extension services officer. One of the main tasks of this officer is
to link the farmer with an exporter so that a competitive price can
be obtained. The farmer can also reduce his transaction cost in
looking for market prices and buyers. However there is a flipside
to this. What happens if the extension officers becomes a middle
man rather than a facilitator of information? This is clearly evident
in the GAP value chain where some farmers do not know their
exporter and price negotiation happens between the extension
officer and the exporter.

I will make one final point on this. To my knowledge there are no


restrictions on an extension officer becoming a farmer and being
in the same value chain (if there are restrictions then this is a
serious issue). An extension officer who plays a facilitator role
between the farmer and the exporter has significant access to
price and demand data. When such an official becomes a farmer
it is quite possible for him to sell his harvest before all the other
farmers for a better price.

This is also evident in the GAP value chain where farmers are
facing difficulties in finding exporters while their extension officer
has sold almost three times of what farmers have produced.
Therefore allowing the extension officer to reduce the transaction
costs might reduce the incentives for farmers to stay in the value
chain.

(Dr. Chatura Rodrigo is an agriculture economist. He can be


reached at chatura_rodrigo@yahoo.com and 94 77 986 7007.)
Posted by Thavam

Вам также может понравиться