Market risk in Indian Agriculture – A case of Rice

Ramesh Chand and S S Raju, National Centre for Agricultural Economics and Policy Research (ICAR), New Delhi, India

Introduction

In a country like India, where more than 60 per cent of the area under cultivation is not irrigated, farm production is highly vulnerable to fluctuations in rainfall.  Beside production risk Indian farmers also face high market risk. Farm harvest prices in the country show high inter and intra year volatility. Price variation is quite pronounced in the regions and commodities where price support mechanism is not operative. With increased commercialization of agriculture, price fluctuations have become highly significant in affecting farmers’ income. Accordingly, market risk is also now quite important in affecting farmers’ income.

Rice is the most important crop in the country both in terms of area and production as well as in terms of consumption. About 80 per cent of the total production of rice (paddy) is marketed by the farmers and rest retained for self use as food, feed, seed etc. Over time, the proportion of marketed surplus in total production has gone up. This shows that rice production in India has a very strong market orientation and the price received by farmers for their produce plays a crucial role in incentivising farmers to take production decisions.

About 90 per cent of rice in India is produced in the summer (kharif) and the surplus is brought to market for sale within just two months.  This results in a glut in the market and many times forces producers to accept a price lower than normal market price. Similarly, when there is a bumper crop, the farmers find themselves in the buyer’s market during the peak marketing season, which makes them a price taker. This kind of market often inflicts undue losses, even when farmers adopt the best available technology and produce efficiently.

Government policies: Minimum Support Price

It is because of these factors that the policy of assurance of a remunerative and stable price environment has been pursued by the government of India for so long. The Government of India announces Minimum Support Price for different grades of paddy at the time of the sowing of paddy each year. MSP take into account several factors including, cost of production, changes in input prices and input-output price parity.  The MSP is then paid to farmers through the procurement of public agencies.  This system has worked very well due to price assurance in those markets and areas where public procurement is made.  It is important to mention here that public agencies procure around 40 per cent of the total marketed surplus of paddy in the country.  The remaining 60 per cent of the marketed surplus is purchased by the private sector which has no obligation to pay a guaranteed price to producer suppliers. If there are signal of short supply in the country and a possibility of significant price rise in the future then the private sector pays the MSP or an even higher price. In a normal situation the price paid to farmers often goes below the MSP.       

Conclusion

It is not considered desirable or feasible to provide price assurance to farmers through procurement of the entire marketed surplus.  Therefore a paradigm shift is suggested from MSP to DPP (Deficiency Price Payment). We feel that implementation of market insurance or Farm Income Insurance to cover price risk is much easier than yield insurance. This can be done by requiring interested farmers to register their marketable surplus with an insurance agency or market committee at the time of the sowing of the crop. The insurance agency should offer insurance cover to include a price guarantee which could be the minimum support price in some cases or a market based price from the past. Farmers should pay a premium for this kind of price insurance and initially the government should share some of the burden of the premium. During harvest, if price in the notified market falls below the guaranteed price then the insurance agency should pay an indemnity. There are however remaining modalities to be worked out for implementation of this kind of model.