25 June 2020
Agriculture, in general, and farming specifically, is an economic activity where the entrepreneur farmer is in it to make a profit.
This is an obvious point to state, but an important one in understating the long-term viability of the sector. Thus, it is important to evaluate the link between agricultural prices and macroeconomic policies to agricultural supply.
Agricultural supply translates into food availability thereby addressing issues of food insecurity, creating employment and alleviating poverty – the so-called triple challenges in South Africa. In other words, the article deals with the following key question: Are agricultural incentives effective in boosting agricultural supply?
In the main, macroeconomic policies (monetary policy, fiscal policy, trade and exchange rate policies) affect agricultural prices through their effects on the real exchange rate. Agricultural prices, along with non-price factors including exogenous shocks, determine agricultural output or supply.
The issue of agricultural supply response is a very important one as it has an impact on growth, poverty and the environment. Indeed, the size of agricultural supply response is informative about whether a policy of taxing agriculture through lower farm prices or through overvalued exchange rates and industrial policies will generate resources for investment in other sectors of the economy.
It is also important in determining whether such policies will retard agricultural growth, create food and input bottlenecks that eventually bring down the rate of growth of the economy as a whole.
Moreover, the agricultural supply response, mainly in the form of area expansion, is also useful since it could be informative about the seriousness of environmental problems.
In the pursuit of profits, farmers have to bear the cost of inputs.
High input costs annihilate nominal output price incentive. Hence, input prices are a very important element of agricultural production. The prices of the following inputs are particularly relevant: fertilisers, pesticides, improved and high yield varieties of seeds, tractors and cars.
The foregoing assertion supports the notion that Southern African countries including South Africa, should invest more in local inputs production to lower their cost. Moreover, urban wages and the price of consumer goods have a serious impact on agricultural output prices.
An increase in input prices increases input costs and decreases the incentive to produce more, other things being equal.
This is generally the case for external inputs, such as fertilisers, pesticides, improved and high yield cultivars of seed and machinery, which, as imported goods, at least in many Southern African countries, see their prices raised by policies that protect industry. On the other hand, in many countries there is a fair amount of subsidisation of these inputs as in the case of an over-valuation of currency that artificially reduces the cost of imported inputs.
In short, agricultural output price can boost production by increasing the returns on inputs. Suffice to say that market forces and/or by government intervention through trade policy (export tax or subsidies), exchange rate policy, taxes and subsidies and direct government intervention (i.e. price controls) agricultural output prices.
That is, real output price is subject to two types of distortions: direct taxation represented by trade tariffs and government fixation of prices, and indirect taxation captured by currency over valuation as well as protection of non-agricultural sectors.
Cognisance should be taken that there are other factors that affect supply response whose omission generally brings about omitted variable bias apart from pure agricultural incentives captured by prices.
One set of such factors is public inputs, sometimes called public goods such as irrigation and some type of human and physical capital, adult literacy, life expectancy, research, extension, road density and roads paved. Irrigation water positively affects agricultural output through its effect on productivity. Adult literacy, by helping individuals to assimilate or to adopt technical advances faster is also positively related to agricultural output. An increase in life expectancy represents a measurement of health, which affects output through productivity.
Income level has a positive impact on agricultural output to the extent that the higher the farmer’s income the higher the level of production, all things being equal. With a higher income, the farmer can easily acquire much-needed inputs that can help boost productivity.
Technology or spending on research is perhaps the key variable if one has to raise substantial output in regions such as Southern Africa.
Indeed, an increase in research in the sense of technology advancement can help achieve the twin goals of agricultural output growth and environmental conservation through land use intensification. A caveat, however, is in order since some of the advances can lead to overuse of inputs such as fertilisers, which in the end may reduce agricultural productivity.
Thus, the kind of technological advancement desires should enhance agricultural productivity while being environmentally benign. An example of such innovation is the Water Efficient Maize for Africa (WEMA) developed by the Agricultural Research Council in South Africa. This cultivar of maize ensures economic yields under dry weather conditions and reduced external inputs.
Rural infrastructure is very important in the agricultural production setting to the extent that a deficient infrastructure can wipe out all other production incentives.
Indeed, adjusting prices may not be all that is needed to increase the output and incomes of target groups. More often than not, the poor in developing countries are located in areas with little access to roads, transports, communication, agriculture services, marketing facilities, and so on.
Improving prices may be a necessary condition for restoring incomes, but not a sufficient one. If farmers cannot get the supplies and services they need, infrastructure investments may be required to give these farmers the capacity to increase output and yields. Better extension and irrigation services also positively contribute to agricultural productivity.
Policy implications of the different stylised facts concerning the relationship between prices (and non-prices) and agricultural productivity are well known and understood. The rationality of farmers, for example, implies that measures should be taken to eliminate price distortion since an increase in output price leads to an increase in agricultural output and productivity.
At the same time, one should not neglect other incentive elements. Indeed, in developing countries in general and Southern Africa in particular, non-price factors are equally if not more important than output price in agricultural production.
One such factor is infrastructure. Suitable and functional infrastructure creates a conducive environment within which agricultural production and productivity can thrive.
Source: Independent Online