Saturday, June 4, 2011

OXFAM gets India Wrong - Problem of Plenty Here

Oxfam in their new report, “Growing a Better Future in a Resource Constrained World” predicts that the prices of food, already at a record high, will more than double in the next 20 years. In addition, by 2050, demand for food will rise 70 percent, yet the report says the world’s capacity to increase food production is declining. They were wrong about India as this Economic Times article indicates.

India faces problem of plentiful food

Is there food shortage in India? Bet you will say yes. After being rammed by inflation, it's natural. But not true. India has no food shortage. On the contrary, we are now faced with the huge problem of plenty.

There is a bumper wheat and rice crop. In Andhra Pradesh, India's rice bowl, production is up 30%. Millers are offering only Rs 8 for a kilo of paddy though the MSP is Rs 10.30. Angry farmers last week threw paddy into the Krishna River. The state government has borrowed Rs 550 crore from RBI for procurement. The FCI can do little. After buying 50 million tonne wheat and rice this season, added to 44 million tonnes left from last year, it is exhausted.

The oilseed crop is 20% larger. Import of palm oil from Malaysia and Indonesia is down for the sixth straight month till April, a three-year low. Sugar output is up 28%. Even exports can't prod the bulls into action.

Production of pulses rose by a fifth to cross 17 million tonne. The Planning Commission pegs this year's demand at 19 million tonne. As the gap narrows, premiums are evaporating.

Cotton prices hit a 140-year high in March on the back of the world market and then crashed by Rs 20,000 per candy within two months. Textile mills can't absorb the record harvest. In crop after crop, output is higher. In West Bengal, farmers have put 60% of their potato in cold storage, hoping prices will improve. And a 15% jump in onion harvest has pushed wholesale prices in Maharashtra back to Rs 5 per kilo. In January, we paid Rs 70.

What has changed? It's the classic case of over-stimulation by high price expectation. Net returns in most crops were so high that farmers left no stone unturned to maximize gains. They tilled every available inch of land. An extra 2.5 million hectares was cultivated last winter. One million hectares was added to wheat. Area under pulses touched 130% of the normal. Sugarcane acreage rose 15%. This June, farmers intend to plant another million hectares with "white gold" cotton.

Along with area, productivity increased. Farmers invested heavily in best seed, irrigation and crop inputs. High crop prices make it easier to adopt new technology. Erratic weather was the only party pooper. Within a few short months, the farmer has proved that with enough money on the table, India can overcome its supply side constraints.
Unfortunately, demand failed to keep pace. It never does. Despite what economists and politicians believe, middle class demand is not endless.

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