Are higher food-grain prices beneficial for farmers?

Jomo Kwame Sundaram, the co-ordinator for Economic and Social Development at the Food and Agriculture Organization, writes about the differences in the responses of small and big farmers to increasing food prices in the Economic and Political Weekly (EPW).

It is often presumed that higher food prices would induce farmers to produce more food for the market. In reality, however, the price responsiveness of output and marketable surpluses produced by smallholder farmers is influenced by many factors, including their interest and ability to respond to what may be seen as temporary price changes.

The agricultural sector in most developing countries comprises many, typically heterogeneous producers, differing in the resources and technologies they have access to, as well as the determinants of their production and consumption decisions. Factors that influence farmers’ production and consumption decisions include access to land and other resources, household dependency ratios, access to off-farm employment, the extent of production, family consumption (of output) and market risks, and the markets to which they have access.

Depending on their nature and context, farm households facing similar incentives may make different decisions. Food and Agriculture Organization research suggests that the factors influencing farmer propensity to increase production are of three types: (i) access to and productivity of assets, natural resources and labour; (ii) the institutional environment, including land tenure and other arrangements through which farmers access productive resources; and (iii) access to and functionality of the markets in which they participate.

Sundaram explains that the ability of farmers with small landholding capacities may not be able to reap the benefits of higher prices of food-grains.

…the ability of smallholders to increase output to benefit from increased food prices involves constrained choices. Smallholders are likely to increase production when they have secured tenure to land and other natural resources, and well-functioning markets provide appropriate incentives and reduce disincentives. When they have access to technology, knowledge, productive resources and infrastructure, and are able to use their assets to produce more, they are more inclined to raise output. However, they may not be able to respond to higher prices to increase output if any of these conditions are absent.

Further, it could also happen that the income that increases from higher food-grain prices will lead to an increase in consumption amongst the poorest farmers, leaving little for productive investment. Without any substantial investment, how much of benefit the poorest farmers can get from higher food-grain prices is unclear. In fact, both in Asia and in sub-Saharan Africa, the effect of higher prices on the market surpluses has often been negative for many poor smallholders who produce for both home consumption and sale.

Originally published at logiconomics.wordpress.com on October 20, 2015.