The solution to problems of low/volatile agri prices is not ICTs, it’s economics

Posted by on July 18, 2018  /  0 Comments

The search for a silver bullet ICT solution for low/volatile prices for agricultural produce continues, even when it should by now be evident that there is none. What matters is the level of supply and demand when the crop is ready to be harvested. We have great difficulty in foretelling the future. ICTs can, as the Economist points out, result in faster and wider dissemination of misleading or irrelevant information such as what is everyone growing at this particular time. What is relevant is the price that will be fetched when the crop is harvested, which is determined by supply and demand at that time. If too many farmers grow the same crop now, it is likely that there will be oversupply at harvest time and that prices will crash.

A third explanation is that all too often, farmers’ produce fetches miserably low prices. There were hopes that speedier information brought by the spread of mobile phones would help farmers make better decisions about what to plant, but just as often it has made too many farmers bet on the same crops. Last year the government of Telangana state suggested that farmers grow chili because the price was high; so many took the advice that it collapsed.

Good analysis in the Economist.

There are two solutions: one based on central planning and the other on the forward and future markets. Both are difficult to implement.

Central planning requires massive information collection and the ability to command farmers what to grow and when. The first component is afflicted by GIGO (wrong information being fed into the system, resulting in erroneous decisions being made). Does the state have the ability in countries like India and Sri Lanka to actually command farmers, even if the commands are based on good data? Will these commands create incentives for farmers to skew the information that is provided for the planning system?

Forward contracts utilize decentralized market mechanisms to signal to farmers what to grow and when. Here too, there is need for accurate information on what is being grown, weather patterns, demand predictions, etc. but the users of the information are traders, not farmers. All they see is a single number: how much can x crop be sold for in y time in the future.

The biggest problem here is trust. Will the farmer who promised a certain volume of produce at time y actually deliver? Even when spot market prices at that time are higher? Futures markets allow the risks of such behavior as well as weather and pest related risks to be managed.

Different administrations in Sri Lanka have tried hard to implement the planning solution, with little to show for it. Is it not time to seriously work on the alternative?

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