Agriculture and Profitibility

Pricing policies of the government and the local and international trade have a major impact on profitability in the agricultural sector. Thus, changes in agricultural prices affect living standards, employment, incomes, and poverty levels in the rural areas. An increase in the producer prices increases the profitability and improves the standard of living of the people depending on crop income, and vice versa, keeping fixed other factors such as the quantity of goods. If the rate of increase in consumer prices is more than the rate of increase in producer prices then the farmers’ purchasing power declines.

Pakistan is undergoing structural adjustments for many years. Main target of the adjustments is liberalization of markets and prices, especially freeing the currency market, reducing industrial protection, and introducing financial austerity and macroeconomic stability. The agricultural sector is also undergoing these changes, which include eliminating export taxes and other trade restrictions and reducing producer subsidies. Such changes in the sector are critical as agriculture is the largest sector of Pakistan economy.

Due to the dominance of the agricultural sector in the economy and its linkages with other sectors, the changes in value-added, employment, and prices in this sector would significantly affect the overall economic growth and employment in the country. The standard of living in the country in general and in rural areas in particular are also affected by such changes. Variations in the prices of agricultural outputs and inputs affect income distribution, both within agriculture sector and also between the agricultural sector and the non-agricultural sectors. On the other hand, an increase in the prices of inputs results in a decline in the profitability from agricultural production. In short, the farmers gain if producer prices increase more than consumer prices and input prices, keeping quantity fixed.

High farm prices not only benefit the large producers but also the small farmers. Higher prices in agricultural sector not only have implications for an efficient use of resources but can also shift the production function upwards by price-induced technological and institutional innovations and infrastructure investment in rural areas. However, under market clearing assumptions when per capita production rises to an extent that it offsets the decline in relative prices, the total gains to the farmers increase. Discussing over agricultural prices, it seems that they revolve around two different views. One of these view is that the government must support the agricultural prices and the farmers must be protected from the decline in market prices of the agricultural commodities.

This have criticized the pricing policies of the government, arguing that the adverse pricing policies followed by the government had a greater negative impact on small farmers than on large farmers. They argue that, except for the 1960s, agricultural commodities have generally been under priced. This has led to lower profit margins for the farmers and as a consequence declining employment opportunities for agricultural labour. The contrasting view is that the support prices and subsidies have made the agriculture sector highly dependent on government support and in order to survive in the WTO trade regime the sector must become highly competitive, efficient, and self dependent.

When the prices in the international market are lower than thedomestic market the free trade brings reduced profits for the farmers but greater purchasing power for the consumers. In both cases i.e. whether the prices in the international market are higher than the prices in the local market or lower than the prices in the domestic market, the society reaps the net gain. The proponents believe that by reducing the level of protection domestic resources would automatically shift to the areas of comparative advantage. It is believed that when government takes measures to reduce duties and subsidies on agricultural trade, it results in increased efficiency in agricultural production due to increased competition from other countries. Producers of those agricultural products, which can fetch higher prices in international market, generally gain from the increased prices and larger market. Consumers in this case have to pay higher prices.