Agribusiness Management and Trade

Lesson-32 Producer Surplus of Agricultural Commodities

32.2  MEANING OF PRODUCERS SURPLUS

In any developing economy, the producer’s surplus of agricultural product plays a significant rote. This is the quantity which is actually made available to the nonproducing population of the country. From the marketing point of view, this surplus is more important than the total production of commodities. The arrangements for marketing and the expansion of markets have to be made only for the surplus quanit6ty available with the farmers and not for the total production.

The rate at which agricultural production expands determines the pace of agricultural development, while the growth in the marketable surplus determines the pace of economic development. An increase in production must be accompanied by an increase in the marketable surplus for the economic development of the country. Though the marketing system is more concerned with the surplus which enters or is likely to enter the market, the quantum of total production is essential for this surplus. The larger the production of a commodity, the greater will be the surplus of that commodity and vice versa.

The commodity, the marketed and marketable surplus helps the policy-makers as well as the traders in the following areas.

• Framing Sound Price Policies: Price support programmes are an integral part of agricultural policies necessary for stimulating agricultural production. The knowledge of quantum of marketable surplus helps in framing these polices.

• Developing Proper Procurement and Purchase Strategies: The procurement policy for feeding the public distribution system has to take into account the quantum and behaviour of marketable and marketed surplus. Similarly, the traders, processors and exporters have to decide their purchase strategies on the basis of marketed quantities.

• Checking Undue Price Fluctuations : A knowledge of the magnitude and extent of the surplus helps in the minimization of price fluctuations in agricultural commodities because it enables the government and the traders to make proper arrangements for the movement of produce from one area, where they are in surplus, to another area which is deficient.

• Advanced estimates of the surpluses of such commodities which have the potential of external trade are useful in decisions related to the export and import of the commodity. If surplus is expected to be less than what is necessary, the country can plan for imports and if surplus is expected to be more than what is necessary, avenues for exporting such a surplus can be explored.

• Development of Transport and Storage System: The knowledge of marketed surplus helps in developing adequate capacity of transport and storage system to handle it.

32.3 TYPES OF PRODUCERS SURPLUS

The producer surplus is the quantity of produce which is or can be made available by the farmers to the non-farm population. The producers’ surplus is of two types.

1. Marketable Surplus

The marketable surplus is that quantity of the produce which can be made available to the non-farm population of the country. It is a theoretical concept of surplus. The marketable surplus is the residual left with the producers farmers after meeting his requirement for family consumption, farm needs for seeds and feed for cattle, payment to labour in kind, payment to artisans, blacksmith, potter and mechanic payment to landlord as rent and social and religious payments in kind. This may be expressed as follows:

MS = P - C

where

MS = Marketable surplus

P =Total production, and

C = Total requirements (family consumption, farm needs, payment

to labour, artisans, landlord and payment for social and religious work)

2. Marketed Surplus

Marketed surplus is that quantity of the produce which the producer farmer actually sells in the market, irrespective of the requirements for family consumption, farm needs and other payments. The marketed surplus may be more, less or equal to the marketable surplus.

Whether the marketed surplus increases with the increase in production has been under continual theoretical security. It has been argued that poor and subsistence farmers sell that part of the produce which is necessary to enable them to meet their cash obligations. This results in distress sale on some farms. In such a situation any increase in the production of marginal and small farms should first result in increased on-farm consumption.

An increase in the real income of farmers also has a positive effect on on-farm consumption because of positive income of farmers also has a positive effect on on-farm consumption because of positive income elasticity. Since the contribution of this group to the total marketed quantity is not substantial the overall effect of increase in production must lead to an increase in the marketed surplus.

32.4  RELATIONSHIP BETWEEN MARKETED SURPLUS AND MARKETABLE SURPLUS           

The marketed surplus may be more, less or equal to the marketable surplus, depending upon the condition of the farmer and type of the crop. The relationship between the two terms may be stated as follows.

             >

Marketed surplus         <          surplus

                                     =

1. The marketed surplus is more than the marketable surplus when the farmer retains a smaller quantity of the crop than his actual requirements for family and farm needs. This is true especially for small and marginal farmers, whose need for cash is more pressing and immediate. This situation of selling more than the marketable surplus is termed as distress or forced sale. Such farmers generally buy the produce from the market in a later period to meet their family and/or farm requirements. The quantity of distress sale increased with the fall in the price of the product. A lower price means that a larger quantity will be sold to meet some fixed cash requirements.

2. The marketed surplus is less than the marketable surplus when the farmers retain some of the surplus produce. This situation holds true under the following conditions.

• Large farmers generally sell less than the marketable surplus because of their better retention capacity. They retain extra produce in the hope that they would get a higher price in the later period. Sometimes, farmers retain the produce even up to the next production season.

• Farmers may substitute one crop for another crop either for family consumption purpose or for feeding their livestock because of the variation in prices. With the fall in the price of the crop relative to a competing crop, the farmers may consume more of the first and less of the second crop.

3. The marketed surplus may be equal to the marketable surplus when the farmer neither retains more nor less than his requirement. This holds true for perishable commodities and of the average farmer.

32.5  FACTORS AFFECTING MARKETABLE SURPLUS

The marketable surplus differs from region to region and within the same region, from crop to crop. It also varies from farm to farm. On a particular farm, the quantity of marketable surplus depends on the following factors.

• Size of holding: There is positive relationship between the size of the holding and the marketable surplus.

• Production: The higher the production on a farm, the larger will be the marketable surplus and vice versa.

• Price of the Commodity: The price of the commodity and the marketable surplus have a positive as well as a negative relationship, depending upon whether one considers the short and long run or the micro and macro levels.

• Size of family: The larger the number of members in a family the smaller the surplus on the farm.

• Requirement of Seed and Feed: The higher the requirement for these uses, the smaller the marketable surplus of the crop.

• Nature of Commodity: The marketable surplus of non-food crops is generally higher than that for food crops. For example,in the case of cotton, jute and rubber, the quantity retained for family consumption is either negligible or very small part of the total output. For these crops, a very large proportion of total output is marketable surplus. Even among food crops, for such commodities like sugarcane, spices and oilseeds which require some processing before final consumption the marketable surplus as a proportion of total output is larger than that for other food crops.

• Consumption Habits: The quantity of output retained by the farm family depends on the consumption habits, for example, in Punjab, rice forms a relatively small production of total cereals consumed by farm-families compared to those in southern or eastern states. Therefore, out of a given output of paddy/rice, Punjab farmers sell a greater proportion than that sold by rice eating farmers of other states. The functional relationship between the marketed surplus of a crop and factors affecting the marketed surplus may be expressed as :

M = f (x1, x2, x3, .......)

Where

M = Total marketed surplus of a crop in quintals

x1 = Size of holding in hectars

x2 = Size of family in adult units

x3 = Total production of the crop in quintals

x4 = Price of the crop

the other factors may be specified..

32.6   RELATIONSHIP BETWEEN PRICES AND MARKETABLE SURPLUS

Two main hypotheses have been advanced to explain the relationship between prices and the marketable surplus of foodgrains.

• INVERSE RELATIONSHIP: There is an inverse relationship between prices and the marketable surplus. This hypothesis was presented by P.N. Mathur and M. Ezetkiel. They postulate that the farmers’ cash requirements are nearly fixed and given the price level, the marketed portion of the output is determined. This implies that the farmers’ consumption is a residual and that the marketed surplus is inversely proportional to the price level. This behaviour assumes that farmers have inelastic cash requirements The argument is that, in the poor economy of underdeveloped countries farmers sell that quantity of the output which gives them the amount of money they need to satisfy their cash requirements ; they retain the balance of output for their own consumption purpose. With a rise in the prices of foodgrains, they sell a smaller quantity of foodgrains to get the cash they need and vice versa. In other words, with a rise in price, farmers sell a smaller, and with the fall in price they sell a larger quantity. Olson and Krishnan have argued that the marketed surplus varies inversely with the market price.  They contend that a higher price for a subsistence crop may increase the producers’ real income sufficiently to ensure that the income effect on demand for the consumption of the crop outweighs the price effect or production and consumption.

• POSITIVE RELATIONSHIP: V.M. Dandekar and Rajkrishna put forward the case of a positive relationship between prices and the marketed surplus of foodgrains in India. This relationship is based on the assumption that farmers are price conscious. With a rise in the prices of foodgrains, farmers are tempted to sell more and retain less. As a result, there is increased surplus. The converse, too, holds true.