Agricultural Price Policy

Formulation by CACP:
an Overview

Presentation by The Commission

for Agricultural Costs and Prices
(CACP) at the Planning
Commission, 12th August, 2010

1
Contents of the Presentation
1. Data Base at field level for collecting
cost of cultivation and concepts A2 and C2
costs.
2. Methodology for projecting costs to the
current year from previous years data
3. Factors that determine MSP of crops

In the end, Feedback from farmers on data

and methodology
2
 CACP Genesis
Need for a price policy to take care of the interests
of producers and consumers.

Government set up a Committee under the

Chairmanship of Late L.K.Jha in 1964.

Based on the recommendations, Government set up

the Agricultural Prices Commission in January,
1965. (Chairmen in 60s and 70s M.L.Dantwala,
Ashok Mitra, Dharam Narain)

The Commission was re-named as the Commission

for Agricultural Costs and Prices (CACP) in March,
1985.
3
Composition of the Commission (Present)

Chairman
Member-Secretary
One Official Members (generally economists or
experts from agricultural economics)
Two Non-official Members (representing the
farming community)
Total 5 members including Chairman

4
 Terms of Reference for CACP
Advise on price policy keeping interests of producers
and consumers.

The price policy should focus on incentivising

producers; rationally utilise resources; effect on rest of
the economy.

Suggest measures on non-price factors.

Undertake studies in respect of different crops assigned

by Govt. and organise research studies on price policy.

Advise Govt. on problems relating to agri. prices and

production etc.
5
 Why Minimum Support Price ?

Remunerative and stable price environment important for

increasing agricultural production and productivity (a long
term price guarantee)

Market place for agricultural produce inherently unstable.

This often inflict undue losses on growers, despite

adopting best cultivation practices.

Hence, Minimum Support Prices (MSPs) for major

agricultural products fixed by Government each year,
based on recommendations of CACP.
6
 Crops under MSP coverage

CACP recommends MSP for 24 crops:

Kharif Crops — Paddy, Jowar, Bajra, Ragi, Maize,

Tur (Arhar), Moong, Urad, Groundnut, Sunflower
seed, Soyabean, Sesamum, Nigerseed, Cotton,
and Tobacco.

Rabi Crops — Wheat, Barley, Gram, Lentil

(Masur), Rapeseed/Mustard, and Safflower.

Other crops — Raw Jute, Sugarcane, and Copra.

7
Data Base for Collecting Cost of Cultivation
at field level

‘The Comprehensive Scheme for Studying the cost of

cultivation of Principal Crops in India’ (CS) initiated in 1971
is the data base.
The CS is administered by the Directorate of Economics and
Statistics (DES), Depart. of A&C, Ministry of Agriculture
The scheme at present covers 19 States and is
implemented through 13 Agricultural Universities, 3 general
universities and Directorate of Tobacco Development.
These 17 implementing agencies collect and compile data in
different states and send it to DES for generating the
estimates of cost of cultivation.
8
 Comprehensive Scheme (CS):
Sampling
Sampling methodology adopted is three stage
stratified random sampling.
Each State divided into homogenous agro-
climatic zones
Primary sampling units (first stage units) are
tehsils allocated to different zones
Second stage units within each tehsil are
villages/ clusters of villages

Third stage units are operational holdings

selected at random from each land-size class .
9
 Classification of Operation Holdings

There are about 840 tehsils and 8400 sampled

operational holdings covered under the study.
Samples changed every three years.
The following is the classification of operational
holdings:
(a) Less than 1 hectare
(b) Between 1 and 2 hectares
(c) Between 2 and 4 hectares
(d) Between 4 and 6 hectares
(e) Above 6 hectares
In each size class, two holdings are selected. Thus 10
holdings are selected in each village
10
 System of Data Collection

Data collected on inputs and outputs in physical and

monetary terms following uniform methodology. The field
data collected on the cost accounting method

Daily entries of debit/ credit for the expenditure/ income

made to assess the total cost/ benefit.

Field data collected by field men who are posted in the

village and one field supervisor allocated to 10 field men.

Farm Analysis Package (FARMAP) software is used for

processing of cost data. It was developed back in 1992 in
collaboration with FAO. New package recommended.

Assistant Statistician is in-charge of data entry, validation

and transfer of data to the Ministry of Agriculture.
11
 COST CONCEPTS : A2

Paid out costs (out of pocket expenses) and Imputed costs.

Several cost concepts. We concentrate on A2 and C2

Cost A2: Paid out costs

(a) Value of hired labour (human, animal, machinery).
(d) Value of seed (both farm produced and purchased)
(e) Value of insecticides and pesticides
(f) Value of manure (owned and purchased)
(g) Value of fertilizer
(h) Depreciation on implements and farm buildings
(i) Irrigation charges
(j) Land revenue, cesses and other taxes
(k) Interest on working capital
(l) Miscellaneous expenses (Artisans etc.)
(m) Rent for leased-in land

12
 Percentage Shares of Inputs in
total Input Cost (Paddy)2007-08
Inputs AP Assam Punjab Tamil Nadu UP WB

Human Labour 55.61 60.55 35.10 47.50 46.69 61.17

Bullock Labour 3.45 27.26 0.58 1.97 9.89 11.23

Machine Labour 13.53 1.70 23.29 18.98 9.94 4.20

Seeds 4.29 5.40 4.66 9.95 10.14 3.94

Fertilizer 13.27 1.69 15.00 12.19 11.48 8.75

Manure 2.37 2.56 1.16 3.00 2.08 3.30

Insecticide 4.70 0.00 9.53 1.73 0.58 1.58

Irrigation Charges 2.78 0.84 10.68 4.69 9.20 5.82

Sum 100.00 100.00 100.00 100.00 100.00 100.00

13
 Percentage Shares of Inputs in
total Input Cost (Wheat)2007-08
Rajastha
Inputs Bihar Haryana MP Punjab UP n

Human Labour 25.07 32.62 28.37 21.58 27.09 33.47

Bullock Labour 4.21 1.10 6.46 0.48 4.90 2.68

Machine Labour 25.24 28.66 20.04 37.74 24.71 18.58

Seeds 13.39 8.55 13.81 8.54 11.51 12.76

Fertilizer 15.33 15.19 12.50 20.28 14.44 10.39

Manure 0.04 0.00 0.02 0.39 0.20 1.85

Insecticide 0.00 3.19 0.04 7.09 0.20 0.61

Irrigation Charges 16.73 10.69 18.76 3.89 16.94 19.66

Sum 100.00 100.00 100.00 100.00 100.00 100.00

14
 Cost Concepts: C2

C2 ( overall cost of production) = A2 + Imputed costs

Imputed value of family labour (statutory wage rate or the

actual market rate, whichever is higher)

Rental value of owned land( net of land revenue)

estimated on the basis of prevailing rents in the village
for identical type of land or as reported by the sample
farmers subject to the ceiling of ‘fair rents’ given in the
land legislation of the concerned state.

It varies between 30 and 33 percent of gross value of

output (GVO )

Interest on value of owned fixed capital assets (excluding

land) charged at 10% per annum
15
Methodology for Projecting Costs to the current year
from previous years

Data made available to CACP at states level by DES.

This involve a time lag of two years. For example, in
2008-09, we get data for 2006-07.
Here the work of CACP starts after getting state level
data from DES.
The cost components are required to be projected for the
ensuing crop season, by accounting for changes in prices
of various inputs.
The Commission makes use of wholesale price indices of
farm inputs from the Economic Adviser’s office, Ministry
of Industry and wage rates from Labour Bureau, etc.
Commission constructs, for each state and each crop, a
variable input price index to account for likely change in
input cost for the year of projection.
16
Methodology for Projecting Cost
Estimates(Contd)
Price indices constructed include labour (human ,bullock,
machine), fertilisers,manures,seeds,insecticides and
irrigation charges. Basically for paid-out costs
Total input cost broadly divided into two parts: variable
input cost and fixed cost.Projection done only for variable
cost.
After constructing individual price indices for each input,
a composite index is constructed.
Increase in variable input price index over each of latest
available3 years data for projecting A2+FL cost,i.e. all
paid-out cost including family labour.
Intesst on working capital worked separately and the
added to the projected A2+FL cost to arrive at total
projected variable cost

17
 Actual and Projected C2 cost of
production (Rs.quintal): All India

Paddy 2003-04 2004-05 2005-06

Actual C2 491.65 516.08 580.73

Projected C2 525.24 530.94 557.60

Wheat 2003-04 2004-05 2005-06

Actual C2 504.58 513.11 579.02

Projected C2 496.82 515.56 541.52

18
Different Committees on Cost of Cultivation
S.R. Sen Committee (1980) : crop complex approach as
basis of sampling instead of a single crop.

C.H. Hanumantha Rao Committee (1990) : value family

labour at actual wage rates for casual labour and not on
the basis of attached labour.

Also recommended a separate C3 cost adding 10

percent on account of management input to C2 cost.

Y.K. Alagh Committee (2005): reposition the mandate of

CACP to include integration of price policy with trade
policy in the changed scenario of globalized trade.

Also advocated adoption of LRMC principle etc.

Recommended that transport and some other costs
should be included in the costs. 19
 Alagh Committee: Recent Decisions

For recommending MSP, the following items of

cost will also be considered by CACP
(i) The premium, actually paid by farmers for crop
insurance, as a cost item
(ii) Marketing and transport charges incurred by
farmers
Advising on tariff structure by CACP is not
accepted
Adoption of LRMC principle will not be accepted
for agricultural crops.
Statutory Status will not be given to CACP

20
STEPS FOLLOWED BY CACP IN THE PREPARATION OF
PRICE POLICY REPORTS
Identifying the main issues for the relevant crop season

Issue of Questionnaire to the stakeholders, to seek factual

information and views on certain issues.

Holding consultation sessions with the stakeholders

(farmers, industry, state governments, central govt. depart.

Undertaking field visits, for on-the-spot observations and

feedback.

Preparation of Price Policy Report.

21
PRICE POLICY REPORTS SUBMITTED BY CACP

Every year 5 Reports are submitted:

Price policy report on Kharif crops (15 crops)

Price policy report on Rabi Crops (6 crops)

Price policy report on Sugarcane

Price policy report on Copra

Price policy report on Raw Jute

22
 USE OF WEIGHTED AVERAGE COST METHOD

Cost of production vary from state to state and also

within the same state from region to region.
For example, the cost (C2 per quintal) for paddy is
much higher in Andhra Pradesh (Rs.746) as
compared to Punjab (Rs.566) in 2010-11.
However, MSP is recommended for the country as a
whole. Regional MSP’s would create inefficiency.
Hence, weighted average cost method followed.
Weights are the shares in production.
MSP ensures that at least the paid-out expenses and
family labour of farmers (A2+FL cost) are generally
covered even in high cost regions, and C2 cost in
relatively efficient states.
23
 C2 Cost/quintal (Rs): Paddy (2010-11)
States C2/quintal % shares in total production
Andhra Pradesh 746 14.0
Assam 843 3.6
Bihar 656 5.3
Chhattisgarh 636 5.3
Gujarat 585 1.5
Haryana 762 3.7
Himachal Pradesh 945 0.1
Jharkhand 856 3.5
Karnataka 645 3.9
Kerala 1093 0.6
Madhya Pradesh 856 1.6
Maharashtra 1068 2.8
Orissa 748 7.5
Punjab 566 11.3
Tamil Nadu 812 6.0
Uttar Pradesh 776 12.8
Uttarakhand 663 0.6
West Bengal 778 15.8
24
Wt Average 742
 C2 Cost/quintal (Rs): Wheat(2009-10)

States C2/quintal % shares in total

production

Bihar 722 5.4

Chhattisgarh 1006 0.1
Gujarat 626 4.4
Haryana 661 13.6
Himachal Pradesh 871 0.8
Jharkhand 1232 0.2
Madhya Pradesh 783 9.0
Punjab 643 21.0
Rajasthan 614 9.4
Uttar Pradesh 748 35.0

Uttarakhand 807 1.1

Wt Average 701
25
Yield and Costs in Paddy: Punjab 2000-01 (MSP Rs. 510)
Yield Interval (Qt./ha) Yield(qt/ha) Cost of culti Cost of prod.
(Rs./ha) (Rs/qt.
16-36 31 20779 663
36-43 40 20638 520
43-47 45 21094 468
47-51 49 22160 453
51-55 53 22231 422
55-58 56 22826 406
58-61 59 24190 410
61-63 62 22269 361
63-67 65 23346 361
67-75 70 24561 350
average 57.5 22305 386
26
 Factors considered while formulating price policy

The Commission takes a comprehensive view of the entire

economy of the particular commodity. CACP does not
mechanically fix prices although C2 is the main factor
The factors considered are:
Cost of production;
Demand and supply;
Trends in market prices—both domestic and international;
Parity between prices paid and prices received by farmers;
Inter-crop price parity;
Effect on industrial cost structure, cost of living, and
general price level;
Objective needs of the economy at a particular point of
time, including food security, agri. diversification, etc.
Commission recommended higher MSP for wheat when
there was shortage in 2006-07 (food security)
Certain degree of informed judgment is used and not
mechanically cost-plus approach followed 27
Factors considered for Sugarcane
Price Policy
Cost of production of sugarcane
Return to the growers from alternative
crops
Availability of sugar to the consumer at a
fair price
The price at which sugar is sold
Recovery of sugar from sugarcane
Realization from sale of by-products ,viz.
molasses,bagasse and press mud
28
 Contd----
Statutory Minimum Price (SMP) changed in
nomenclature to Fair and Remunerative Price
(FRP) since 2009 through amendment to
Sugarcane (Control )Order, 1966, called
Sugarcane (Control) Amendment Order,2009.
Its essential feature is reasonable margins for
the growers of sugarcane on account of risk and
profits over and above overall C2 cost.

29
 Percentage change of MSP
over all India C2 Cost for Commodities: 2009-10

Crops MSP(Rs/Qtl) C2(Rs/Qtl) MSP over C2(%)

Paddy 1000 645 55
Cotton 2500 2111 18
Jowar 840 804 5
Bajra 840 658 28
Maize 840 738 14
Ragi 915 861 6
Tur (Arhar) 2300 2197 5
Moong 2760 2705 2
Urad 2520 2257 12
Groundnut 2100 1879 12
Soyabean 1350 1200 13
Sunflower Seed 2215 1915 16
Sesamum 2850 3035 -6
Nigerseed 2405 2368 2
30
 -contd….

Crops MSP(Rs/Qtl) C2(Rs/Qtl) MSP over C2(%)

Wheat 1080 649 67
Barley 680 565 20
Gram 1730 1495 16
Lentil (Masur) 1870 1462 28
Rapeseed/Mustard 1830 1184 55
Safflower 1650 1456 13
Sugarcane 129.84 81 60
Jute 1375 1193 15

31
 MSP and Cost of prodn(C2) of Paddy

1200.00

1000.00

800.00
Rs/Quintal

600.00

400.00

200.00
cost MSP

0.00

32
 MSP and Cost of Production(C2) of Wheat

1200.00

1000.00

800.00
cost
Rs/Quintal

600.00
MSP
400.00

200.00

0.00

33
 Farmers’ feedback
Farmers have problems at all three levels (These are
perceptions of the farmers not of DES or CACP)
Data and Cost Concepts problems
Complaints regarding fieldmen not visiting the villages and
vacancies of field men and other officials (DES and CACP met
and discussed these issues)
Wage rates of agri.labour doubled particularly due to MNREGA
and this is not reflected in CS data
In general, the costs of inputs like seeds, irrigation water,
insecticides, labour, diesel etc. have increased many times and
this is not reflected in the cost data of CS
Some costs are not included (e.g. one farmer said that he spent
Rs.300 per acre for catching rats on paddy fields)
Rental value of owned land is low
Interest for owned fixed capital charged 10% is low
Cost concept should include cost of market risk, etc. 34
 Farmer’s Feedback (contd.)
Methodology of Projection (farmer feedback)
Criticism is that CACP is using two or three years old data
for computing costs
State Governments provide higher costs per quintal (in
general)
Formulating Price Policy (farmer feedback)
MSP’s are low. Lowest government employee gets higher
income than farmer.
Farmer spends also on health and education. They want
more like incomes policy than MSP
Farmers say that M.S. Swaminathan’s recommendation of
50% over cost should be implemented
They also compare when market prices and international
prices are high and say that MSP should be linked with
international prices 35
 Mahatma Gandhi NREGA- its
Impact in Agriculture
Problem of availability of farm labour
Agicultural wage rate has cosiderably
increased
In the last two years, rate of increase
in wage rate in majority of states varies in the
range of 15 to 42 percent.
Growing reluctance among agricultural labourers
to farming activity.
Need for slotting work under MNREGA while
farming operations not in its seasonal tempo.

36
 CONCLUSION
Comprehensive Scheme(CS) is a rich data base.
However, need to have a re-look at cost data of
CS for two reasons.

It also gives an opportunity to look into

recommendations made by Y.K.Alagh
Committee. The Committee notes that “CACP
does not analyse the cost behaviour of efficient
and inefficient farmers
Implementation of the Scheme required to be
tuned up for generation of cost estimates with
greater accuracy.
37
 Conclusion
On the Methodology of projecting costs, the options are limited except
reducing the time lag in providing the data
On determining levels of MSPs
First, MSP can not be linked (or chase) to international or national market
prices because MSP is generally unidirectional. It may not be reduced
when international prices go down.
One suggestion is that procurement price should be different from MSP.
Second, Government has not accepted so far the recommendation of M.S.
Swaminathan (50% over C2 cost).
Third, MSP can not be viewed as incomes policy or solve all problems of
farmers because non-price factors are equally important for raising
incomes of farmers.
Finally, the dilemma of price policy: Remunerative prices for farmers and
low prices for consumers. Whenever CACP recommends higher prices,
people say it would hurt the consumers. Can we delink?

38
THANK
YOU

39