Prices, Procurement and Production-An Analysis of Wheat and Rice

An Analysis of Wheat and Rice Ashok Gulati Pradeep K Sharma There has been an unusual hike in the procurement prices of wheat and paddy in 1989-90. This raises issues such as: how are these prices determined? What is their impact on open market prices? How do they affect the volume of procurement and output by entering into the incentive structure of farmers? This paper explores these issues in an empirical framework. The results indicate that procurement prices are largely influenced by movements in cost of production and lagged open market prices with occasional bonanzas emanating from non-economic considerations; procurement prices have a decisive influence on current market price formation with other factors like stocks with government and zoning playing only marginal roles; the volume of procurement is significantly affected by level of output and difference between procurement and open market prices weakly supported by administrative measures; the supply of wheat and rice is influenced by their open market prices, suitably deflated, and non-price variables like irrigation. The elasticity with respect to shifter variables is much greater than price elasticity. Results for wheat are more robust than for rice. In all cases state-level results reveal greater diversity. The study contemplates a supportive role for prices which becomes critical when non-price factors are in place.