North-South grain markets and trade policies 081338642X, 9780367011062

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North-South Grain Markets and Trade Policies

North-South Grain Markets and Trade Policies EDITED BY

David Blandford Colin A. Carter Roley Piggott

~~ ~~o~;~~n~~~up LONDON AND NEW YORK

First published 1993 by Westview Press, Inc. Published 2018 by Routledge 52 Vanderbilt Avenue, New York, NY 10017 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN

Routledge is an imprint of the Taylor & Francis Group, an informa business Copyright © 1993 Taylor & Francis All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe.

Ubrary of Congress Cataloging-In-Publication Data North-South grain markets and trade polides I edited by David Blandford, Colin A. Carter, and Roley Piggott. p. em. Includes bibliographical references. ISBN 0-8133-8642-X 1. Grain trade-Government policy-Case studies. 2. Grain tradeCase studies. I. Blandford, David. II. Carter, Colin Andre. Ill. Piggott, Roley. HD9030.6.N67 1993 382' .4131-dc20

ISBN 13: 978-0-367-01106-2 (hbk)

93-9268 CIP

This book is dedicated to PtlSClll FotzD and Davendra Tyagi, whose untimely deaths created intense sadness

Davendra Tyagi was Chairman for the Commission for Agricultural Costs and. Prices, Government of India. He was shot dead May 10, 1992, at the doorstep of his official residence by two suspected militants only hours before his daughter's marriage. Pascal Fotzo was a Senior Lecturer in Rural Economy at the Dschang University Centre, Dschang, Cameroon. He was killed in a plane crash, January 1987, en route to a KIFP/FS seminar in Brazil. We will each remember Davendra and Pascal in our own special way. God rest their souls.

Contents

Preface

Acknowledgments 1

An Overview of the World Grain Economy

David Blandford

xili XV

1

World Grain Production, 1 The Importance of Technological Change, 9 Grain Consumption, 11 Trade in Grains, 15 Prices and Price Formation, 20 Domestic Policies and World Grain Markets, 24 Grain Markets and the Countries in this Book, 25 Notes,27 References, 28 2

Australia

Roley Piggott and Brian Fisher Introduction, 31 Grain Production, 34 Domestic Markets, 37 Marketing Systems and Institutions, 38 Intemational Trade, 41 Public Policy: Description, 42 Public Policy: Evaluation, 47 Policy Issues, 51 vii

31

viii

Contents

Summar y, 53 Note, 54 References, 54 3

Canada Colin A. Carter

57

Introduction, 57 Grain Production, 58 Disposition of Grains Through Domestic Consum ption and Exports, 61 International Trade in Grains, 64 Marketin g and Governm ent Regulation in the Grain Sector, 67 Canadia n Policy Developments, 72 Summar y, 77 Notes, 77 References, 77 4

The Europea n Commu nity David Blandford and Madeleine Gauthier

79

The Community: A Loose Federalism, 80 Agriculture in the Community: Diversity and Structural Change, 82 Cereal Production: Decreasing Area Increasing Yields and Capital Intensity, 84 Consum ption: The Importance of Animal Feed, 89 Trade: The Commun ity as a Growing World Force, 91 The Commo n Agricultural Policy: The Centerpiece of the System, 94 Grain Marketing and Distribution Systems, 99 Financing and the Reform of Commun ity Grain Policies, 103 Conclusions, 107 Notes, 108 References, 108

5

The United States David Blandford and Harry de Gorter Grain Production: Growth and Diversity, 111

111

Conteuts

ix

Grain Use in the United States, 120 Grain Trade: The World's Largest Exporter, 122 Grain Marketing Systems and Institutions, 125 Government Policies: A Key Element, 128 Public Policy and the U.S. Grain Sector, 130 Conclusions, 143 Notes, 144 References, 144 6

Cameroon

David ~landford and Sarah Lynch

147

Production: Diversity and Dynamism, 150 Consumption: The Pressures of Change, 155 Trade: Growth of Rice and Wheat Imports, 158 Marketing: Traditional and Modem Systems, 160 Policies: Form Versus Substance, 165 Conclusions, 170 Notes, 172 References, 172 7

Colombia

Alvaro Silva Carreflo and Rodolfo Alvarado

173

Grain Production in Colombia, 173 Cereal Consumption, 181 The Grain Marketing System, 183 International Trade, 188 Public Policy, 188 Conclusions, 195 Notes, 196 References, 197

8

China

Colin A. Carter and Simei Wen

Growth in Grain Production, 200 Technological Advances, 205 Importance of Foodgraiils in the Chinese Diet, 208 Marketing System and Institutions, 210 China's Position in International Grain Trade, 215 Public Policy, 217 Notes, 224 References, 224

199

Contents

X

9

The Dominican Republic

Norberto A. Quezada

227

Grain Production, 228 Grain Consumption and Self-Sufficiency, 233 Grain Marketing and Government Regulation, 236 Conclusions, 245 Notes,248 References, 249

10 India Davendra Tyagi

251

The Grain Production System in India, 253 Development Policy and Growth in Grain Output, 257 Grain Consumption, 264 Foreign Trade in Grains, 273 Grain Policies, 277 . Conclusion, 285 Notes,286 References, 287 11 Indonesia

Roley Piggott and Kevin Parton

289

Introduction, 289 Production, 295 Consumption, 303 Supply and Demand Elasticities, 305 Grain Marketing Systems and Institutions, 306 Grain Trade: A Drive for Sel£-Suffidency, 310 Grain Policy: Background, 312 Public Policy: A Partial Evaluation, 316 Conclusions, 321 Notes,322 References, 322 Appendix, 325

12 Mexico Jaime Matus-Gardea and Ralph Bier/en The Mexican Economy, 329 Grain Production, 333 Grain Consumption: A Case of Inequality, 336

329

Contents

xi

Grain Marketing in Mexico, 340 Grain Imports: A Case of Continued Growth, 344 Government Participation in Grains: Public Policy, 348 Notes,355 References, 355

13 North-South Grain Markets and Policies: A Synthesis David Blandford

357

Part 1: A Cross Country Comparison of Grain Policies, 357 Part II: Issues Raised by the Case Studies, 370 Notes, 386 References, 387

About the Contributors About the Book and Editors

389

391

Preface Assuring the adequacy of grain supplies has always been high on the list of priorities for many governments. With rapid growth in the world's population, the challenge of meeting the need for grain has become a complex balancing act requiring interactions among technologies, institutions, and policies. The purpose of this book is to show how a set of countries, some highly economically developed (the North) and others at lower levels of economic development (the South), attempts to deal with the organization and management of their grain sectors. The book is composed of a series of case studies. The countries included reflect the interest and experience of the authors who collaborated in preparing the volume. No attempt was made to provide representative coverage based upon a comprehensive classiftcation of countries, which is why there are no chapters dealing with such exporters as Argentina or Thailand or importers such as Egypt or Japan. Despite the somewhat eclectic geographical mix, many of the fundamental issues that face the North and the South, both individually and collectively, are illustrated by the case countries. We would argue that there is much to be learned about the effective implementation of policy choices and the constraints that policymakers face by looking at individual country experiences, rather than by attempting to generalize on the basis of an abstract theoretical framework There is a dearth of information on what countries actually do in managing domestic grain markets. We emphasize that the focus of this book is on domestic policies relating to the most basic of agricultural commodities-grains. The focus is not on "international grain trade • or "world grain markets •-again, this would have required a different, and probably a larger, selection of case studies, as well as a unifying conceptual framework. Too, although it is acknowledged in the book that the position of individual countries needs to be viewed in a global market context, there is no primary focus on the implications for international markets of the policies pursued by the countries analyzed. This emphasis was deliberate, because most policymakers are primarily concerned about achieving domestic objectives ftrst and meeting international commitments second. We implicitly accept this ranking but are careful to stress the implications of interdependency through trade. xiii

xiv

Preface

The case studies describe grain policies and their effects, highlighting successes and failures. Each case study has a similar order and presentation, permitting, for example, matket structures and principal instruments of policy to be identifted and compared. The synthesis chapter draws out the lessons to be learned, using information from the case studies mixed with some conventional wisdom. It shows that there is often substantial similarity among policy objectives and the mix of policy instruments used in different countries. In a nontechnical way it evaluates the choices facing governments in using alternative policy instruments in attempting to implement their objectives. A conscious attempt is made to be nondogmatic and to provide a balanced assessment of the pros and cons of government intervention. The chapter recognizes that success or failure is difftcult to evaluate objectively, because it depends on the criteria by which success is judged, but makes a number of clear and practical recommendations on what conditions must be met to ensure a healthy and dynamic domestic grain matket. The operation of grain markets and policies is frequently complicated, making economic analysis correspondingly complex. The authors have attempted to keep the analysis understandable to the intelligent lay person, rather than requiring the reader to have a doctorate in economics. It is nevertheless hoped that both specialists and nonspecialists will f:md this work of interest. The book has two target audiences: 1) policymakers and those engaged in advising policymakers, particularly in developing countries, and 2) students of agricultural policy. For the former group it provides a series of benchmarks against which to evaluate needs, objectives, and potential strategies for their own countries. It provides a set of laboratory examples of what has worked and what has failed and why. For the second target group it provides a set of readings, which can supplement more theoretical courses on agricultural policy dealing with either developed or developing countries.

David Blandford Colin A. Carter

Roley Piggott

Acknowledgments In 1986, the Kellogg Foundation of Battle Creek, Michigan, established a three-year, nondegree program to advance professional leadership involved in bringing about improvements in food systems in developing countries. The International Fellowship Program in Food .Systems (Irtant grain crop in the United States. In 1987-89, it accounted for about 40 percent of harvested area and 65 percent of total production. Some maize is harvested as silage for dairy and beef cattle feed, which accounts for the difference between harvested and planted area (Table 5.1). Approximately 95 percent of the maize produced in the United States is dent maize, so called because of the indentation in the kernel caused by the shrinkage of starch. 1he Federalgovemmentsetsgrainstandardsin the United States. It classifies dent maize into yellow, white, and mixed categories. Six levels of quality are identified on the basis of such factors as test weight, moisture content, and the proJX>rtion of broken or damaged kernels and foreign material. Maize is growninalmosfevery state and occupies roughly 20 percent of total U.S. cropland. However, the bulk of grain production is located in the Midwest (Figure 5.1). 1he major maize-growing area, known as the "Com Belt," includes the states of Ohio, Indiana, Illinois, Iowa, Minnesota, Missouri, and Nebraska. Two of these states, Iowa and Illinois, accounted for 35 percent of total production in 1987-89 (Table 5.2). These states are particularly suited to maize production because of their rich, well-drained soils, warm summer climate (average temperature 2£1l-25°C.), and well-distributed precipitation. Maize is sown as early as March in the southern states, and planting for grain is completed in the north by late May. In drier areas, such as central Nebraska, irrigation is used. Harvest begins in early October in the Com Belt and finishes by mid-November. Most of the maize is field-shelled using a combine with a com head. The shelled com is then dried, either on farm or at commercial drying facilities.

'

Winter wheat

--

0

'Rice

FIGURE 5.1 Major U.S. Grain-Producing Areas.

Spring and durum wheat, barley, oats, and rye

(}-Maize

*Sorghum w

..... .....

David Blandford and Harry de Gorter

114

TABLE 5.2 Leading Grain-Producing States (1987-89) Percent of Total Production

Percent of Total Production

Maize

Iowa illinois Nebraska Minnesota· . Total these states

Sorghum Kansas

Texas Nebraska Total these states

Oats

Minnesota South Dakota Iowa Wisconsin North Dakota Total these states

Rye

South Dakota North Dakota Georgia Minnesota Nebraska Total these states

18.7 16.5 12.7 8.5 56.4

35.2 24.2 16.2 75.6

12.1 12.1 12.0 11.4

6.6

54.3

Wheat Kansas

North Dakota Oklahoma Montana Washington Total these states

Barley North Dakota Idaho Minnesota Washington South Dakota Total these states Rice Arkansas

California

Louisiana Texas Total these states

15.2 10.3 7.7 6.0 5.9

45.0 23.2 14.2 9.9

8.1 5.0

60.5

40.9 20.3 14.6 13.2 88.9

22.1 15.8 10.6 6.7 6.6 61.7

Source: USDA, National Agricultural Statistics Service. Crop Production 1989 Summary. Washington, D.C., 1990.

Wheat is raised in many areas of the country, particularly where precipitation is too low to reliably produce maize. Five states (Kansas, North Dakota, Oklahoma, Montana, and Washington) accounted for 45 percent of total wheat output in 1987-89 {T(lble 5.2). Wheat is divided by the U.S. federal grading system into hard red winter, soft red winter, hard red spring, durum, red durum, ~hite, and mixed. Federal standards specify six quality grades for wheat, corresponding to those for maize. Hard wheats are generally 1n9re vitreous and have more protein than soft wheats, although there is·some overlapintheprotein ranges. Typically,hardreds pringhasthehighest protein content (up to 18 percent); and white has the lowest at 8-10 percent. United

The United States

115

Stateswheatproductionisdominatedbywinterwheat,whichisusedasacover crop in many areas to protect soils from wind erosion, or as a source of early spring grazing for livestock. In 1987-89, winter varieties accounted for over 75 percent of total production. The leading class of wheat grown in the United States is hard red winter, which makes up 40-45 percent of total production. It is a medium protein wheat, typically ranging from 10-12 percent. Production is centered in the Great Plains states of Kansas, Nebraska, Oklahoma, and Texas (Figure 5.1). In these areas, precipitation averages less than 650 millimeters per year, with frequent dry periods. Winter temperatures are sub-zero, but there is usually adequate snow cover to protect the young plants during their winter dormancy. Hard red winter wheat is planted between late August in the north to lateOctoberinthesouth,andisusuallyharvestedduringmid-Juneinthesouth andmid-Julyin the north. Softred winterwheat(9-12 percentprotein)accounts for 20-25 percent of total wheat production and is grown primarily in more humid areas close to the Great Lakes (primarily the states of Illinois, Indiana, and Ohio) and the Atlantic coast. Planting dates are similar to those for hard red winter, but harvest can extend into August in the more northern states. Hard red spring accounts for 15-20 percent of the total U.S. wheat crop and is grown primarily in the upper Plains states, such as North Dakota and Minnesota, where extreme winters make the climate unsuitable for winter wheat production (Figure5.1). Planting takes placefrommid-April to the end of May, and the crop is harvested during August or early September. Durum wheat (10-16 percent protein) makes up less than 5 percent of U.S. production and is planted principally in North Dakota, but also in Minnesota, Montana, South Dakota, and Arizona. Planting and harvest periods are the same as those for hard red spring wheat. White wheat, accounting for 10-15 percent of U.S. wheat production, is mainly grown in the northwest in Washington, Oregon, and Idaho (Figure5.1). The planting period variesconsiderablydependingon the state. In Oregon, for example, white wheat can be planted as early as mid August or as late as the end of January. Harvest typically extends from mid-July to late August. Both white wheat and soft red winter wheat are produced east of the Mississippi river in illinois, Indiana, Ohio, and also in the East Coast states. Sorghum has become an important grain crop in the United States. In 198789, it accounted for close to 7 percent of total grain area harvested and 6 percent of total grain production (Table 5.1). Sorghum is planted under a wide range of soil and climatic conditions because it tolerates limited moisture and high temperatures. A large portion of U.S. production is located in the Southern Plainsstates;withalmost60percentofthetotalinKansasandTexas(Table5.2). Sorghum is divided into four classes for grading purposes: yellow, white, brown, and mixed. These classes are graded 1 through 4 depending on test weight, moisture content, and the proportion of damaged or broken kernels.

116

David Blmzdford and Harry de Gorter

Barley accounted for 6 percent of the total harvested grain area in the United States in 1987-89 and 3 percent of total production (Table 5.1). Like wheat, barley is well adapted to the cooler and drier sections of the country. Most U$. barley is grown in the Northern Plains, where spring wheat production is also concentrated (Figure 5.1). The leading producers are North Dakota and Idaho, which collectively accounted for 37 percent of barley output in 1987-89 (Table 5.2). Typically, 30 percent of the barley grown in the United States is lowprotein ~lting barley, which is used in the brewing industry; the rest is fed to livestock. Barley varieties are classified as either malting or feed, and the malting varieties are further subdivided into two-row and six-row, each having unique properties and malting characteristics. Number grades are employed for each subclass of barley, in addition to descriptive terms such as bleached, smutty, or stained (Heid and Leath, 1978). Most barley is seeded in the spring, although winter varieties, which are planted in thefall,arealso grown. In the arid partsofthe Northern Great Plains, barley is spring pla~ted on land fallowed the previous year to gather moisture. Malting varieties are often seeded on irrigated land in this area because the protein level can be controlled more easily by increasing fertilizer applications (particularly nitrogen) which requires a secure water source. Malting quality is also improved when more phosphates are applied. In the more humid parts of the Northern Great Plains and in eastern areas, spring barley is sown as part of a continuous crop rotation. Barley is frequently planted on land that is plowed in the fall and fallowed over the winter. Winter barley is most common in the south, where it is used for winter pasture as well as grain production. Oats are grown throughout the United States, but the northern states of Minnesota, South Dakota, Iowa, and Wisconsin are the principal areas of production. In 1987-89, these four states accounted for over 45 percent of total U.S. oat production. Oats made up roughly 4 percent of the national harvested area of grains and 2 percent of grain production (Table 5.1 ). Spring or northern whiteoats are the most common species because they are most suited to the cool climate areas of the northern United States. Red oats are grown in areas that are too warm for white oats, such as the South. Grey oats are grown on the West Coast. Oats also double as pasture, silage, nurse, and cover crops, thus explaining their widespread cultivation throughout the United States. Spring oats (white oats) are usually planted in April and May and harvested in July or August. In dairy areas, oats are harvested green for silage or "oatlage". Winter oats (red oats) are planted in the early fall and are used as winter pasture for livestock. The livestock are subsequently removed, and the grain is usually harvested in May or June. A second crop, for example, soybeans, is then planted.Altematively,inthes pringtheoatstubblemaybeplo wedunder,and soybeans or sorghum planted. Rice accounted for less than 2 percent of total grain area in 1987-89 and roughly 1 percent of total grain production (Table 5.1). Rice production is

The United States

117

largely confined to Arkansas, California, Louisiana, and Texas, which accounted for almost 90 percent of output in 1987-89 (Table 5.2). Roughly 70 percentofproductionislong-grainrice, withmedium-grainricemakingupthe remainder. Cultural practices vary slightly between areas, but all are highly mechanized. Most rice land is leveled to facilitate irrigation and drainage. Seeding, typically by airplane, takes place in April and May, except in the Gulf Coast area where planting occurs from early March to late June. Irrigation water is supplied by wells, on-farm water storage structures, and rivers. The crop is harvested with self-propelled combines. Rye is the least important grain produced in the United States. In 1987-89, it accounted for less than one-half of one percentofharvestedgrainareaand onefifth of one percent of total grain production (Table 5.1). In recent years, three states, South Dakota, North Dakota, and Georgia, produced about 50 percent of the total rye grain crop (Table 5.2). As evident from Table 5.1, a substantial portion of the area planted is not harvested. In many areas, rye is used as a cover croporgreenmanure,forstraw,or as winterorearlyspringforagefor livestock. Changes in Area and Yields

Yields in the United States vary substantially by grain type. In 1987-89, production per hectare ranged from a lowof1.7metrictonsforrye, to6.7 metric tons for maize (Table 5.1 ). New varieties and innovations and improvements inproductiontechnologieshavehadamajoreffectongrainyieldsintheUnited States since the 1930s. Most dramatic is maize, whose yields rose from the 193034 averageof1.4 metric tons per hectare (shelled basis), to over7metric tons per hectareduringthe 1980s because of the introduction of high-yielding, fertilizer responsive hybrids and the increased use of fertilizer and other inputs. The yields of other grains also grew substantially. In the years following the Second World War (1945-49), U.S. wheat yields averaged just over 1 metric ton per hectare, while in recent years, the average exceeded 2.3 metric tons per hectare (Table5.1). Trends in yields of coarse grains (maize, sorghum, barley, oats, rye, millet, and mixed grains), wheat, and rice from 1960-89 are shown in Figure 5.2. During this period, yields improved steadily; particularly for coarse grains. As a whole, the rate of increase was 2 percent per year, with a 2.4 percent growth rate for coarse grains (Table 5.3). All yields are quite variable, however, with an average annual devjation from trend of roughly 9 percent. COarse grain yields fluctuate most, with an average annual variation of 11 percent per annum. Periodic droughts affect coarse grain production, the most recent being in 1988 (Figure 5.2). The use of hybrids and large quantities of fertilizer led to rapid growth in maize production, but also made yields more susceptible to the effects of drought because high-yielding varieties are less tolerant of adverse conditions. Rice yields are most stable since the crop is produced with irrigation.

118 60

1.6 1.4

50

1.2

'Oil Q)

~40 ..... u

1.0

Q)

I

.230

0.8

~

0.6

m2o .....




~

0 Season Average

40

0

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 ~------------------------------r1.5

Inventories H .2

Ratio of Stocks to Use

I

f.,o.9

~.6

~.3

50

55

60

65

70

I

75

80

85

89

~.0

Year FIGURE 5.7 U.S. Wheat Prices and Inventories. Source: Data provided by the U.S. Department of Agriculture.

The United States

137

in loan rates, but not in target prices. Market prices followed the decline in the loan rate until drought in 1988 led to a large jump in prices. Only in periods whenU.S.grainstocksarelowh avemarketpricesbeenaboveth eloanrate,and market prices are rarely above target prices. The commodity programs for grains directly affect production, trade, and prices of grains in the United States. However, programs for nongrain commoditiescanhaveimportan tindirecteffects. One of the most notable cases is the sugar program. Sugar producers in the United States are protected from low-cost imports by import quotas. In recent years, the domestic sugar price has been two to three times that of the world price. High sugar support prices gave added impetus to the development of sugar substitutes, particularly maize sweetener. As indicated earlier, expansion of the sweetener market accounted for much of the increase in domestic use of maize in the United States, resulting in growth in production of an important feed by-product, maize gluten meal. This by-product is marketed in the European Community, wheredomesticfeedgrain prices are kept high with price supports. The growth of maize sweetener I gluten meal production created tension between the UnitedStatesandtheCommun ity.lthasalsomeantthatmaize producersand sweetener manufacturers support domestic sugar producers in their lobbying efforts for the continuation of high support prices for sugar.

Trade Policies Measures that directly affect grain trade in the United States are limited, but important. A licensing system is used to control imports. Such control is necessary to prevent imported grains from displacing domestic supplies when loan rates are above world market prices, and to limit the accumulation of public stocks under the loan rate program. Since the United States is a major grain exporter, most of its trade policies focus on exports. These include export subsidies, food aid, and subsidized credit. With the exception of the CCC, the United States does not maintain a public institution similar to the producer marketing boards in Canada and Australia. However, during the 1970sand 1980s, the U.5. government directly intervened in trade by imposing a number of export embargoes. In 1974 and again in 1975, moratoria were placed on shipments of grain to the Soviet Union and, in the latteryear,onshipmentstoPola nd. Thesernoratoria,eachofwhich lastedonly a few weeks, were instituted to stabilize the domestic grain market because of uncertainty about the adequacy of supplies in the face of production shortfalls in the United States and abroad. In January 1980, the United States imposed an embargo for sixteen months on the export of a number of products, including grain, to the Soviet Union because of its invasion of Afghanistan. During the embargo, the United States honored a prior commitment under a long-term grains agreement to supply 8 million metric tons of grain to the USSR. What

138

David Blandford and Harry de Gorter

impact these embargoes had is controversial. Evidence suggests that they had little long-term effect on world supply, demand and international trade, but possibly an important psychological effect on importers who no longer view the United States as a reliable trading partner (USDA, 1986). Apart from these limited cases of direct intervention, the government's role in export sales is largely limited to monitoring and inspecting overseas shipments, funding of variousexportpromotionactivities, and providing food aid. It also influences trade through the rules and regulations that manage the accumulation and disposal of government stocks. The United States instituted a food aid program with the passage of Public Law 480in 1954,of which grains area major component. Primary goals include disposal of excess CCC stocks, creation of new commercial markets for grains by changing consumer preferences, and achievement of humanitarian or political objectives. During the 1960s, shipments of grain under the PL 480 program were an important part of total U.S. grain exports, while in recent years, they have constituted only a minor portion. Nevertheless, the United States remains the world's major food aid donor (see Chapter 1). In addition, the United States offers credit under concessional terms to selected importers who purchase grain commercially from the United States. Short-term credit is supplied under the General Sales Manager (GSM) 102 program, longer-term creditisgranted underGSM 103. In the 1980s, upto$U.S.5billionofcreditwas provided under GSM 102 and $US. 1 billion under GSM 103. Changes in U.S. grain ·programs can have major implications for U.S. grain exports and international grain prices. Under the legislation in forceduringthe early 1980s, production controls and the accumulation of public stocks were used to support high domestic prices that priced U.S. exports out of world markets. Because of the dominant role the U.S. plays in the world market, U.S. production controls and support purchases inevitably sustain world prices to a certain extent. A costly payment-in-kind (PIK) program in 1983-84 was introduced to reduce stocks. Under this program, producers were given government-owned commodities in exchange for controlling production. The program reduced production and stocks significantly in 1983, but had only a temporary effect on the domestic supply I demand balance and none on the uncompetitivepositionoftheUnitedStatesininternationalma rkets. Itwasnot until the Food Security Act of 1985, under which loan rates were reduced, that exports began to rise and stocks to fall. A variety of export subsidies were introduced under the 1985 Act, of which the most important were enacted through the Export Enhancement Program (EEP). Under this program, public stocks are used to subsidize exports of agricultural commodities, including grains, to specific markets. These stocks are released through the use of commodity certificates issued to exporters. The U.S. Department of Agriculture draws up a proposal for the sale of a commodityor commodities to a particular country through EEP. A Trade Policy Review

The United States

139

Group, made up of representatives from seven Federal agencies, including the USDA and the Department of State, reviews the proposal. If approved, private exporters submit a request to the USDA for the subsidy they need to make the sale. If the USDA accepts the request, the subsidy or "bonus" is paid to the exporterintheformofcommoditycertificates,whichcanberedeemedforCCC stocks to complete the export sale. The Export Enhancement Program was developed because policy-makers feltthat other exporters, primarily the European Community, were displacing the United States from its traditional markets with subsidies. EEP is expensive, costing over $2.3 billion by the end of 1989 (USDA, ERS, 1990). The principal commodity exported under EEP is wheat, and how much the program has contributed to boosting U.S. exports is controversial. The program did lower import prices for some countries, but may not have altered their total purchases. Whatever its cost effectiveness, the program is politically popular because it is viewed as a direct counter to EC grain subsidies, and one of the few ways that the United States has to try to force the Community to reduce these subsidies. U .5. agricultural trade policy is increasingly dominated by disputes with the European Community over its agricultural policies. U .5. responses to these policies affect world markets for grains, with attendant significant implications for importing countries and other grain exporters.

Other Policies The major policies that influence the U.S. grain sector are the price and income support programs, which are part of farm legislalion, There are, however, other measures that affect the competitive position of U.S. agricultural and grain exports. The government provides a variety of additiOnal direct or indirect agricultural subsidies, ranging from preferential tax treatment to public funding of irrigation systems and waterways used to transport grain to port§, Other subsidies, such as those designed to promote the production of fuel alcohol from grain, are also important. The United States maintains an extensive, publicly supported research and extension system that provides informationandtechnicalassistancetofarmersandothersengagedinagriculture at little or no cost. Over the years, this system has contributed to steady improvements in agricultural productivity and to the maintenance of agriculture's competitive position. As gains in productivity continue, the real price of agricultural commodities declines, and it is becoming increasingly difficult to maintain support prices with public purchases and production controls alone. As the agricultural economy and the grain sector in particular have become morecapital-intensiveand dependent on overseas markets, they have become increasingly sensitive to changes in domestic macroeconomic policies and to the state of the world economy in general. The level of interest rates, the value of the dollar, and the rate of economic growth in the rest of the world are key

140

David Blalldford aud Harry de Gorter

determinants of the financial health of U.S. agriculture. During the 1970s, low real interest rates, a low dollar value, and high income growth in the rest of the world contributed to a strongworldwidedemand for U.S. agricultural exports, especiallygrains. Duringtheearly1980s,acombinationofrestrictivemonetary and expansionary fiscal policies caused real interest rates and the value of the dollar to rise at the same time as expansion real incomes in the rest of the world fell. This caused a substantial reduction in demand for U.S. agricultural exports, resulting in financial stress in the agricultural sector (Blandford, Meyers, and Schwartz, 1988). Macroeconomic policiesin general place significant constraints on U.S. farm policies and have a major influence on the effect that farm policies have on domestic farm incomes and international trade. In addition, because the world's economies have become so interdependent, the domestic grain economy is also extensively influenced by overseas demand for U.S. grain products.

Program Costs The costs of supporting grain prices and farmers' incomes through U.S. farm programs can be large in some years. When target prices are high relative to marketpricesorthe loan rate, substantialdeficiencypaymentsaremade. When the loan rate is high in comparison to market prices, costly stocks are acquired. Most of these expenses are borne directly by U.S. taxpayers. In the 1980s, farm programs were especially costly. As world market prices softened during the early 1980s, support expenditures rose (Figure 5.8). In 1981, they cost roughly $2 billion, but by 1983, expenses jumped to almost $12 billion. Tite decline in 1984 is apparent rather than real because expenses incurred by the Payment in Kind program in 1983and 1984arenotindudedin the figures. PIKexpenditures, which were not charged totheCCC'sbudget, totaledalmost$10billion (USDA, ERS, 1988). As indicated earlier, thepassageoftheFoodSecurity Actattheend of1985led to a substantial rise in support costs. In fiscal year 1987, these totalled more than $18 billion. Feedgrains, primarily maize, are the largest source of total expenditures. · Government support payments became increasingly important to farmers during the 1980s. The producer subsidy equivalent (PSE) measures the gross transfers to producers from all types of government policies (Figure 5.9), including costs borne by consumers and taxpayers. In the case of U.S. grains, virtually all transfers to producers are from taxpayers. The estimates also include such items as transportation subsidies from the construction and maintenance of inland waterways and fuel tax exemptions for farmers (Table 5.6). In the early 1970s, the PSE for grains averaged 8 percent, butin 1986, the PSE stood at 53 percent. Subsidies to rice farmers in that year were equivalent to over 70 percent of the value of rice production. The relative assistance to grains has exceeded that for other products in recent years (Figure 5.9). Transfers to grain producers as a proportion of the total have risen from less

141

20

16

"' ro

1111 Other (mostly food aid) D Loans and related outlays • Deficiency, diversion and disaster payments

L..

0

12

"'0

c:

0

co

8

4

0

0

co

Ol

co

Ol

N

co

Ol

It)

co

Ol

«>

,.....

Ol

Ol

co

co

co co

Ol

Ol

co

Ol

15 13 11

"' L..

~

0

"'0

c:

• Feedgrains ~Wheat

II Rice

9 7

0

co

5 3

Year FIGURE 5.8 Government Costs of Grain Programs. Source: Data provided by the U.S. Dept. of Agriculture. Note: Years are Oct.-Sept. fiscal years. Figures exclude the costs of the PIK program in 1984-85, which were not included in the CCC's budget.

142 80

Wheat Coarse grains -Rice

-g ~

(I)

E-

60

c (I)

"'iij

> '5 40 C'"

UJ

>-

"0

'iii

..0 :l V'l

.... 20 (I) u :l

e

"0 Q..

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

80

-.::: c:

~

...c:

.(1)

E-

60

-Grains All products - - - - Grain transfers as percent of total

(I)

"'iij

>

'§. 40 UJ

>-

"0

'iii

..0 :l V'l

.... 20 (I) u :l

e

"0 Q..

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

Year OECD. FIGURE 5.9 Producer Subsidy Equivalents for Grains. Source: Agricultural Policies, Markets and Trade, Monitoring and Outlook, 1988 and 1989.

The United States

143

than 20 percent in 1979 to almost 40 percent in 1986-87. Although expenditures dipped in the late 1980s, drought was the cause, and a return to large crops would again cause expenditures to rise. There have been several attempts to place a permanent capon theseexpendituresas part of efforts toreducethe U.S. government's budget deficit, but the strength of the farm lobby has so far prevented this from occurring.

Conclusions

The United States is a major grain producing and consuming nation with a highly developed system for the production, processing, and marketing of grain. Private institutions, particularly the futures markets, provide an important vehicle for price formation and the spread of price information, both domestically and abroad. Public policies, particularly government price and income support programs, have a significant effect on the volume of U .5. tr "-> 10

43.0 73.6 34.8 29.1 21.3 27.2 57.9 40.5 35.0 33.8

Area harvested ('000' ha)

-1.4 -0.4

1.7 1.4 0.3 1.0

44.1 42.7 43.2 39.9 27.2 27.8 92.4 66.1 46.5 46.3

Production Rough Milled (Kt) (Kt)

29.8 8.4

3.2 37.1 154.3 151.0 157.6 212.2 181.4 261.9 271.9 272.2

Importsa (Kt) 4.0 37.9 0.4 22.7 36.5 13.2 51.2 19.2 0.2 1.6

Beginning st~ks (Kt)

Sources: SEA, Rice Department, unpublished data; INESPRE, "Boletin Estadistico," 1985-88. All figures are for milled grains, except rice area, yield, and rough production. •The Dominican Republic exports no rice or maize. bRough and milled rice growth rates are different because of statistical error.

1970-87 1980-87

1.0 0.6 1.2 1.4 1.3 1.0 1.6 1.6 1.3 1.4

Yield (m.tons/ha)

Growth rates (percent per year)

1970 1975 1980 1981 1982 1983 1984 1985 1986 1987

Maize

Year

Table 9.1 (continued)

4.0 6.0 22.7 36.5 13.2 51.2 19.2 0.2 1.6 1.0

Ending stocks (Kt)

11.9 8.9

47.3 111.7 175.2 177.0 208.1 212.1 305.8 347.0 317.1 319.1

8.5 6.2

12 24 31 30 35 34 48 54 48 48

Apparent consumJ;!tion Per Total capita (Kt) (kg)

0

w

N

Dominican Republic

231

marketing agency, then the sole rice purchaser. Harvested area increased by just over 1 percent per annum during the same period, indicating that yield improvements were primarily responsible for production growth. Yields have risen by roughly 4 percentperyear,and therateofincreasehasaccelerated since 1982. Rice yields in the Dominican Republic are above average yields obtained in other parts of Latin America (ClAT, 1985). Rice accounts for approximately 11 percent of the value of crop production. About three-fourthsofriceoutputis produced by 28 thousand irrigated farms, each less than 5 hectares in size. Roughly 40 percent of planted area is owned by the state but is farmed by settlers assisted by the agrarian reform agency. However, production from state land accounts for only 34 percent of rice output because of lower yields compared to privately owned farms. Because rice is so important in the average diet and because of the state's involvement in production, rice receives preferential treatment in terms of producer prices and access to new technology.

Maize and Sorgltum Maize and sorghum are primarily used as feedgrains in the Dominican Republic, with more than 95 percent of the crop consumed by livestock. Maize production is essentially stagnant, averaging about 45 thousand metric tons per year. Since 1970, average yields have increased at somewhat less than 2 percent per year, but declining harvested area resulted in virtually unchanged production (Table 9.1). Farmers find it more profitable to grow other crops, such as beans and cassava, or to use cultivable land for pasture. To boost feedgrain output, the Dominican government encourages the production of sorghum, which is moredroughttolerant than maize and can be grown successfully under rainfed conditions. Sorghum production has increased by about 8 percent per year since 1970 to over 50 thousand metric tons, largely because of an expansion in area. However, the use of more marginal land has resulted in a slight decline in average yields (Table 9.2). Despite the increase in sorghum production, a declining share of domestic demand for feedgrains is met locally. Feed manufacturers and livestock producers would like to use more sorghum because it has 90 percent of the feeding value of maize (95 percent for ruminants) and is less expensive. However, because imported maize supplies are reliable and easy to obtain, they are used in place of sorghum. Maizeimportshavegrowneleven-fold since 1970, to more than 250 thousand metric tons. Most domestically produced maize is grown under rainfed conditions on poor land. Fertilizeris used on only 5 percent of the harvested area (SEA, 1984), and the domestic, open-pollinated varieties that predominate are low yielding. With irrigation, hybrids and fertilizer, yields could be much higher, but farmers use irrigated land and fertilizers to produce more profitable crops, such as tomatoes, melons, and other vegetables.

4.6 5.4 9.3 10.7 13.3 14.5 15.9 17.2 16.4 20.6

-1.3 -1.5

3.1 3.1 2.7 3.2 2.6 2.7 2.7 2.8 2.8 2.4

Yield (m.tons/ha)

7.8 10.4

14.0 16.3 25.1 34.2 34.6 38.5 42.9 47.2 45.6 50.1

Production (Kt)

8.8 6.4

59.6 91.7 161.2 165.9 158.6 174.8 167.8 243.0 223.7 249.5

(Kt)

0.0 6.5 0.0 0.0 0.0 0.0 2.0 0.0 0.0 0.0

Imports (Kt)

7.3

16.8 28.1 47.2 27.7 30.6 19.7 26.7 27.2

-

8.8 8.4

1.1

0.1 0.0 0.3 6.9 4.8 0.5 0.2

Beginning stocks (Kt))

1.1

28.1 47.2 27.7 30.6 19.7 26.7 27.2 27.2

-

8.8 8.4 4.5

0.1 0.0 6.9 4.8 6.2 0.2

Ending stocks (Kt)

8.8 7.5

59.6 91.7 149.9 146.7 178.1 171.9 178.7 236.0 223.2 249.5

8.3 16.6

14.0 22.8 18.5 36.3 33.2 38.7 44.0 39.5 46.0 54.0

6.0 5.0

15 20 27 25 30 28 28 37 34 37

5.0 14.0 kg

4 5 3 6 6 6 7 6 7 8

Apparent consumJ2tion Per Total capita (Kt) (kg)

Sources :SEA, "Plan Operativo," 1987, 1988; INESPRE, "Boletin Estadistico", 1985, 1986; ONE, 1983, 1985; Molinos Dominicanos, unpublished data.

Growth rates (percent) 197G-87 198G-87

Wheat 1970 1975 1980 1981 1982 1983 1984 1985 1986 1987

Growth rates (percent) 197G-87 9.2 12.1 198G-87

Sorrr;um 19 0 1975 1980 1981 1982 1983 1984 1985 1986 1987

Year

Area harvested ('000' ha)

TABLE 9.2 Supply and Disposition of Sorghum and Wheat, 1970~87 w N

N

Dominican Republic

233

About equal volumes of sorghum and maize are produced, but sorghum is planted on only slightly more than half of the area planted to maize. In contrast to maize, sorghum is usually planted on larger, sometimes irrigated, farms, with the exception of the Oviedo region in the south, which has fertile soils and ample summer rains. Sorghum must be harvested during dry periods, encouragingtheuseofcombines. Sorghum area continues to grow because the crop withstands drought; however, it is more difficult for smaller farmers to produce sorghum because mechanical harvesting equipment and timely harvesting services are not readily available.

Wheat No wheat is produced in the Dominican Republic. Although several attempts have been made to introduce the crop, land suitable for wheat is already planted to high-value vegetable crops. Further, because of high ·temperatures, low yields can be a problem. However, in experiment station trials, yields as high as 4 metric tons/ha were achieved in the northwest. Although the government actively promotes white sorghum production for human consumption to reducecerealimports (white sorghum requires special processing, but yields a flour that can be mixed with wheat flour and used in bread making), efforts have been unsuccessful because production subsidies were introduced simultaneously for rice and wheat, making the crop uncompetitive. The principal wheat supplier is the United States. There is a single, stateowned wheat milling company with facilities in the capital city of Santo Domingo. A second mill site is in Puerto Plata. Since 1970, the volume of wheat imports has increased at an annual rate of roughly 9 percent (Table 9.2). Grain Consumption and Self-Sufficiency Although the total volume of grains consumed in the Dominican Republic is small in comparison to many other countries, grains are a very important part of the diet. In 1986, apparent consumption reached the 1 million metric ton mark for the first time. Of this, rice accounted for 41 percent, maize 32 percent, wheat 22 percent, and sorghum 5 percent. In 1987, the proportion of total grain consumption produced domestically (theself-sufficiencyratio)was43percent(Figure9.3). Theratiovariesbycrop98 percent for rice, 15 percent for maize, 93 for sorghum, and 0 for wheat. Over the period 1970-87, thedegreeof grain self-suffidencydeclined because the rate of increase in consumption (roughly 9 percent) was substantially above growth in production (less than 5 percent). The combined self-sufficiency ratio for domestically produced grains-rice, maize, and sorghum-fell from 100 percent in 1970 to 59 percent in 1987 (Figure 9.3). The annual rate of growth in consumption for all grains between 1979 and

234 1.6 1.4

--+-

1.2 0

·~

Rice Maize Sorghum

1.0

~

u>- 0.8

c:

·u (I)

.... ~

::I

"'

...!. ~

t/')

0.6 0.4 0.2 0.0 1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

Year 1.0

0.8 0 ·.::::; ~

0.6

~

>-

u

c: (I)

·u

....

0.4

~

::I

"' ...!.. ~

t/')

0.2 -+--

Total domestic grains Domestic grains plus wheat

0.0 1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

Year FIGURE 9.3 Self-sufficiency Ratios for Grains in the Dominican Republic. Source: Tables 9.1 and 9.2.

Dominica11 Republic

235

1987 was close to 8 percent per year, while population growth was less than 3 percent. Demand for maize and wheat grew most rapidly at 12 and 9 percent, respectively. The rapid increase in maize use is attributable to sharply higher demand for livestock feed, particularly for poultry. However, as previously mentioned, maize production remained stagnant, forcing feed manufactures to resort to imports. Sorghum production increased rapidly, but not fast enough to meet the demands of the feed industry. Production of both maize and sorghum has been depressed by government policies, particularly substantial overvaluation of the domestic currency (see the discussion of grain marketing and government regulation below). Growth in wheat consumption resulted from changes in dietary preferences. As incomes have risen, consumers have switched from traditional staples, such as plantain, sweetpotatoesand cassava, to bread and pasta products. Between5and8percentofmaizesuppliesareconsumeddirect lybyhumans, mainly in the form of maize flour porridge and arepas (a "pancake" similar to a thick tortilla). Along with wheat bran, rice bran, and soybean meal, maize and sorghum are the main ingredients used in animal feeds. Increasing demand for chicken and eggs, which require substantial amounts of grain, has accounted for the bulk of growth in feedgrain use since 1970. On a per capita basis, apparent annual rice consumption (51 kg in 1985)in the Dominican Republic is high relative to other Caribbean countries; in contrast, apparent per capita consumption of wheat (36 kg in 1985) is quite low (FAO, 1984). However, an unknown quantity of both grains is smuggled into Haiti because consumer prices are higher there. The Dominican government subsidizes the consumer price of wheat flour and, to a l~r extent, that of rice. The subsidy is enforced with price controls, and·supply is maintained with imports paid with overvalued currency and low-interest loans, such as those granted under the US PL-480 food aid program (see the chapter on the United States). Without the subsidy,average per capita consumption would be lower. Annual percapitaapparentwheatconsumptionaveraged 36kgin 1984-87,and apparent rice consumption averaged 55 kg (Tables 9.1 and 9.2). A recent study of food consumption in the Dominican R-epublic (Rogers and Swindale, 1988) showed that wheat flour and rice are consumption substitutes. The cross-price elasticity between rice and pasta is 0.85. Plantain is less frequently consumed in place of rice, with a cross-price elasticity between rice and plantain of0.12. Plantain and pasta were found not to be substitutes. Over time, the consumption of rice and wheat prod1,1cts is rising, while that of plantains and cassava is falling. This is due to a relative increase in the price of plantain and changes in dietary preferences in favor of rice and bread. Ownprice demand elasticity was found to be ..0.42 for rice and -0.19 for pasta. The . demand for poultry products was found to be highly price and income elastic (Rogers and Swindale, 1988: 59-60).

236

Norberto A. Quezada

Grain Marketing and Government Regulation The Dominican government intervenes extensively in the grain economy. Major policy instruments include a producer guaranteed price, direct purchases of rice and sorghum, input and irrigation subsidies, governmentcontrolled consumer prices, and state-controlled production on agrarian reform projects (farms owned by the state but farmed by settlers). A number of instruments are used to control trade, including tariffs, import permits and quotas,and an agricultural marketing agency with an import monopoly. Other indirectinstrumentsareforeignexchangecontrols with currency overvaluation, credit subsidies, and government regulation of profits earned by marketing agents-private or governmental (Table 9.3). Most aspects of grain marketing are regulated by the government. The method of control varies according to the crop, ranging from complete regulation of importing, milling, and distribution of wheat and wheat flour, to partial control over maize and sorghum imports. In 1987, rice marketing was liberalized after fourteen years of monopolistic control by a state marketing board. Import permits for maize and sorghum are awarded based on proof of parallel domestic procurement by the importer of these grains, although procured amounts need not be equivalent to the imports authorized. The importance of grain in the diet is frequently used as the rationale for extensive regulation in the marketplace. A particularly popular argument is the need to protect the poor, who depend on grain even more than the average consumer, from high grain prices. However, government regulation also generates profits. Public interest arguments justifying continued government intervention may be valid, but personal gain may be equally important in maintaining the system. Marketi11g I11stitutimrs

The main government agencies active in grain marketing are the Price Stabilization Institute (lnstituto de Estabilizaci6n de Precios---INESPRE); the Agricultural Bank (Banco Agricola-BAGRICOLA); the Dominican Wheat Mill (Molinos Dominicanos); and the Directorate General of Price Control (Direcci6n General de Control de Predos---DGCP). These agencies are headquartered in the capital city of Santo Domingo. I11stituto de Estabilizacio11 de Precios (INESPRE)

INESPRE, created in 1969, is the most important government agency active in managing food prices. It uses local procurement, direct imports, import control, and storage. The agency is organized as an autonomous body, but the Secretary of Agriculture heads the board of directors, and the President appoints the executive officer. INESPRE's statutory function is to smooth fluctuations in food prices between harvests to protect producers and consum-

Dominican Republic

237

ers. However, in attempting to balance these often competing objectives, it sometimes creates price distortions in the marketplace. INESPRE is involved in price management for many other foods in addition to grains. In 1986, its operations covered some 35 commodities, and it was the the only authorized buyer and seller of sugar, rice, and wheat bran. The organization owned a milk plant, several rice mills, a fish processing plant, five factories (producing condiments and packaging orange juice, taro, and legumes), two farms (one producing pork, the other aquaculture products), and even marketed generic medicines. Despite its range of activities, the purchase and sale of rice, maize, and sorghum is INESPRE's main business. The organization is very active in all facets of domestic grain marketing (Table 9.4), even though its importance declinedduringthelate1980swhenitwasdivestedofitsmonopolisticpowers. Rice procurement fell from 91 percent of total production in 1980 to 8 percent in 1987. INESPRE maize procurement as a percentage of total production declined from 17 to 3 percent of the total in the same period, while sorghum decreased from 20 to 10 percent (Table 9.4). INESPRE pays the support price, which is the same for all parts of the country, for procured grains. Maize's poor record is partly explained by the agency's inactivity in domestic procurement. Had it acquired more domestic production, fewer import permits would have been issued, thus encouraging feed mills to purchase domestic supplies. INESPRE's limited role in the maize market reflects the fact that the enforcement of the rice monopoly occupied most of the agency's resources. INESPRE stores purchased grain in its own warehouses; some warehouse space is also rented from private entities. It typically sells to wholesalers and does not clean, dry, or store grain for farmers. An import perqtit is required to bring foodstuffs into the Dominican Republic. INESPRE has a statutory monopoly over imports of all grains with the exception of wheat, which is handled by the Molinos Dominicanos. The organization authorizes grain imports by individuals or private companies, who obtain a special import permit from the Secretariat of Agriculture. The agency is also legally mandated to manage (imports, storage,and distribution) foreign food assistance (donations and concessional sales). The United States is an important supplier of maize and rice, purchased with short-term credits granted by the US Commodity Credit Corporation (CCC) and with long-term credits, which are part of the US PL-480 food aid program (see the chapter on the United States). Total INESPRE purchases in 1985 amounted to $DR 609 million ($US 214 million at the official exchange rate), of which maize, rice, and sorghum accounted for 60 percent. INESPRE subsidized consumers by selling rice at a lower price than it paid producers.1 The government transferred funds to the agency to cover part, but not all, of the difference. By the end of 1985, the organization's liabilities totalled $DR 309 million, and it had a negative net

Norberta A. Quezndn

238

TABLE 9.3 Summary of Grain Policy Instruments in the Dominican Republic,

1987

Instruments PRODUCTION/CONSUMPTION Producer guaranteed price Deficiency payments Direct" purchases Production quota Input subsidies Fertilizer /pesticide Machinery I fuel Seed Irrigation Government-controlled consumer price TRADE Import -Tariff -Quota -Subsidy Export subsidy State trading (INESPRE) Concessionary imports OTHER Marketing subsidies -Storage -Transport - Processing State agency (INESPRE) Credit - Guaranteed loan -Int. rate subsidy Exchange rate policy Government control over retail markup

Rice

Commodity Sorghum Maize

X

X

X

X

X

X

b

b

xc

X

xc

X

X

Wheat~'

X X X

X

X

X

X

X

X X

X

X

X

X

X

- - - Overvaluationd - -

X

•AU wheat needs are imported. bMaize/sorghum are feedgrains. Consumer prices for poultry and eggs are controlled. •Import permits given in direct proportion to local purchases. dQvervaluation is evident from the parallel (free) market rate. The official and parallel (free) markets were unified from 1985 to 1986. In 1987-1989, the official rate was again lower than the parallel rate.

worthof$DR 60 million. INESPRE failed to make timely payments to creditors and lost its access to US credit, including that provided by the CCC. Responsibility for PL-480 food imports was transferred by decree to the Technical Secretariat of the Presidency, a cabinet-level agency. However, the law

Dominican Republic

239

granting import monopoly to INESPRE has not been changed. In August 1986 under a new administration, INESPRE's mode of operation was radically changed. Responsibility for rice marketing was transferred to the Agricultural Bank (BAGRICOLA), sugar marketing to the sugar mills, and wheat bran marketing to the Dominican Wheat Mill and the Secretariat of Agriculture. Fees levied by INESPREon private maize imports to raise revenue were abolished. However, the agency maintained its other operations and has become more active in various social programs, especially the ''Popular Sales Program," involving distribution of food at subsidized prices to the poor, and the ''Producer Markets," involving construction of farmers' market facilities. Rice is important in the first program but not in the second. As required by law, INESPRE maintains a monopoly over imports of edible oils. The gross margins (markups) applied by INESPRE vary substantially by commodity (Table 9.4). The organization uses profits earned from the sale of some commodities to subsidize others, particularly rice. Small or negative profits in domestic rice marketing are largely offset by returns realized from the sale of vegetable oils and maize imported at the official exchange rate. Consequently, strong incentives exist to maintain high levels of vegetable oil and maize imports. However,becauseofeashflowproblernsand thelossofPL-480, INESPRE did not import maize in 1987. It continues to import edible oils and beans, adding large markups at sale. Even though the agency no longer monopolizes rice marketing, it still buys locally and distributes about 10 percent of total domestic consumption through the ''Popular Basket" or ''Popular Sales" programs of subsidized sales in poor areas.

Tlte Agricultural Bank (Ba11co Agricola- BAG RICO LA) Agriculturalcreditwas traditionallyprovidedbythestatebank, BAGRICOLA, but in the 1980s, private sector commercial and development banks became more active. However, BAGRICOLA is still the main government agency lending to the agricultural sector and is the sole source of agricultural credit for farmers on state-owned land. BAGRICOLA's share of agricultural credit decreased from 60 to 31 percent between 1980 and 1987 (Quezada, 1988: 30). Credit issued to grain producers accounts for more than half of the agency's loan portfolio .. For example, in 1984, rice loans represented 55 percent and sorghum 3 percent of all its outstanding loans (BAGRICOLA, 1984). Although BAGRICOLA's main role is to provide credit, it also participates in other aspects of grain marketing. In 1986, the agency inherited monopoly control over milled rice marketing from INESPRE, but high operating expenses,acostlybureaucracy,andtheorganization'sinabilitytorepayiNESPRE's rice milling debts forced the government to further liberalize rice marketing in 1988. As a result, millers are no longer required to sell all of their milled rice to BAGRICOLA. Merchants can purchase rice directly from the mills, but still

Norberto A. Quezada

240

TABLE9.4 INESPRE's Participation in Grain Marketing, 1980-87 (percent) Description

1980

1981

1982

1983

1984

1985

1986

1987

73

75 100 82

55 61

65

8 0 8

INESPRE procurement as a percentage of

Rice

Production Imports Consumption Maize Production Imports Consumption Sorghum Production Imports Consumption Markups on Imports of: Rice Maize Procurement of:

Rice

Maize Sorghum Wheat bran

91 100 90

86 100 88

84 0 88

76 0 79

17 100 74

16 99 84

6 92 82

10 97 67

73 66

14

9 14 20

6 1 3

3 0 1

20 0 14

33

0 45

40 0 50

40 0 39

24 100 15

27 0 13

25 0 33

10 0 14

3 13

0 31

46

0

0 42

68

4

54

-18 6 6 18

5 6 6 17

-11

-26 9 -7 183

32

6

-4

6 16

0 79

-14 6 63

5

a

3 160

-50 12 14 29

Source: INESPRE, Plan Operativo, 1985,1986. Negative margins indicate a loss to INESPRE. aLess than 0.5 percent.

must obtain a permit to import. The agency continues to manage state rice stocks, to make decisions regarding rice imports, and to administer the price support system. State rice reserves are replenished with purchases made by BAGRICOLA from farmers at the support price. Some of this rice is used to supply INESPRE public distribution programs. For maize and sorghum, BAGRICOLA issues certificates- verifying that importers have complied with the law requiring them to make parallel purchases of domestic grain. These certificates qualify the marketer to apply for import permits issued by the Secretariat of Agriculture. Before issuing the certificates, BAGRICOLA requires letters of credit from importers. These are used as prepayment for domestic grain delivered to the importer by farmers who owe money to the bank. This practice necessitates active involvement by bank officers in arranging harvesting, bagging, and transportation of domestic grain, distracting from their primary mission of credit management.

Dominican Republic

241

The Dominican Wheat Mill (Molinos Dominicanos) Molinos Dominicanos (MD) is a 67 percent government-owned corporation that processes all imported wheat, and is the sole domestic supplier of wheat flour. The remaining 33 percent of MD's share capital is owned by private individuals, whohavelittle sayincorporatedecisions. MD imports wheat duty free and is exempted from obtaining import permits. Flour is sold to bread and pasta makers at prices established by the government, as is wheat bran. Because it is the exclusive supplier, MD controls the amol.mtof wheat available on the domestic market; thus allowing it to maintain state-mandated prices. Up to 1984, MD sold wheat flour at a profit. When the Dominican peso was devalued in 1985, MD threatened tO raise flour prices. At the government's order, it agreed to postpone the increase in exchange for cash transfers from the treasury. Low international wheat prices in 1986 and 1987 allowed the government to end the cash transfers. In 1988, MD was forced to double flour prices because of its precarious financial situation, which resulted from increases in the world wheat price, a further devaluation of the currency, and a lack of government financial assistance.

Directorate General of Price Control (Direccion General de Control de Precios) The Direcci6n General de Control de Precios (J:x.;CP) controls the prices of major foodstuffs, including grain. The OCCP's objective, defined by law 13 of April1963, is to protect the needy from "undue" price increases. OCCP sets maximum prices for twelve primary agricultural products, including rice, wheat flour, pasta, bread, and maize. Prices are based on costs of production (including manufacture) and are computed based on information supplied by the Secretariat of Agriculture (SEA), INESPRE, industry, and DGCP's staff. DGCP typically sets different prices for the various levels of the marketing chain. The normal markup for wholesalers is 4 percent, while 15 percent is allowed forretailers. DGCPinspectorsand supervisors monitor wholesale and retail prices to ensure that marketers do not overcharge. Violators can be given citations and forced to sell at controlled prices in the presence of inspectors. Convicted violators can face fines or prison terms.

Other Institutions Several other institutions are active in grain marketing and policy in the Dominican Republic. The Centro de Promoci6n de Exportadones (Export Promotion Center-CEOOPEX) is in charge of promoting Dominican exports. It has the power to prohibitexportsofmostexportablecommodities, including rice. The Central Bank fixes the exchange rate, while the Customs Authority collects import taXes. Grain is usually imported tax free, except for maize and sorghum, which are charged a 10 percent ad valorem tax on the f.o.b. value.

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Norberta A. Quezada

The Secretariat of Agriculture (SEA) is responsible for agricultural research, extension, training, planning, data collection, and analysis. It also rents machinery to farmers and distributes seeds and agr

I Con;nEr I

I I

-~s

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270

Davendra Tyagi

They generally use their own capital to buy produce in the assembling markets either for themselves or on behalf of clients in more distant markets. Pucca arhatias usually do not deal directly with the seller (Figure 10.3). The buyer charges his clients a commission for obtaining the grain and also. recovers expenses incurred for weighing, processing, packing, and transport. Over the last forty years, the government has established regulated markets, to solve problems, such as short weights, excessive charges, unauthorized deductions and allowances made by commission agents, and the absence of a dispute settlement machinery for sellers and buyers. The principal objectives of market regulation are to safeguard producer interests and to raise standards in local markets. Farmers, traders, sellers' cooperatives, and representatives of the state governments sit on market committees, which typically have a producer majority. All of the functionaries in the regulated markets are licensed, and business transactions are conducted under rules and laws framed and administered by the market committees. Charges, allowances, and deductions are fixed bythemarketcommittee,and anyone charging more is likely to have their license revoked. Disputes between sellers and buyers are submitted for arbitration to a disputes subcommittee. Regulated markets now exist in all important foodgrain-produdng states.

Marketi11g Chamrels In India, there are two important marketing channels for grain. In the first, grain moves directly from the producer to the consumer through various middlemen, while in the second, public sector agencies handle grain sales (Figures 10.3 and 10.4). In the private channel, the producer sells grain to katcha arhatias either directly or tluough village merchants, and it is then transported to a wholesaler. The wholesaler may store the grain in a warehouse or merchandise it to another wholesaler in the secondary market Retailers purchasesuppliesfromwholes alersinthesecondarymarket.G rainthatmoves through the public sector marketing channel iseitl1er sold directly by producers to the Food Corporation oflndia (FCI) or to state agencies purchasing on behalf ofFCI. This grain is transported to the Food Corporation oflndia' s transit stores and then to the FO' sdepots. On the advice of the Central Government, tl1e FCI releases grain stocks to state agencies for distribution. The state agencies in tum send grain to fair price shops, where consumers may purchase it at prices fixed by the government. The Food Corporation of India was established on 1 January 1965 as the sole agency of the central government to purchase, store, transport, and distribute foodgrains. Until the late 1970s, the FCI handled all cereals including coarse grains, but beginning in 1980, its responsibilities were reduced to wheat and rice. Coarse cereals are handled by the National Agricultural Cooperative Marketing Federation (NAFED). The FCI maintains offices in most states and also at the district level. The FCI also owns godowns (warehouses), silos, and

India

271

some processing plants. At the end_ of 1987, the FCI had 151 district offices, 19 regional offices, four port operation offices, and four zonal offices, with a staff of .over 71 thousand. In addition, the FCI owns 21 rice mills equipped with modem drying and milling facilities. On 30 March 1988, the FCI owned 12.7 million tons of storage capacity and rented another 8.6 million tons from state warehousing corporations and private parties. In some markets, the FO buys directly from producers, whereas in others, stategovemmentagendesoperate on its behalf. During 1987/88, the number of purchase centers/mandies (markets) for paddy procurement run by the FCI and state government agendes was over 4,400. Of these, roughly 2,400 were directly operated by the FCI. For wheat, the total number of purchase centers exceeded 7,800, of which less than 1 thousand were managed directly by the FO. As indicated earlier, the FO purchases foodgrains at prices fixed by the government. Procurement by the FCI largely depends on the volume of production and the difference between open market prices and government procurement prices. During times of scarcity, open market prices are higher than the government-declared procurement price, and FCI purchases of grain are small. When supplies are abundant, its purchases are large (Table 10.7). Until1977, to maximize procurement, the government imposed restrictions on private movement of grains among states (Kahlon and Tyagi, 1983). This lowered prices in the states that produced a surplus and narrowed the difference between open market and procurement prices. As a consequence, the FCI was able to procure substantial amounts of foodgrains. However, with · increasingproduction,FCipurchasessincel978/79haveprimarilybeenmade to provide producer price support. For wheat, FCI or its agents purchase directly from farmers in the regulated market by participating in auctions. In some states, the state government exerdses the right of pre-emption in market purchases. Rice is procured by levying millers, who are required to sell a specified percentage of the rice that they mill to FCI at a price equal to the procurement price for paddy plus a milling allowance. However, when the price of paddy reaches the procurement price, the FCI also purchases paddy and mills this in its own fadlities or in private mills. In a good crop year when prices are low, FCI purchases may be substantial, whereas in a poor crop year when market prices are high, they may be small. In 1985/86, the FCI purchased 105 million tons of wheat and 9.8 million tons of rice, or about 23 percent of total wheat production and 15 percent of total rice production. Assuming that 40 percent of the wheat crop and 35 percent of rice output is marketed each year, FCI purchases accounted for about 56 percent of all wheat and 43 percent of all rice sold in the country. Each state government has an administrative department of "dvil supplies" or its equivalent. Its secretary is responsible for implementing the state's policy on foodgrain pricing, procurement, and distribution. Thus, general control over the public distribution systems rests with the dvil supplies/ food depart-

Net imports (3)

4.8 3.5 8.7 3.6 2.0 -0.5 3.6 5.2 7.5 6.9 0.1 -0.6 -0.2 -0.3 0.7 1.6 4.1 2.4 -0.4 -0.1 -0.4 1.9

48.1 72.0 65.0 87.1 94.9 92.0 84.9 91.6 87.4 105.9 97.3 110.6 115.4 96.0 113.4 116.6 113.3 133.3 127.4 131.6 125.5 121.1 52.4 75.7 73.9 89.5 94.3 96.2 88.8 97.1 89.3 102.1 99.0 110.3 114.9 101.4 114.3 116.9 114.7 128.6 124.3 133.2 134.6 128.4

Netavailability of food grains• (4) 3.8 0.5 4.5 6.7 8.9 7.7 8.4 5.7 9.6 12.9 10.0 11.1 13.9 11.1 13.0 15.4 15.7 18.7 20.1 19.7 15.7 14.1

Procurement (5)

Source: GOI, 1989. Detail may not add because of rounding. a Net availability= net production- net imports- change In government stocks. b Includes quantities released under the Food for Work Program. c Provisional. d Less than 0.05 percent.

1951 1961 1967 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981C 1982C 198JC 1984C 1985C 1986C 1987C 1988C

(1)

Year

Net production of food grains (2)

11.~

15.ob 13.ob 14.8b 16.2b 13.3b 15.8b 17.~ 18.4b 18.3b

8.0 4.0 13.2 8.8 7.8 10.5 11.4 10.8 11.3 9.2 11.7 10.2b

Public distribution (6)

1.4

3.5 1.8 -0.3 d -0.3 1.5

9.2 4.6 11.7 4.0 2.1 -0.5 4.0 5.3 8.4 6.8 0.1 -0.5 -0.2 -0.3 0.6

(7}

Col.3 as%of col.4

TABLE 10.7 Net Availability, Procurement, and Public Distribution of Foodgrains (million tons)

8.0 0.7 6.9 7.7 9.3 8.3 9.9 6.2 10.9 12.1 10.2 10.0 12.0 11.6 11.4 13.2 13.8 14.0 15.8 15.0 12.5 11.6

Col.5 as%of col.2 (8) 15.3 5.3 17.8 9.9 8.3 10.9 12.9 11.1 12.6 9.0 11.8 9.2 10.2 14.8 11.4 12.6 14.1 1Q.4 12.7 13.2 13.6 14.3

Col.6 as%of col. 4 (9)

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ments in each state government. The stocks for the fair price shops are also channelled through the state governments. The civil supplies de~tments estimate their monthly foodgrain requirements and, by the third week of the month, request grain supplies from the Government of India for the coming month. The DepartmentofFoodoftheGovernmentoflndiaallocatesfoodgrains among the states. Later, following the instructions of the Department of Food, the regional offices of the FO, in consultation with the state civil supplies departments, allocate quotas to be issued from each depot. These departments thenissuepermitstothefairpriceshops,whichcollectthefoodgrainsfromFO · or state government godowns. The government distributes subsidized imported and internally procured foodgrains to meet the needs of deficit areas and the poorer members of the population.Fairpriceshops werefirstinstitutedduringtheSecond World War, when the government opened grain stores in various areas to distribute specified quantities of subsidized foodgrains to laborers. Since 1951, the ever expanding public distribution of foodgrains reflects the growing ability of the government to procure and, in bad harvest years, to import large quantities of foodgrains(Table 10.7). The level of demand for grains through the fair price shops is related to the difference between subsidized and open market prices, and the number of shops, which has increased. At the beginning of 1987, there were more than333 thousand fair price shops.lSThe grain procured by the FCI is distributed through the shopsatfixed prices. Each year, the government sets a uniform issue price for wheat and rice, which is usually much lower than the cost of the procured grain (procurement price plus procurement and distributioncosts).Hence, thegovernmentpaysaconsumersubsidyon the distribution offoodgrains.Thus,inlndia,thereisadualmarketforfoodgrains,afreemarket where prices are determined by demand and supply, and a managed market where both the prices paid by consumers and received by producers are fixed by the government. Foreign Trade in Grains The central government monopolizes foreign grain trade. The government, acting through the FCI, decides which grains are to be importeQ and from

which country. Wheat accounts for the majority of imports; rice and coarse grain imports are relatively insignificant. Foodgrain imports vary inversely from year to year with domestic output. Exports of grains are generally insignificant. Grain Imports

India lost substantial rice-producing areas in East Bengal and wheat-producing areas in West Punjab when Pakistan became a separate country at independence in 1947. Consequently, imports of both wheat and rice of about 1 million

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Davendra Tyagi

tons each became necessary. By the middle 1950s, the domestic availability of foodgrains deteriorated even further. Subsequently, India signed an agreement with the United States to import 16million tons of wheat and one million tons of rice under PL-480 (see the chapter on the United States in this volume) over a four-year period to meet increased consumption reqUirements and to aid in rebuilding reserve stocks. However, the situation continued to deterioratewithseriousdroughts in the crop years 1965/66and 1966/67. In 1966,over 10 million tons of foodgrains were imported, accounting for 15percent of total availability (Table 10.6). Most of these imports were wheat, while rice accounted for less than 10 percent (Table 10.8). Wheat was imported from the USA, Canada, and Australia, whilemostriceimports were supplied by Burma. After HYVs were introduced in 1%7/68, foodgrain output and wheat production, in particular, grew substantially. Breakthroughs in the development and dissemination of new wheat seeds, combined with the expectation of similar developments in the production of rice and other cereals, led to a decision by the government to halt concessional imports by the end of 1971. Since then, most grain imports have been on cash terms or on a deferred payment basis. Between 1%7I 68 and 1970/71 India was gradually able to reduce imports (Table 10.8). During the 1970s, foodgrain imports fluctuated from year to year. Total imports declined from about 3.6 million tons in 1970 to OS million tons in 1972 but rose to 7.4 million tons in 1975 before falling again in 1976 to 6.5 million tons, mainly because of increases in domestic output. During 1978 and 1979, there were no imports a tall. Wheat accounted for about90percent of foodgrain imports during this period. The United States was the main supplier, followed by Canada and Australia. As compared with the 1%0s, rice constituted a much lower proportion of imports of foodgrains in the 1970s, despite the fact that rice is preferred by the majority of Indians and that rice production increased at a slower pace than wheat. The reason is thatriceisrelativelymoreexpensive than other grains on the world market, especially in comparison to the domestic price of rice. Burma and Thailand continued to be the most important rice suppliers. During the 1980s, imports of foodgrains were smaller on average than in the 1970s, fluctuating between almost negligible quantities in 1979/80, 1980/ 81, and 1986/87 to4.2 million tons in 1983/84 (Table 10.9). Wheat continued to account for an overwhelming proportion of total imports, with the United States, Australia, Canada, and Argentina as the major suppliers. Rice imports remained largely the same. Thus, over the years, the composition and sources of grain .imports remained unchanged, but the share of imports in total domestic supply declined drastically.

5.2 3.5 3.6 4.5 6.3 7.5 10.4 8.7 5.7 3.9 3.6 2.1 0.5 3.6 4.9 7.4 6.5 0.6 0.0 0.0 0.1 0.9 2.1 4.1 2.4

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

0.1

0.1

0.3 0.2 0.2 0.3 0.3 0.3 0.1 b

USA

0.2 0.2

0.1 b

b 0.2 0.2 0.2 0.2 0.1 b 0.1 0.1

Thailand

11

0.1 0.2

0.3 0.2 0.2 0.2 0.2 0.2 0.4 0.2 0.1 0.2 0.1 0.1

Burma

0.3 0.5

0.1 0.1 b

0.7 0.4 0.4 0.5 0.6 0.8 0.8 0.5 0.4 0.5 0.2 0.2 0.1

Totala

0.1 0.4

b 0.2 b b 0.1 0.2 0.9 0.8 0.6 0.6 0.7 0.5 0.2 0.6 0.3 0.4 0.3 b

Canada

Source: COl, Bulletin on Food Statistics, various issues. Detail may not add because of rounding. a lndudes im~ts from other sources. ~ Less than 0. million tons.

Total cereals

Year

A.R. and Egypt

Rice

TABLE 10.8 Indian Cereal Imports by Principal Countries of Origin (million tons)

0.8 1.3 3.6 0.8

4.0 2.5 2.8 3.9 5.3 6.0 6.6 4.5 3.9 2.2 2.6 1.2 0.1 1.4 1.9 4.6 4.1 0.1

USA

0.8

0.2 0.5 1.0 0.3

0.3 0.4 0.4 0.2 0.3 0.3 0.3 0.8 0.2 0.1 0.1 0.1 b

Australia

Wheat

0.8 2.1 3.8 1.8

4.4 3.1 3.3 4.1 6.6 5.6 7.8 6.4 4.8 3.1 3.4 1.8 0.3 2.4 4.2 7.0 5.8 0.5

Total a

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276

Grain Exports

Since 1956, cereal exports have generally been prohibited. However, exports of scented, long grain rice, certain pulses, and some coarse cereals were permitted from time to time, and small quantities of wheat were exported in some years. Cereal exports are relatively unimportant but have tended to increase on average such that India became a net exporter in the late 1970s. During the 1980s,itwasanetexporterin 1980,1985, 1986,and 1987(Table 10.9). Rice accounts for the bulk of exports, with basmati (scented, long grain rice) exported even in years when ordinary rice is imported. Basmati normally commands a price on world markets that is three to four times the price of ordinary, long grain rice. Wheat is occasionally exported, and recently barley exports have increased. The main market for basmati rice is the Middle East, while parboiled rice is exported to the USSR, Sudan, and the United Kingdom.

TABLE 10.9 Imports and Exports of Rice and Wheat by Indian Government (000 tons) Year

Rice

1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87

41 12 397 165 333 361 0 0 0 0

Exports Wheat 494 778 641 58 0 104 24 32C 337