Academic journal article Pakistan Economic and Social Review

Prices of Food Grains and Farm Inputs in Pakistan: Empirical Analysis of Farmers' Incentives and Terms of Trade

Academic journal article Pakistan Economic and Social Review

Prices of Food Grains and Farm Inputs in Pakistan: Empirical Analysis of Farmers' Incentives and Terms of Trade

Article excerpt


Keywords: Distortions, Incentives, Interventions, Markets, Subsidy, Implicit taxation


Farm commodity markets in Pakistan in general and of food grains in particular have witnessed several interventions, over time, to stave off short time supply challenges and realize immediate and short time objectives. Many a time these interventions were not based on in depth analysis of the facts and relevant factors and without much consideration for long term consequences and implications of such interventions for farm incentives. In addition, measures impacting farm incentives have, inter alia, included varying customs duties, exchange rate management, monetary and fiscal policies. The most important manifestations of these government interventions are on prices of outputs received by farmers and of price paid by them in purchase of inputs. The relationship between domestic and international prices, reflecting opportunity cost of domestic production, have implications for farmers' incentives, farm production and productivity.

Similarly, policies and interventions in farm inputs and outputs markets impact the domestic terms of exchange, trade, and purchasing power of farmers, their incomes and wellbeing. In the wake of structural adjustment programs launched in the mid-1980s economic reforms were initiated in several sectors including agriculture. These reforms have led to deregulation of input-output markets and phasing out of many policy interventions in agriculture, which has also been devolved to the provinces as a result of the 18th amendment enacted in 2011.

In view of the importance of agriculture and food grains for the economy and food security, many scholars have analyzed the commodity markets in general and wheat market in particular. Some of these studies were concerned with pricing and marketing of wheat (Cornelisse and Naqvi 1987, Dorosh and Salam 2008, Salam and Mukhtar 2008, and Salam 2009), while others examined the domestic and international prices for various crops, estimating distortions to incentives (Hamid 1990, Orden,, 2006, Dorosh and Salam 2009, Salam 2010 and Dorosh, 2016). A few of these studies dealt with the terms of trade for agriculture; (Cheong and D'Silva 1984, Qureshi 1985, Salam 1992, Khan and Qazi 2005, Niazi, 2010 and Salam, 2011).

The studies by Hamid, Orden,, Salam, Dorosh, have analyzed the domestic and international prices of many commodities including food grains and estimated distortions in producer incentives. Cornelisse and Naqvi, Dorosh and Salam, Salam and Mukhtar and Salam examined the role and functioning of wheat markets and wheat prices in the context of government pricing policy and policy options. Cheong and D'Silva Qureshi 1985, Niazi, and Salam estimated and examined the pattern in terms of trade for agriculture sector for different time periods. But only a few of the studies have examined the food grains in total and none of these examined the distortions in pricing and terms of trade together. The results of quite a few of these studies have also become dated.

Here, we examine the incentives in the production of food grains and their distortions, review domestic prices of important farm inputs and analyze the domestic terms of trade for food grains during the period of 1995 - 2015; the period which has seen a paradigm shift in policy framework increasingly relying on markets in determining prices of farm inputs and outputs.

Rest of the paper is organized as follows. The role of food grains in Pakistan's economy is explained in section II. The conceptual framework for estimation and analysis of incentives in farm production and terms of trade are detailed section III. A methodological note for estimating producer incentives and terms of trade is presented in section IV. The empirical estimates of producer incentives are detailed in section V. …

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