In this article we will discuss about the marketed surplus:- 1. Introduction to Marketed Surplus 2. Importance of High Marketable Surpluses from Agriculture/Rural Economy 3. Factors on which Marketable Surplus Depends 4. Measurement of Marketed Surplus 5. Mathur-Ezekiel Hypothesis / Thesis & Marketed Surplus.
- Introduction and Definition to Marketed Surplus
- Importance of High Marketable Surpluses from Agriculture/Rural Economy
- Factors on which Marketable Surplus Depends
- Measurement of Marketed Surplus (How to Calculate)
- Mathur-Ezekiel Hypothesis / Thesis & Marketed Surplus
Marketed Surplus: Introduction, Importance, Factors and How to Calculate Marketed Surplus
1. Introduction and Definition to Marketed Surplus:
There are three aspects of agricultural marketing. First relates to the determination of market price and this is largely a function of demand and supply plus government intervention. The second aspect relates to reorganisation of agricultural marketing. While the first one belongs to the pure theory of agricultural economics, the second aspect relates to agricultural administration.
Government intervention in price setting and regulating marketing supply and demand come under policy intervention. Third important theoretical issue is to examine the economics of ‘marketable surplus’ and in particular the relationship between marketable surplus and market stimuli or price stimuli. The last important aspect is the study about mobilisation of resources from agricultural and rural sector, both in the real terms and in monetary (financial) terms.
Marketable Surplus versus Marketed Surplus:
Marketable surplus which is genuine and not artificial or forced, if, the fountain source of not only agricultural development but also of overall economic development. It is real surplus generated by agricultural sector.
It can be measured thus-
Old stocks + current output – (consumption + waste + inventories for next season)
‘Marketable surplus’ is sometimes referred as ‘gross surplus from agriculture’ while the ‘marketed surplus’ is referred to as ‘net surplus from agriculture’
Marketable surplus is naturally related to the entire economics of production. Entire gamut of measures and condition that increase agricultural output determine one aspect of marketable surplus. Other things which determine marketable surplus are consumption and stocks for future. Consumption depends mostly on population and income also. However, higher income will not increase the consumption, as the income elasticity of demand for agricultural products is low. Increase in population will definitely increase consumption, the age-sex pyramid of population being given.
Marketed surplus depends on several things, e.g., storage facilities transport facilities, cash needs of the farmers, prices prevailing in the market, holding capacity of the farmers, etc.
2. Importance of High Marketable Surpluses from Agriculture/Rural Economy:
The importance is so obvious that it looks odd that it should require even a discussion. Marketable surpluses from agriculture are ‘real surpluses’—of the type that make for the progress of the economy. It is from the real surpluses, that the real savings, real capital formulation and real income are obtained. They in turn make it possible to make real investment. This brings real employment and real development.
High marketable surpluses from agriculture are signs and symptoms of rising real productivity in agriculture per person, per man- hour, per acre or per unit of capital or per unit of input-package. It is not the high production that is important but high rate of output-input relation, i.e., high rate of productivity. In fact if there is any ‘key to development’, it is rising productivity. Since still nearly half of the GNP of medium class countries is derived from agriculture, the importance of high marketable surpluses can never be exaggerated.
High production is necessary for good health and nutrition of those who are engaged in agriculture, but high marketable surpluses are necessary for the good health and nutrition of those who are non-cultivators. High marketable surpluses from agriculture will decide not only the adequate availability of agro-based consumption goods but also their availability at reasonable prices. No riots can be serious than the food riots and they can be avoided with high marketable surpluses.
Usually the rise in the wage structure gets triggered off due to rising prices of foodstuff. Wage instability ensues in a system of rising food prices brought about by erratic marketable surpluses. It is a sad story everywhere in the free world that the wages of workers can never keep pace with the rising prices. Workers—even with very strong trade unions—can never hope to get 100 per cent compensation for rising prices.
Their real standard of living and/or the real savings go down. Usually the government allows any amount of rise in the capital-income but not in the labour-income—all in the name of containment of inflation. A dissatisfied labour class ‘goes slow’ and productivity and production norms suffer.
The malady of inflation gets compounded. So many inflations can be traced to have the origin in dwindling marketable surpluses from agriculture, more particularly in relative terms—relative to rising population, rising income and rising needs for raw materials in agro-based industries.
High marketable surpluses help in the development of agro-based industries. Since these industries are to be located where the ‘load shedding expenses’ of the raw materials are low, they are usually dispersed rather than concentrated. Rural industrialisation can be considered to be the direct concomitant of the high marketable surpluses from agriculture.
The taxable capacity of the rural people depends not on agricultural production but on marketable surpluses. These real marketable surpluses are converted into cash and how much of it can be taken in the form of taxes will depend on the political will of the government.
Usually the governments hesitate to tax the agricultural sector heavily or even adequately due to certain well known reasons, e.g., (i) the governments fear that the rural populace will vote them out, (ii) the cost of collection will be high, (iii) agricultural development may receive a setback, etc.
Marketable surpluses converted into cash are mobilised by the financial institutions. In any economy where nearly 15 per cent of the urban population pays 85 per cent or more direct taxes, and where the banking system is supposed to divert funds from urban to rural areas, this cannot be done unless the rural savings are mobilised. Mobilisation of rural savings will, in the first instance, depend on the marketable surpluses.
Marketable surpluses, converted into cash, put the purchasing power in the hands of the rural population. It is this purchasing power that enables the secondary and tertiary sectors to sell their goods and services to the primary sector. Markets for all the sectors are widened as a result of higher marketable surpluses.
The three sectors come into complementary position; they sustain each other; they thrive on the spurs provided by each other. The economy can take off. (However, this is not to say that the single factor, i.e., marketable surpluses from agriculture, will provide this sort of magic wand. High marketable surpluses from agriculture are a necessary but not sufficient condition for economic take-off of a country.)
In due course of time, higher marketable surpluses will promote healthy migration from the rural to urban areas. As marketable surpluses increase, the farmers have greater cash with them. They can use better and larger input packages. This will increase productivity per acre as well as per person.
Since a desired income can be earned by fewer persons, others become ‘redundant’. They can move to other places to earn money without detriment to farming in rural areas. The manpower so released can help in industrial development around village as also in urban areas. Another aspect can also be emphasised, the future manpower (i.e., the present young generation) can get better education because their parents can afford the same.
Higher marketable surpluses will obviate the need for government subsidies in the long run. Nothing accords better than the principle ‘first thing first’ and this is reflected when agriculture starts yielding higher marketable surpluses.
3. Factors on which Marketable Surplus Depends:
The marketable surplus depends on production minus consumption, whereas old stocks are included in production, while waste and stocks for the next sowing season (to be used as seeds) are to be included in consumption—also known as ‘absorption’.
Thus, all those factors which determine:
First we take the factors that determine production.
(i) Production Effect:
Agricultural production depends, inter alia, on the use of better inputs in optimum quantities. Agricultural development and adequate and timely supply of water are synonymous. Use of high yielding varieties, fertilizers and pesticides itself depends on the availability of the complementary input water.
Finance plays a dual part in this respect on the one side it enables the production of inputs of agriculture and on the other hand it enables the potential users (the farmers) to use them in required quantities. The demand for money is derived demand and money by itself cannot produce anything.
Higher agricultural output may be neutral to scale but it is not neutral to the scale of input use. Any type of farm, unless too small to be viable, can yield high output per acre, per unit of input, per unit of time or per person. Big farms yield high absolute surplus and over 70 per cent of the total agricultural output from the owners of big farms becomes ‘marketable surplus’. Medium farmers generally supply 45 per cent of their output as surplus. Not more than 20 per cent of the output of small farmers can be supplied as agricultural surplus.
Subsistence and marginal farmers cannot generate ‘marketable surpluses’. Sometimes the cash requirements of the small farmers are so pressing and compelling that they sell a very large proportion of their output and later on purchase foodgrains from the market. This is not to suggest that only big farms are efficient since a large part of their output goes as marketable surpluses. Land reforms are necessary from several points of view—social, political, ethical and even economic.
Marketable surpluses depend on the type of crops also. While subsistence agriculture cannot yield marketable surplus, commercial agriculture supplies practically the entire output as marketable surplus.
High cropping intensity or multiple cropping will naturally supply larger marketable surplus but this effect can be included in the effect of ‘better irrigation facilities’, because water is the crucial requirement in this regard.
Then come the farm organisation. Large farms under private ownership can overcome indivisibilities, i.e., lumpy investment can be made in them. Economies of large scale can be reaped on large farms. Other things remaining the same, it is expected that yield per acre and productivity will be high and hence they can generate large agricultural-marketable, surpluses.
Since it will be possible to use heavy farm machines, advanced type inputs in the required quantity, and the farms can be managed scientifically with proper budgeting, the owner can always manage to keep the benefit-cost ratios high (or cost-benefit ratios low).
However, the personal touch may be absent. Usually such large private farms are possible in low-population-density countries with very large cultivable areas, e.g., in Canada, Australia or USA. In less developed countries like India, such large private farms will give rise to social tension. (Naxalite movement in India was the direct outcome of such a state of affairs.)
Since such large farms are managed by absentee landlords who prefer to live in urban areas and lead urban life, usually the hired/slave type labourers work there. Productivity may not be that high. In any case the social productivity of manpower will be low. Land reforms become necessary and hence small farms may be more desirable.
They also can be made viable provided the financial institutions meet their social obligation of concessional, timely and adequate financing for inputs procurement and land development. If intensive and highly personalised cultivation is done on the small farms, there is no reason why these farms should provide not only adequate consumption-food for the cultivators but also sufficient marketable surpluses.
Large collective farms should also provide large marketable surpluses. However, the experiences of USSR and Poland brought the collective farming into disrepute.
Yet, it should be remembered that:
(a) USSR was not short of foodgrains but feedgrains. (Like other western countries it also feeds grains to animals to obtain juicy and succulent meat); and
(b) Secondly, severe cold weather frequently upset all planning and calculations.
However as “everybody’s business became nobody’s business there”, the USSR itself collapsed.
Co-operative farming can something which can be regarded as a compromise between large farming on capitalist principle and large farming on collective principle. Unfortunately the rural house is now as divided as the urban society. Apart from political considerations, the caste and class considerations come in the way of effective cooperation. Worst of all the politicians and officials have made co-operative system a thoroughly corrupt and inefficient system.
(ii) Marketable Surplus and Consumption:
Countries with large populations will naturally leave smaller marketable surpluses, other things remaining the same. Under all circumstances, a country with a large population, high rate of growth of population, or high birth and death rates (which will give a lower growth rate of population yet will mean loss on account of consumption), high density of population per sq. km of land, high dependency burden (proportion of the young and/or old to the working population) will naturally leave a smaller marketable surplus.
A country whereas a result of public health measures, the morbidity incidence goes down (incidence of sickness goes down), the consumption will increase and marketable surpluses will go down. However, later on the production will also go up. In early stages of demographic transition (when death rates start declining but the birth rates remain high), which may even extend up to 50 years, the population of young ones will go up. (For example- the non-adult population of India is estimated to be around 45%). This will also increase consumption.
Consumption goes up after a lean agriculture year. Consumption also goes up when people were hitherto fore living near starvation or semi-starvation level and their income goes up. Nutritional standards improve and consumption goes up. This is true at lower per capita income levels. In the early stages of economic development the income elasticity of demand for agricultural products is high.
If ‘consumption’ is taking to mean ‘absorption’, then in quasi-static or quasi-dynamic economies, the people will have tendency to store foodgrains in kind for or up to the next harvesting season for consumption and reproduction purposes. When warehousing facilities increase and government builds up buffer stocks and/or when food imports are very easy and cheap, this sort of inventory building will not be high, i.e., direct consumption and productive consumption will not be very high. Higher marketable surpluses will be released.
Better transport and warehousing facilities increase marketable surpluses but may reduce the marketed surplus in the immediate post- harvest period. The farmers can phase out their marketable surpluses to secure better terms of trade.
Marketable surpluses also depend upon the consumption habits. For example- the cultivators of Punjab sell about 90 per cent of their paddy output but not such a high percentage of wheat since they are wheat-eaters. Cash crops naturally have very low direct consumption and, therefore, a substantial part of their output becomes marketable surplus.
Better, efficient and cheap transport system helps in sale of the marketable surpluses over a wider area price differentiates get reduced. Depressed prices and very high prices do not rule the market. Average and fair prices are obtained by producers and thus for the next season certain incentives are created.
Warehousing facilities help in the phasing of marketable surpluses into marketed surpluses. Terms of trade get improved. The margin of seasonal variation in prices gets reduced. This can again provide incentives for greater marketable surplus in the next season.
4. Measurement of Marketed Surplus (How to Calculate):
Figures for (i) past stocks, (ii) current output, (iii) current consumption, (iv) probable wastes, and (v) stocks for seeds will be necessary to find out the marketable surpluses. Periodic census can be taken, if details are collected at the time of census.
Outputs can be estimated. Various categories of farms (highly productive farms, medium productivity farms and low productivity farms) can be quantified. Their average per hectare output can be estimated. Thus, total output can be found. The per capita consumption and total consumption can be stimulated. Estimates can be made about waste and future needs.
The total marketable surplus is never sold at one price. Average prices differ. Besides, there are ‘minimum support prices’, ‘levy price’, ‘open market price’, ‘black market price’, ‘distress sale price’, ‘lean period price,’ ‘wholesale price’, or ‘retail price’. It can be found how much of the real marketable surplus is sold at various prices. This will give us total cash equivalent of the marketable surplus. Calculations are not always easy for obvious reasons—suppression of facts and difficulties of obtaining correct samples.
One simple method of finding marketable surpluses in money terms is to reduce the (i) non-farm income from the (ii) total income accruing to the agriculturist. Actual marketable surplus is calculated ex post, i.e., the actual figures are obtained from the persons concerned. Ex ante marketable surpluses can.be calculated in times of emergency, where the minimum consumption may be allowed. Average weighted price of various types of prices can be taken. Progressive farmers can keep accounts.
5. Mathur-Ezekiel Hypothesis / Thesis & Marketed Surplus:
P.N. Mathur and H. Ezekiel in a very controversial paper hypothesized that “marketable surpluses are inversely related to prices.”
In other words, if the prices rise, marketable surpluses will become lower and when the price are low marketable surpluses will be higher. It means price rise does not act as a stimuli but a damper!
On the face of it this thesis will appear contrary to the expected behaviour of any producer. Many economists considered it not only to be incorrect but outrageous. However, Mathur and Ezekiel had certain explanations.
They were of the opinion that the cash requirements for non-food items are fixed! The farmers have a sort of static way of living for which the cash requirements are fixed.
This is another way of saying that the farmers are the persons with fixed aspirations. They have a fixed labour preference and if lower level of labour brings the same income, they will increase their leisure preference. As prices rise, a lower output secures for them the desired income in money terms. They, therefore, reduce labour and have greater leisure and thus produce less!
A diagram can be used:
Like any other demand curve, here also the demand curve has a negative slope; meaning thereby that at higher prices the demand will be low and vice versa.
‘M’ curve is the curve for marketable surplus. It also has a negative slope. It shows that with a fall in price, marketable surplus will increase—or will have to be increased so that a particular amount of money can be obtained. As the demand rises to D’, price rises to P’. At higher price the marketable surplus is reduced from Q to Q0.
(It is to be noted here that the diagram does illustrate that with rise in demand and hence with rise in price, the marketable surplus will decline. However, this ‘proof is based on the hypothesis of negatively sloping ‘marketable surplus supply curve’. If this assumption is arbitrary or incorrect, then the proof becomes dubious ipso factor.)
Mathur and Ezekiel had in mind the picture of a typical rural society. In this society, the farmers consume bare minimum. They have capacity to reduce their consumption or increase the same. They believed that the consumption of foodgrains by the farmers is ‘residual’. It will go down in lean income years and go up in bumper income years. In other words, as there is bumper income, first the consumption goes up and then the marketable surplus will be decided.
Since the cash requirements of the farmers for non-food needs are fixed, it will not be the marketable surplus or marketed surplus that will be increased in times of bumper income but the consumption. In their model there seems to be infinite possibility of increasing consumption. The consumption-production relationship is very high.
Mathur and Ezekiel model is a short-run model. It is in the short run that the cash requirement for non-food items is fixed. Hence, this inverse relationship. Mathur and Ezekeil believe that the demand for cash is inelastic, i.e., cash requirements are fixed!
It is clear that Mathur and Ezekiel could have formulated their hypothesis or thesis on the basis of certain hunches only. They probably based their observations on deductive logic about macro behaviour. In order to ‘prove’ their hypothesis they took shelter behind the short-run behaviour.
Mathur and Ezekiel had taken that picture of cultivation in which the government dues from the farmers were related to the size of the land, rather than output. Since the acreage remains the same, land revenue obligation was presumed to be static. Short-term investment requirements also remain the same.
Mathur and Ezekiel hypothesised that the subsistence farmers will increase their consumption since they were consuming far below the satisfactory level.
However, why should super-marginal farmers not provide greater marketable surplus as production goes up? They cannot consume more because they must already be consuming as much as they could. The reason that is advanced by Mathur and Ezekiel is that these farmers build up inventories in kind.
Agriculture depends upon the vagaries of rain pattern and who knows the next crop may fail or fail partially. Stocks have got to be built up both for consumption and seeds. They are built up in kind. Thus, super-marginal farmer save-not in the form of cash but in kind. Hence, marketable surpluses (marketed surpluses) do not go up.
Dharam Narain later ‘confirmed’ the Mathur and Ezekiel thesis with the help of some empirical evidence that he collected from the data relating to the year 1950-51. He was of the opinion that as the size of holding increases up to 15 acres, the marketable surplus decreases; the reason being the same, i.e., more is required for consumption purposes. Farmers having smaller land must be having consumption gap.
Since most of the marketable surplus (almost 50%) came from the farmers owning less than 10 acres of land, the overall effect of Mathur and Ezekiel is realised. When we give high weightage to the marketable/marketed surplus of the small farmers (near subsistence level farmers), the Mathur and Ezekiel effect will be found to be realistic.
Marketable surplus was shown to be result of tension between (i) price elasticity of demand for foodgrains, and (ii) income elasticity of demand for foodgrains.
Two conclusions are appended:
1. If the price elasticity of demand is greater than the income elasticity, then the marketable surplus curve will have a positive slope (not the Mathur and Ezekiel type).
2. If, however, the income elasticity exceeds the price elasticity, the marketable surplus will have a negative slope.
[In the second case when the prices rise the income effect outweighs the substitution effect and, therefore, consumption rises].
Income elasticity of demand will naturally be high at low levels of income. In this case as the prices rise, income will rise. Rise in income will increase the demand for food for consumption purposes and hence the marketable surplus will decline.
Critical Evaluation of Mathur-Ezekiel Thesis:
Mathur and Ezekiel thesis is contradicted by micro evidence. Time has made it hopelessly incorrect. During the last three decades, even in a country like India, the farmers have become quite materialistic. Their cash requirements for non-food items are not static what to say in the short period, but even on day-to-day basis. With so many consumption goods in the market, the farmers covet the industrial goods as much as others. Hence, the cash requirements are always rising.
Secondly, India has become self-sufficient in foodgrains long back and income elasticity of demand for foodgrains is showing downward tendency. Of course there are people ‘below the poverty line’ but, by and large, they too are not starving.
The price of inputs of agriculture is rising. With that is rising the cash requirement of the farmers. This cash requirement can be met only by disposing of marketable surpluses. So far as dues of government revenue are concerned, either the land revenue has been abolished on small farms in most of the India states or it has been made more elastic to farm income rather to farm size. Though agricultural income is not taxed, agricultural inputs have tax elements in them. (Not all inputs are provided with the subsidies).
Hence, cash requirements for all these purposes are also not fixed.
It is true that a prudent farmer will save in kind for insuring his family against starvation if the next crop fails. He would also like to save the seeds in kind rather than in cash-equivalent. However, this is true in case of rudimentary economy. When organisations like Food Corporation of India or state/central warehousing corporations exist, and when there is surpluses food over the above the consumption requirements, the farmers do not retain the tendency to hoard. In fact fearing storage losses at home on fall in price in the next bumper season, they can dispose of all surpluses, albeit in a phased manner so that terms of trade do not deteriorate.
Mathur and Ezekiel hypothesis is a pure static case. When agricultural income grows as a result of increase in production and/or rise in prices, the elasticity of the marketable surplus will invariably positive. Expectations about the future price behaviour were neglected in Mathur and Ezekiel thesis. If prices are expected to rise, the marketable surplus will be higher than the marketed surplus, but if prices are expected to fall, then the marketed surplus will be equal to marketable surplus.
In practice, the elasticity of supply of agricultural output is within a wider range than the elasticity of demand. If the elasticity of the marketable surplus (also known as the elasticity of supply or elasticity of offer curve) is greater than the elasticity of demand curve, then the price movements will be explosive.
If the elasticity of demand fluctuates within a narrow limit (as it does) as also the elasticity of offer curves, then there will be possibility of equilibrium and price fluctuates will be narrow. Since usually it is the first case, the price fluctuations are erratic. In such a case, the fluidity of Mathur and Ezekiel thesis cannot sustain.
Then gone are the days of rent being collected in kind, i.e., in the form of a part of the crop. This was true in the days of zamindars and heartless landlords. In those days in the year of bad harvest the surplus left over rent declined. After the consumption reserves, the marketable surpluses used to be low. Thus, in a period of bad harvest when prices used to go up, the marketable surpluses used to be low. Now this entire economics has become irrelevant (except where landlordism of the old times prevails).
Prof. Raj Krishna had conducted a study back in 1961 and came to this conclusion-
No general presumption in favour of the irresponsiveness of crop output to prices in poor economics can be upheld. The responsiveness, however, varies as between different crops and regions.
The elasticity of the marketable surplus is never negative so long as the substitution effect is non-zero.
A series of studies have been made about the phasing of the marketable surpluses into the marketed surpluses. Studies abounded between the time period 1951 and as late as (say) 1985.
The following conclusions emerge:
(a) With economic development, government support and betterment of even small farmers, the ‘distress’ sales might have gone down, but post-harvest bulk sales continue. Thus while we may not use the words ‘distress sales’ for the immediate post-harvest sales, the fact remains that 50 to 75 per cent marketable surplus is unloaded in the market immediately in the first quarter after the harvest.
It is a different matter that these sales are not made to the ‘greedy traders’, ‘loan sharks’, or ‘money-lender-cum- landlords’. Rich or well-to-do consumers also make purchases for the entire year and then there are organisations like government purchase agencies, including the Food Corporation of India.
(b) Farmers do not phase out their marketable surpluses during the lean period but the bulk-buying agencies do. Rich farmers may do so but the age-old pattern of bulk sales within six months of the post-harvest season remains.
This saves the farmers from the storage costs and risks. The farmers are becoming banking minded. They sell their marketable surpluses and convert them in cash. Premium is not earned in the form of higher prices of marketable surpluses but in the form of interest. This is not to say that everybody does that but only to say that now there are three ways in which these surpluses can be held- (i) stocks for future consumption, (ii) stocks for future sale and/or seed-stocks, and (iii) conversion in the form of cash.
Thus, it can be concluded that the Mathur and Ezekiel hypothesis is a very static case even for short period. It has some relevance for rudimentary agricultural economy but not for others. When agricultural production increases, the elasticity of the marketable surplus will invariably be positive.