Producer’s Surplus of Agricultural Commodities

Significance of Producer’s Surplus in Developing Economies

In a developing economy, the producer’s surplus of agricultural commodities is crucial as it is the quantity that becomes available to the non-producing population. From a marketing perspective, this surplus is more important than the total agricultural production. This is because marketing systems and market expansion efforts only need to focus on the surplus quantities available with the farmers, rather than the total production of a commodity.

Importance of Marketable and Marketed Surplus for Policymakers and Traders

Understanding the quantum of marketable and marketed surplus assists policymakers and traders in several critical areas:

1. Framing Sound Price Policies

• Price Support Programs:
  • These are a key part of agricultural policies designed to stimulate production.
  • Knowledge of the marketable surplus helps design effective price support initiatives to encourage farmers to increase production.

2. Developing Procurement and Purchase Strategies

• Public Distribution System (PDS):
  • Procurement policies need to consider the marketable and marketed surplus to ensure sufficient availability of food grains.
  • Similarly, traders, processors, and exporters must base their purchase strategies on marketed quantities to secure profitable transactions.

3. Minimizing Price Fluctuations

• Surplus Management:
  • Knowing the magnitude and distribution of surplus quantities enables the government and traders to organize the movement of goods.
  • This ensures efficient transportation from surplus areas to deficit areas, stabilizing market prices.

4. Export and Import Decisions

• International Trade Planning:
  • For commodities with potential for external trade, advance estimates of surpluses help in strategizing export and import activities.
  • If the surplus is lower than required, the country can plan imports.
  • Conversely, if the surplus is greater than necessary, efforts can be made to export excess quantities, benefiting trade relations and economy.

5. Development of Transport and Storage Infrastructure

• Efficient Logistics Infrastructure:
  • Awareness of the marketed surplus supports the development of transport and storage facilities.
  • Proper infrastructure ensures that agricultural commodities are stored and transported effectively, reducing losses and wastage.

Meaning and Types of Producer’s Surplus

Producer’s Surplus Definition

• The producer’s surplus is the quantity of agricultural produce that farmers can or do sell to the non-farm population, which can be further divided into two types:
  1. Marketable Surplus
  2. Marketed Surplus

1. Marketable Surplus

• Definition:
  The quantity of agricultural produce that could potentially be made available to the non-farm population, after meeting the various requirements of the producer, such as:
  • Family consumption
  • Farm needs (seeds and feed for cattle)
  • Payments in kind (to artisans, blacksmiths, landlords)
  • Social and religious payments
• Mathematical Representation:

MS=P−C

Where:

• • MS = Marketable Surplus
  • P = Total Production
  • C = Total Consumption and Other Requirements
• Significance:
  • It is a theoretical concept highlighting the portion of output left after fulfilling consumption and other obligations.

2. Marketed Surplus

• Definition:
  The actual quantity of the agricultural produce that the farmer sells in the market, regardless of family consumption, farm needs, or other obligations.

• Difference from Marketable Surplus:
  • Marketed surplus can be greater, lesser, or equal to the marketable surplus, depending on the farmer’s decision-making and market conditions.

• Theoretical Considerations:
  • In poor and subsistence farming areas, farmers may only sell the part of their produce that satisfies their cash obligations, often resulting in distress sales.
  • An increase in farmers’ real incomes improves on-farm consumption due to positive income elasticity, as surplus availability is retained for consumption rather than sale.
  • The overall increase in production generally leads to a higher marketed surplus, although the extent depends on farm types (marginal, small, or large farms).

Relationship Between Marketed Surplus and Marketable Surplus

The marketed surplus and marketable surplus are closely linked but distinct concepts in the context of agricultural economics. Their relationship depends on the farmer’s condition, economic strategy, and type of crop. Here’s a breakdown of their relationship:

1. Marketed Surplus Greater than Marketable Surplus

• Situation: The farmer sells more than what is theoretically available in the marketable surplus.
• Reason: This situation often occurs among small and marginal farmers, who are under financial pressure and need cash urgently.
• Often termed distress or forced sale, it results from the need to meet cash obligations, such as:
  • Emergency purchases
  • Falling crop prices
  • Immediate cash shortages

In such cases, farmers may later have to purchase produce back from the market to meet consumption and farm needs.

2. Marketed Surplus Less than Marketable Surplus

• Situation: Farmers retain some surplus instead of selling it all.
• Reason: This scenario is more common among large farmers with higher retention capacity.
• Reasons include:
  • Price Expectations: Farmers retain surplus crops with the anticipation of higher prices in the future.
  • Consumption Preferences: Crops may be retained for family consumption or livestock feed instead of being sold entirely.

Sometimes, farmers even retain surplus until the next production season, hoping to secure a better price.

3. Marketed Surplus Equals Marketable Surplus

• Situation: This occurs when the farmer’s retained quantity exactly matches their requirements for family and farm needs.
• Commonly seen in perishable commodities and among average farmers, where there is no strategic retention or forced sale.

Factors Affecting Marketable Surplus

The quantity of marketable surplus depends on various factors, which can differ regionally, from crop to crop, and from farm to farm:

1. Size of Holding

• A positive relationship: Larger farms tend to have a higher marketable surplus.

2. Production Levels

• Higher production results in a larger marketable surplus.

3. Price of the Commodity

• The relationship between commodity prices and marketable surplus can be both positive and negative, depending on short-run and long-run dynamics.

4. Size of Family

• Larger family sizes often mean smaller surplus quantities, as more produce is retained for family consumption.

5. Requirement of Seeds and Feed

• Higher requirements reduce the marketable surplus because more produce is retained for seed purposes and livestock feed.

6. Nature of Commodity

• Non-food crops like cotton, jute, and rubber have a higher marketable surplus since family consumption needs are minimal.
• Crops that require post-harvest processing, such as sugarcane, spices, and oilseeds, also have higher marketable surplus proportions.

7. Consumption Habits

• Regional consumption habits influence marketable surplus.
• For example, in Punjab, rice consumption within families is minimal compared to southern or eastern states, so Punjab farmers sell a larger portion of their rice output.

Relationship Between Prices and Marketable Surplus

1. Inverse Relationship

• Hypothesis by P.N. Mathur and M. Ezetkiel: In underdeveloped economies, farmers’ cash needs remain relatively constant.
• With a fall in prices, farmers sell more to meet cash needs, and with higher prices, they retain more for consumption.
• Olson and Krishnan also support this inverse relationship, suggesting that higher prices may increase the demand for personal consumption rather than sales.

2. Positive Relationship

• Suggested by V.M. Dandekar and Rajkrishna.
• Farmers are price-sensitive and motivated to sell more if prices rise, as selling provides higher returns.
• A higher price increases the marketed surplus, while a lower price decreases it.

Functional Representation

The relationship between these factors can be expressed mathematically as:

M=f(x1,x2,x3,x4,…)

Where:

• M = Total marketed surplus of a crop (in quintals)
• x1 = Size of holding (hectares)
• x2 = Size of family (in adult units)
• x3 = Total production of the crop (quintals)
• x4 = Price of the crop

Other factors may also affect these relationships, such as regional infrastructure, access to markets, and overall economic policies.