International Trade in

Agriculture Commodities

The principle of comparative advantage

- compare the opportunity costs of producing
a commodity between the countries
- we consider the cost of producing additional
units of any one product in terms of
reduction necessary in the output of other
good
- to produce additional units of crop x, the
country has to rearrange its resources in
such a way that it might have to relinquish
the opportunity to produce some unit of crop
y.

International Trade in
Agriculture Commodities
- import goods for which the
international price is less than the
domestic opportunity cost of
producing an additional unit at home
- export products for which the
international price is higher than the
domestic opportunity cost of
producing an additional unit

International Trade in
Agriculture Commodities

International trade rests on

possible difference among
countries in the rates at which
production of one item can be
replaced by another through
internal reallocation of resources
Principle of comparative advantage
is symmetrical.

International Trade of Ag.

Commodities - Indian
context
Till 1990, international trade in

agriculture commodities was perceived

as residual phenomenon
- Based on difference between domestic
production and effective demand
It was controlled by Govt.
- quantitative restrictions: quotas,
minimum export price
- canalization: trade only through State
Trading Corporations (STCs)

International Trade of Ag.

Commodities - Indian
context

Rationale for protected trade

- to maintain the domestic prices
of agriculture commodities at a
level that are commensurate with
average income
- stability in domestic prices
- balance of payment constraint

New Agriculture Trade

Policy

All Agriculture imports other than cereals,

oilseeds and edible oil have been
decanalised
All agricultural exports, except onion have
been decanalised
Pulses, paddy and coconut: licensing
Sugar, cotton: quantitative ceilings
Groundnuts, tobacco: minimum export
price

Measures of International Price

Competitiveness
Item

Value of Output
Value of Input
T
NT
T
NT
-------------------------------------------------------------------------------------------Domestic
A
B
C
D
Price
Economic Price
(a) Border price
E
G
(b) Opportunity
F
H
cost
Nominal Protection Coefficient (NPC) = A/E
Effective Protection Coefficient (EPC) = (A-C)/(E-G)
Effective Subsidy Coefficient (ESC) = [(A-C)+(H-D)]/(E-G)
Domestic Resource Cost Ratio (DRCR) = (H-F)/(E-G)

Border price

Exportable item:
- the domestic good competes in a
foreign port
- relevant border price is f.o.b price
(say at New York), net of the
transportation cost (domestic and
international), port clearance
charges, marketing costs.

Border price

Importable items:
- the competition is supposed to be
taking place in a domestic port
- relevant border price to be
compared to farm gate price would
be c.i.f price at our port plus port
charges, domestic transport cost
and other handling & marketing
cost.

Nominal Protection Coefficient

(NPC)

A value of NPC greater than unity

means government is protecting
the commodity
- (under free trade, the price would
be lower)
A positive value of (1-NPC) would
measure the degree of
competitiveness of the commodity

Effective Protection Coefficient

(EPC)

Calculation of EPC requires knowledge of

input structure for the commodity
In calculating the denomination of EPC, the
border price of tradable inputs must always
be calculated under the importable
hypothesis.
If value of EPC>NPC ?
- the domestic processors cum traders are
being accorded protection to tradable inputs
through govt. policy as they are realizing
higher profits as compared to free trade.

Effective Subsidy Coefficient

(ESC)

Subsidies on non-tradable inputs

(electricity, irrigation, credit) exist.
It takes care of distortions in the
markets of both tradable and nontradable inputs
It is the most complex measure of
competitive analysis

Domestic Resource Cost Ratio

(DRCR)

It computes the value of domestic primary

and non-tradable resources in order to earn
or save a unit of foreign exchange through
production and exchange of the commodity
A value of DRCR less than unity implies that
the industry is using less of domestic nontradable resources as compared to value
addition through use of tradable resources.
- Hence the industry is said to be
internationally competitive from the social
welfare point of view.

Issues

Competitiveness (cost and quality)

Robustness (sensitivity analysis)
- international price (highly fluctuating)
- international transport cost
- domestic cost of cultivation
Mechanisms to increase exportable surplus
Impact on domestic economy safety nets
Benefit distribution