Introduction:

Pakistans agriculture sector contributes to the economic growth through a variety of channels among which self-reliance in food, provision of raw materials to industry; earning of foreign exchange through agricultural commodities and products; and providing employment to a large portion of population are worth mentioning. Firstly, the sector is very volatile to international conditions in most of the developing countries as well as in Pakistan. Highly inelastic demand for agricultural products, product and market concentration along with other tribulations have confined the agriculture sector to play its potential role in the economic development. Secondly, the increase in liberalization and trade in crops further constrain the self-reliance of countrys food industry. Cereal crops i.e. wheat,maize and rice are the main source of food reliance and also the major foundation for earning the foreign exchange. The temporal variability in the growth rate of food crops3 is extremely high i.e. it varies from -9% to15% per annum Increase in the demand of bio-fuel at the world level accelerates the requirement of cereal crops and results in higher prices. Managing Natural Resources for Sustaining Future Agriculture Research Briefings Volume (1), No (3), 2009Naila Afzal1 and Dr. Shahid Ahmad2 http://upload.wikimedia.org/wikipedia/commons/3/36/Agriculture_Input_Efficiency_in_Pakistan .pdf Agriculture, which is the largest sector of the national economy in terms of its contribution to total employment, Agriculture fuels Pakistans export base as it is the main supplier of raw materials for the export oriented industry(mainly textiles) The private sector owns agricultural land and generates primary and value added agricultural output. Public sector involvement in the agriculture sector is mainly concentrated in providing and maintaining irrigation infrastructure and developing waterways for cultivation as well as providing agriculture extension services and supporting agriculture research. Agricultural prices are important economic variables in a market economy. Price relationships have a significant influence on decisions relating to the type and volume or agricultural production activity. They provide a measure for reaching judgment on policy formulation and administrative and executive action.The major issues pertaining to the agriculture sector from a private sector perspective include distorted agricultural input and output pricing.price distortion mean , Deviation of prices from the natural or normal size due to the application or withdrawal of a force (stress). Two type of price distortion in agriculture 1.input price distortions 2. Output price distortions.
Read more: http://www.businessdictionary.com/definition/distortion.html#ixzz1kBwQ1bEF

litrature review: A recent IMF paper8 concluded that in addition to removing market distortions, there is a need for fundamental improvements in the market mechanisms in the agriculture sector, including reduction in government interventions and enforcement of more competitive behaviors. http://www.adb.org/Documents/Assessments/PrivateSector/PAK/Private-Sector-Assessment.pdf ASIAN DEVELOPMENT BANKDecember 2008

He further argued that in the presence of past pricing distortions, output losses were huge in Pakistan, to the tune of 10 percent a year for cotton and 6 percent a year for wheat for the mid1980s (Faruqee 1995). As with most agricultural commodity markets, the rice market also

suffers from the cobweb phenomenon, where price fluctuations are caused by the time lag between making the decision to cultivate the crop and the ultimate selling of the crop. To decrease the risk faced by farmers from fluctuating prices, the government has set support prices for various varieties of rice (Ahmed, et al., 2000).

Overview:
Output price; Agricultural commodity markets are notoriously volatile and the current price spikes for wheat, coarse grains, rice and oilseeds are neither the only nor the most significant ones to occur in the last 40 years. It is also important to recall that prices for meat, poultry and sugar products have seen no or more modest increases recently. World prices of wheat, coarse grains (in particular corn), rice and oilseed crops nearly doubled between 2005 and 2007 and continued to rise in early 2008. These prices, along with those of meat, sugar and dairy products, are likely to ease somewhat in the next 10 years, but are likely to stay well above the average of the past decade. This price spike in agricultural commodities is due to a combination of factors, including droughts in key grain-producing regions, low stocks of cereals and oilseeds, increased use of feedstock to produce biofuels and rapidly rising oil prices. The fall in value of the US currency is also partly responsible, since the price for these commodities is typically quoted in US dollars. An unsettled global economy also appears to have contributed to a substantial increase in speculative interest in agricultural futures markets, helping to boost prices. These high prices drive up the cost of food and will hit poor and hungry people hardest, particularly the urban poor in low-income countries. Foodimporting developing countries overall will have to spend an even higher share of their limited income on food. And this is not only a short-term problem. The OECD expects prices to come down again in future, but not to their past levels. On average over the coming decade, prices in real terms of cereals, rice and oilseeds are projected to be 10% to 35% higher than in the past decade. Tight market conditions for essential agricultural commodities pose policy challenges for national governments as well as for international organisations. Prices rise when supply does not keep up with demand. Between 2005 and 2007, unfavourable weather in major producing regions, pushed crop yields below long term average levels. World cereal output in 2007 was just 3% higher than in 2005, while oilseed output fell, although vegetable oil production rose by 7% due to rapid growth in palm oil output. At the same time, demand for wheat, coarse grains and vegetable oil increased two percentage points more than output. More than half of the increase in use of both coarse grains and vegetable oil was due to higher use in the biofuels industry. The rest of the increase came from a rise in demand for cereals and vegetable oil for food and for cereal use for feeding livestock, primarily from countries outside the OECD area. The production shortfall would in itself have been enough to send prices higher, although under normal conditions stocks would have helped dampen the price rise. But stocks were already low in 2005 and they kept declining because of bad weather and low yields in major exporting countries. Supply shortfalls, low stocks, the continued increase in food and feed use, and the high growth in demand for biofuels all coincided to make the price increases exceptional. More recently, there has also been a significant increase in investments in agricultural derivative markets. It is likely that this activity has helped boost short term futures prices and is an additional factor in the price spike. Some of the factors behind the price hikes are transitory while others may be more permanent. Making that distinction is an important ingredient in projecting market developments over the coming decade and in designing good policy to deal with any adverse consequences.

Agriculturists and farmers have termed the year 2011 as black year for agriculture as imposition of General Sales Tax (GST) on agriculture inputs/implements and withdrawal of subsidies have multiplied cost of farming in the country. Speaking to Profit, Pakistan Agricultural Scientists Association (PASA) President Jamshed Iqbal Cheema estimated that on the one hand withdrawal of subsidies and levy of GST had increased the input cost by over 35 per cent, while on the other hand agriculture produce prices , except wheat, dropped by nearly 25 per cent that caused huge losses to farmers

http://www.fao.org/giews/english/otherpub/PakistanImpactAssessment.pdf

The poorest households now need to spend 70% or more of their income on food and their ability to meet most essential expenditures for health and education is severely compromised. In addition, the diminished purchasing power has severely impaired the capacity of the poor households to seek health care, and children education, particularly girls. This situation has further exasperated by the falling nutrition level, particularly for already malnourished children. High food prices affect urban and rural households differently, as income, food sources, expenditure patterns as well as coping strategies vary. The survey further indicates that more than 40 percent of households reported no change in income since last year, while a larger share in urban areas observed a decrease than an increase in income. For farmers, the main determinant is the farm gate price they are able to get for crops, while for the 45 percent of the population who are working as employees, it is the change in the real wages, eroded by inflation. The survey also shows that as a result of higher food prices, food expenditure

increased disproportionally to total expenditure compared to base year 2005-06. In relative terms, the increase is more pronounced in rural areas, where food expenditure rose by 10 percent and total expenditure by 4 percent, though in absolute figures the increase has been higher in urban areas. As indicated earlier, the poorest have been severely and disproportionally affected by higher food prices. Simulation results show that the poorest quintile spends 13 percent more on food than two years ago, while the richest quintile spends only 5 percent more. The Simulation results show an increase i
AGRICULTURAL PRICE POLICY AND ADOPTION OF NEW TECHNOLOGIES A price policy may serve as an incentive for farmers to increase their production. There is convincing evidence in Pakistan that a shift from an unfavorable to a favorable price policy for agriculture was the main motivating force behind the Green Revolution in Pakistan (Aresvik, 1967; Dorosh, 2006). Some important dimensions of the domestic agricultural price policy are discussed below. 6.1 Input Subsidies Pakistan has subsidized agricultural inputs since the mid-1950s. Initially, chemical fertilizer was subsidized in order to popularize its use (Naqvi, 1989; Khan, 2006; Hamid, 2008). The list of subsidized inputs and the rate structure of the subsidies were expanded in later years so that towards the end of the sixties, almost all the agricultural inputs including fertilizers, insecticides, seeds, irrigation water, tube-well installations, and the operation and purchase of tractors and tractor-related equipment were subsidized in one or the other form (Aresvik, 1967; Kuhnen & Fritjof, 1989). In the 1970s, subsidies were curtailed to some extent in response to input price increases that occurred in the wake of world worldwide recession, oil embargo, credit crunch, war with India, and steep devaluation of Pakistani Rupee (Chaudhry, 1982). Although subsidies were applicable to most inputs during the seventies, government decided to under pressures from the IMF and the World Bank resolutely remove them from the beginning of the 1980s (GOP, 1980). As a consequence, there was a total withdrawal of subsidy from seeds, insecticides,

tubewells, and tractors. Phased withdrawal of fertilizer subsidy was also under taken, culminating in the case of nitrogenous fertilizers in 1984-85 and in the case of phosphoric and potash fertilizers in 1989-90 (World Bank, 1996).A perusal of relevant data on subsidies presented in Table12 can enable many arguments. First, the inputsubsidies trended continuously up over the period under consideration. Second, in the case of implicit subsidies, irrigation water accounted for as large a share as almost 60 percent of the total subsidy, followed by institutional credit and electricity. Third, many land arguments about the size of the agricultural input subsidies have been made in most of the government meetings and public forum, they hardly exceeded Rs. 2 to 3 billion for most of the period, and never exceeded Rs. 8 billion a year. Finally, as a percentage of budgetary expenditure, total subsidies on agricultural inputs fell from nearly 10 percent in 1979-80 to 1.5 percent in 2000. International Journal of Economics andManagement SciencesVol. 1, No. 1, 2011, pp. 5174http://www.managementjournals.org/ijems/IJEMS-11-1128-aug.pdf