The Hindu Business Line : Fixing the fair price of natural rubber

With the highest productivity and the lowest production cost among the big rubber producers, India should not have any problem accepting that Rs 34-36 per kg is a fair price for the commodity under present conditions.

WITH no authoritative study done yet on what the fair price for natural rubber should be, the subject has been a source of perennial controversy.

Rubber growers are chary of coming out with their production cost, as it may impinge on their interests, especially if the price demanded cannot be justified by the production cost plus reasonable profit.

The Rubber Board is in a position to work out the production cost, yet it has not done so. Even if such an exercise has been done, the findings have not been made public.

The Rubber Board has an excellent statistical wing. One would not err in assuming that the Board has been updating the production cost details every year. Since the Finance Ministry's Cost Accounts Branch had held detailed discussions with the Rubber Board for a study it conducted in 1998 on the production cost of natural rubber, the Board would have assessed the production cost. It would not be incorrect to assume that the Rubber Board updates it each year, as the Centre often seeks information from the respective agencies about the production cost of various crops.

Thus, the reason for the Board not making its findings public is either the one quoted above, or because its assessment of cost and variables are questionable. That is, there could have been some padding up as it is only natural that in such matters the Board's approach will be tilted in favour of the growers.

Though 92 per cent of the rubber production in the country is from Kerala, looking at the price trend of various other crops in the State over time, and comparing the same with that of rubber to assess its fair price, one is beset with a number of imponderables.

The price for copra has been down and under for more than five years. Hence, a comparison with the price trend of copra will not be right. The same is the case with tea. Then again, the gestation period differs from crop to crop. The productivity growth could be at different levels. The production cost of various crops could have gone up over the years, but not at the same levels. Hence, this route has to be abandoned.

The major rubber producing countries exchange information annually on various aspects, including the production cost. According to information gathered, for 2001 the production cost in the major rubber producing countries — Thailand, Indonesia, Malaysia and India — was in the vicinity of Rs 35 a kg.

The figure of Rs 35 a kg, to a large extent, is corroborated by the benchmark price determined by the Government in 1998 after a detailed cost study by the Costing Branch of the Finance Ministry. It is important to note the Costing Branch has considerable experience in conducting such studies and, hence, its findings have much credibility. The price fixed based on production cost plus profit was Rs 34.05 a kg. If the profit is reduced (cost: Rs 33 a kg) then the same will be more or less in line with the production cost of Rs 35 a kg, that is, an increase of Rs 2 in the intervening period.

Many growers have indicated verbally in the last few months that a price of Rs 36 a kg is good for natural rubber. They say that a price of Rs 30 a kg means loss; a price of Rs 32 a kg will meet the production cost; Rs 34 a kg means profit; and Rs 36 a kg will bring in good profits.

Based on these factors, the current production cost of rubber for small growers should be around Rs 34 a kg.

The following are the factors/developments related to the subject:

The Central Government fixed Rs 34.05 a kg as the benchmark price for rubber (RSS-4 grade) in September 1998.

The statutory minimum price for the same grade of rubber was fixed at Rs 32.09 a kg in September 2001.

The benchmark price was based on the cost study conducted by the Costing Branch of the Finance Ministry. Discussions with officials of the Costing Branch indicated that the price fixed is a cost plus price, that is, the required profit margin has been built in. At the time of undertaking the Cost Study, it was gathered that the growers wanted the market cost of land to be taken into account. However, the Costing Branch's stand was that only the normative cost is taken into account.

The statutory minimum price was fixed by the Commerce Ministry. Discussions with the Commerce Ministry officials indicated that the price was fixed using the following method:

"Average price for RSS4 rubber in the international market for a specific period in the past was taken as the basis. On that price, expenses incurred in importing, such as freight, customs clearance charges and so on, were added. Only the import duty of 25 per cent was not added. The price, thus, arrived at has been notified as the MSP."

In April 2003, The Centre announced the Price Stabilisation Fund, with Rs 500 crore, for rubber, tea, coffee and tobacco. When the market prices of these crops become uneconomical, the participating growers to the Fund will receive a pre-determined amount.

A formula was built into the scheme to determine whether the market price has become uneconomic. Applying this formula to rubber, it is seen that participating growers will be entitled to cash compensation when the market price goes below Rs 34 a kg.

It is important to note that be it the benchmark price, statutory price or normative price under the Price Stabilisation Fund, they all range between Rs 32 and Rs 34 a kg. All these prices are determined by the Centre. From this it flows that currently a price of Rs 34-Rs 36 a kg is a cost plus price for natural rubber.

When the above prices were fixed, the growers were happy since the market prices prevailing in the respective periods were lower than the benchmark price/statutory minimum price. They hoped that the market price would rise to the ones fixed by the Centre. However, once the market prices crossed the prices fixed by the Centre, the growers demanded higher prices.

The fair price for rubber can be assessed through two other methods:

Comparative productivity levels of rubber in major rubber producing countries and the return obtained by growers in those countries; and

the farmgate realisation (the price that that growers get compared to the final sale price to consumers) in the major rubber producing countries.

The Table shows the productivity levels of rubber and the farm gate realisation in the four major rubber producing countries. Extrapolating the same, the return that the rubber growers in the four countries get have been arrived at.

The per capita income of the other three countries is higher than that of India, and so also the cost of living. Yet, if a price of Rs 35-36 a kg, is accepted in all those countries as fair price, then should a lower price in India — taking into account the higher productivity and farm gate price — not be adequate?

The growers/Rubber Board often state that the cost of production in India is higher, particularly the labour cost, though both are chary of coming out with comparative statistics. With higher per capita income in other countries, this argument, that is, the higher labour cost does not hold water. Moreover, when the average holding is small the argument of higher labour cost does not hold good. Very few smallholdings employ labour, as proprietors become self employed.

Yes, the notional cost for this working has to be in-built in the price of NR. But then such notional cost cannot be different among the four countries because of more or less akin level of development and per capita income. The cost of other inputs, such as fertiliser, pesticide, fungicide, and so on, is not significant enough.The stand of the growers and the Rubber Board that the production cost in India is higher has been refuted by the International Rubber Study Group (IRSG) London. This is an Association of which all large rubber-growing and consuming countries (except India) are members. The organisation continuously studies various aspects of natural rubber.

This what Mr Budiman, Secretary General of IRSG had to say on the matter: "India should not have any problem with rubber because it has the highest productivity and the lowest production cost among the major producer countries." (Interview published in Rubber Asia, January/February 2003.)

In 1996 there was a severe shortage of rubber in the country. Rubber imports was restricted at that time. This resulted in the market price spiralling up to Rs 60 a kg. This price had no relation to the production cost. But since then, the rubber growers have been claiming that this is the fair price.

Similarly, in May 1992, again due to severe shortage, the price of rubber started going up and is currently at Rs 50 a kg. Again, this price has no relation to production cost. The current production cost of rubber is Rs 33-Rs 34 a kg, and a market price of Rs 35-Rs 36 a kg is a cost plus price, that is, a profitable one.

(The author is Director-General, Automotive Tyre Manufacturers Association, New Delhi.)

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