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Financial profit, as determined by the financial flows moving upstream in the food chain,
can play an important part in the farmer's decision as to what commodities to plant, whether
to plant food crops or non-food export crops. It is not the only factor, however. Many
farmers are quite risk-averse. They perceive themselves to be operating in an uncertain
environment, in both physical and economic terms. Given the varying climatic conditions in
their country, some crops are more variable in yield and susceptible to drought or flooding
than others and will be less attractive. In economic terms, some crops may face fluctuating
prices on world markets, or may face a higher probability of government intervention in
domestic markets. When this is the case, farmers may retreat into producing primarily for
subsistence, thus reducing their dependence on the market, but also the flow of food
commodities onto the market.

The decision to plant a food commodity is not made in isolation, but in relation to the returns
to be made from planting other food or non-food crops. Government can influence this by
maintaining the price of food commodities relative to other crops. Attempts to boost food
production should not be based solely on raising the price of food crops, however. A proper
analysis has to be undertaken as to the knock-on effects of doing this, in terms of labour and
input availability. Box 3.1 shows how emphasis on price policy alone can backfire.


 Box 3.1 Farm Households in Malaysia

 In general, it is assumed that if the price of a commodity such as rice increases, while other
 commodity prices stay unchanged, the output of that crop will rise, at least by a small amount.
 However, farm households have to make decisions about how to allocate their resources among
 different possible uses, only one of which is the production of the staple food crop. They can hire
 labour in and out, which will affect the level of activity on the farm. Also labour can be used on non-
 agricultural domestic activity. Finally, even if there is an increase in output of the staple crop. this
 does not necessarily result in an increase in rice marketed and passed on through the commodity
 chain.

 A study in the Muda River Valley in Malaysia looked at both the household and the market response
 on rice production and marketed surplus of rice of an increase in the market price of rice. When the
 response of the average farm household was examined in isolation, then for a 10% increase in the
 price of rice, output of rice increased by 6% and marketed rice increased by almost 7%. Farm
 households reduced their own input into rice production by 6% but the demand for hired labour
 increased by 16%. However, when the impact of this rice price increase was allowed to work through
 the market as a whole, total rice output actually fell slightly. This was because the demand for hired
 labour rose so much in response to the output price rise that rural wages went up by 13%, thus
 significantly increasing the cost of production and reducing profitability of market production. On
 farm consumption of rice rose by 3% but marketed rice fell by 1%.

 Adapted from: Barnum and Squire, A Model of an Agricultural Household, World Bank, 1979.



The impact of prices is, nonetheless, crucial. A recent study in Thailand, using a technique
called the Policy Analysis Matrix (PAM), examined the relative profitability of rice and
soybean in a number of different regions of the country (Yao, 1995.). The Thai government
has been putting resources such as subsidized credit and increased extension into
encouraging diversification from rice into soybean. However, the PAM analysis showed that


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