average prices to to give estimates of marketing costs in other years. This same general approach was also used in treating rubber, sugar and cotton, but as regards the first two it was incorporated in the treatment of processing costs, discussed separately below.<sup>9</sup>

# _Processing costs_

A number of farm commodities are processed before they are traded internationally, or even very widely in the domestic market. The methods used to treat processing costs are described in the original commodity studies and in the background papers. In three cases ( rice, rubber and copra) the processing margins were not separated, so the protection estimates are for the combined activity of growing and processing. In the case of rice, to the extent that rice mills possess some local monopsony power,<sup>1 0</sup> it is possible that changes in milling margins rice would not be fully reflected in the prices of paddy, and the nominal protection estimates for rice would not accurately represent the incentives to paddy farmers. It was originally intended to separate milling from paddy fanning, but we were not able to obtain satisfactory India-wide data on processing margins or on competition in the rice milling industry. Among other things, to do so was complicated by the need to separate out the processing from the trading functions of the mills. However Sharma's study of marketing and transport costs suggested that rice milling and marketing by private traders is highly competitive, and we have judged that our estimates of nominal protection for milled rice are generally reliable indicators of farm level incentives for paddy. As regards rubber and copra, according to the original commodity studies, the processing margins required to transform latex to smoked rubber sheets and coconuts to copra are very small relative to the international prices of these commodities, and in any case are typically performed by the farmers themselves or in villages in the farming areas. Consequently we believe that the nominal protection estimates for traded rubber sheets and for copra are also reasonably reliable estimates of protection for rubber and coconut farming.

For three other commodities-groundnuts, cotton and sugar-we separated processing from the farming activity. Groundnuts traded internationally are shelled, and so the original study allowed for decortication costs and weight losses (in addition to domestic marketing and transport costs) so as to be able to compare them with the domestic groundnuts as sold by farmers in pods. In the case of cotton, farmers produce seed cotton ( kapas) which is ginned before the cotton lint and cotton seed are traded. The incentive for farmers therefore depends on both the nominal protection of the cotton lint and of the cotton seed by-product. These two were estimated separately, and after allowing for ginning margins, the nominal protection of seed cotton was derived. Although the nominal protection of cotton lint is the main determinant of seed cotton nominal protection, the nominal protection of the seeds turned out to be of some significance. In particular, from the early 1980s onwards especially, the nominal protection of the exportable cotton lint varieties considered was negative in most years, but this was partly offset by high nominal protection of the cotton seeds, which reflected the general import substitution drive and consequent high domestic prices in the oilseed industry during this period.

9 For some commoditie **s** , uch as wheat, which are harveste **d** uring a short period during the year, and must be held for relatively long periods if they are to supply domestic buyers later in the year, the marketing adjustment which should in principle be deducted from reference prices would need to take account of the interest and other costs and could be considerably larger than the adjustments we have made. This issue is discussed in the book, but is not dealt with in the background papers. 10 A study by Subbarao (1978) of rice milling in Andhra Pradesh in the 1970s found that local rice mills had a certain degree of monopsony power.

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