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 The Price of Childhood 

 on the link between prices paid to farmers and the use of child labour in cottonseed production in Andhra Pradesh, India 

title page - contents - list of tables - section-I (introduction) - section-II - section-III - section-IV (summary/conclusions) - appendix - notes


SECTION-III:
COST IMPLICATIONS OF REPLACING CHILD LABOUR
WITH ADULT LABOUR

Everyone agrees about the need to replace child labour with adult labour, especially in the context of adult unemployment. However there are very different views about how much this replacement is going to cost and who is going to pay for it. What is the price of replacing child labour in cottonseed - or in other words - what is the price of child freedom from labour and who is going to bear it - farmers, consumers, or the companies?

There are two views. On the one hand, seed companies argue that since farmers have good profit margins under the current procurement price, that farmers should bear these costs entirely on their own. The child rights advocacy groups and farmers’ organizations, on the other hand, argue that with the current procurement prices of companies, seed farmers cannot afford to pay better wages to the labourers and still make adequate profits which would enable them to continue cultivating cottonseeds. Unless better wages are paid, farmers would not be in a position to attract adult labourers to work in their fields in sufficient numbers. Ironically, this argument is often also adduced in order to justify the use of child labour in cottonseed production - it is highly cost effective. The implications of this argument are that replacement of child labour with adult labour would involve substantial increase in production costs and would require a significant rise in the market prices of seeds. Proponents of this view argue that compared to ordinary seeds, the price of hybrid seeds on the market is already very high and therefore that a further rise in the price of hybrid seeds would price them outside the reach of small and marginal farmers, who are already burdened with an increase in the costs of other inputs. In this section we attempt to estimate the cost of replacing child labour with adult labour. We then investigate how this cost would influence different players in the cottonseed business: (a) farmers’ profits, (b) the seed prices faced by consumers and (c) the profits of seed companies.

Estimation of the Cost of Substituting Child for Adult Labour

The replacement of child labour with adult labour is costly because child wages are so much lower than adult wage (both adult wages within cottonseed as well as outside the cottonseed sector). Moreover, farmers can squeeze out higher productivity from children per day: children will work longer hours, will work much more intensively (particularly in cross-pollination) and they are generally much easier to discipline compared to adult workers, whether through inexpensive treats or through verbal or physical abuse. In short, the switch to adult labour involves not only a rise in wages, but also a rise in number of adults needed to make up for hours lost through shorter days and lower productivity. Below we present estimates of the costs of replacing child labour 100% with adult labour. We use two different methods. Method 1 uses costs data on the partial replacement of child labour which has taken place from 2002-04 - we then use this data to project forward what a 100% substitution of child labour would amount to - we label this the retrospective estimation. The second estimation method - labelled the commensurate wage estimation - relies on wage differences between child and adult labour in cottonseed vs. wages outside based on the assumption that farmers must attract adult labourers to the cottonseed fields with wages (and conditions) commensurate with fieldwork off cottonseed fields. Method 2 also uses data the additional labour required on adult farms vs. that needed on combined child/adult farms.

Method 1: Retrospective Estimation of the Cost of a Complete Substitution of Child for Adult Labour

The analysis of trends in cultivation costs, workforce composition and wage structure over 2002-04 presented in section-II clearly indicates that the changes in workforce composition and wage structure have a significant bearing on the total cost of cultivation. In section-II we estimated the increase in cost derived from the partial replacement of child labour with adult labour in the survey region from 2002/3 to 2004/5. There we explained that the rise in labour costs is almost entirely down to the rise in cross-pollination costs which rose from Rs. 23,306 to Rs. 29,239 per acre per season (Rs. 5934 or a 25.5% rise over the 3 years). Cross-pollination costs rose because of

  1. a rise in cottonseed wages by 16%11 in line with inflationary wage increases in agricultural field work outside of cottonseed production, and
  2. the replacement of some child labour with adult labour - which both pushed up wages further as well as increased total amount of labour required.
In section-II we argued that out of the 25.5% rise in costs, if one assumes that 16% of the rise in wages would have occurred regardless of the substitution, then one could estimate that the remaining 9.5% (25.5-16.4) was the direct result of the substitution of adult for child labour. Thus we found that farmers spent an average of Rs. 5959 more on cross-pollination costs in 2004 than they did in 2002, of which Rs. 3746 is due to a 16% increase of wages and remaining 9.5% or Rs. 2213 is the direct result of substitution of adult for child labour.

Rise in Adult Labourers Calculation - In order to calculate the cost of a 100% replacement of adult with child labour, we must first look back at Table 4 in section-II which is summarised in the table below. We first need to estimate the additional labour needed when we replace child labour 100%. We calculate that since a fall of 1.4 child labourers is equivalent to an extra 0.46 adult labourers, a further fall of 4.88 child labourers is associated with a 3.5 x 0.46 = 1.61 rise in labourers needed per acre per day – this is 17.5% more labourers when compared to the 2002 total requirement. This rise would bring total labour required up to 11.26 (9.65 +1.61 = 11.26). So we now can estimate a projected 100% decline in child labour.

Summary of Table 4: Work Force Composition Per Acre Per Day: Adult and Child Labour (Paid and Family) From 2002-2004 - Projected 2005

 
2002
Change
2004
Change
Projected 2005 -
0% Child Labour
Child Labour
(Paid and Family)
6.28
(68.3% of workforce)
-1.4
(-fall in 17.7 percentage points)
(22.3% fall from 2002)
4.88
(50.6% of workforce)
-4.88
(needed fall in 50.6 percentage points)
(100.0% fall from 2004)
0
(0%)
Adult Labour
(Paid and Family)
2.91
(31.7% of workforce)
+1.86
(+rise in 17.7 percentage points)
(20.2% rise from 2002)
4.77
(49.4% of workforce)
+6.49
(needed rise in 49.4 percentage points)
(100.0% rise from 2004)
11.26
(100.0%)
Total
9.19
(100.0%)
+0.46
9.65
(100.0%)
+1.61
11.26
(17.5% more labourers than in 2002)

In the table above we can see that the proportion of adult labour (both paid and family labour) in the total workforce rose from 2.91 persons per acre per day, or 31.7% of the workforce, in 2002 to 4.77 persons per acre per day or 49.4% of the workforce in 2004 (a rise of +1.86 persons per acre per day, or a rise in 17.8 percentage points. The rise in 1.86 adults per acre per day over the period 2002-04 cost farmers an additional Rs. 2213. In order to replace all child labour, it would require a further rise of 6.49 persons per acre per day. This rise in 6.49 adults per acre per day is associated with a rise in Rs. 7723. (This is because 6.49/1.86 = 3.48 and so Rs. 2213x3.48 = Rs. 7723). Thus farmers would need to pay an additional Rs. 7723 (in addition to the extra Rs. 2213 already paid). Moreover, one should add 8% on for wage inflation each year (e.g. 2005 + wage inflation would be Rs. 8340; and by 2006 it would be Rs. 895912. Such wage inflation is highly likely because (a) unlike children, adults have outside wage opportunities and are therefore much more likely to bargain harder for higher wage and (b) farmers will need to attract adults from higher wage work outside of cottonseed, thereby pushing up cottonseed wages (this second assumption is the basis of Method 2 below).

Method 2: Method 2: Commensurate Wage Estimation of the Cost of a Complete Substitution of Child for Adult Labour

A superficial analysis of wages show that daily wage rates paid to both children and adults in cottonseed work are not far below local daily wages for other agricultural fieldwork. However, when one considers the long work days in cottonseed sector, one finds that hourly wages are significantly below the market wages. Average hourly cottonseed wage is Rs. 3.25 whereas average hourly wage in local agricultural work is 3.8 for women.

Moreover, within cottonseed farms the hourly wage difference between child and adult is high because of the long days worked by children: the average hourly wage for a child is Rs. 3.1 where as adult labour is paid Rs. 3.4.

Average Wages within and outside cottonseed: Average between Kurnool and Mahaboobnagar 2004

 
 
Necessary Rise
Child Wage - within cottonseed
3.1
would need to rise .7 or 22.6%
Adult Female Wage - within cottonseed
3.4
would need to rise .4 or 11.8%
Adult Female Wage - non-cottonseed market rate
3.8
 

Using Method 1 we may have underestimated the full cost of replacement of child labour, because adult labour would need to be drawn in from non-cottonseed areas. This suggests that we should use not the Rs. 3.4, but the higher Rs. 3.8 wage which exists outside cottonseed in these regions.

Compared to adult female market wages outside cottonseed farms, the wages paid to children in cottonseed farms are 22.6% below such market wages and wages paid to adult labour in cottonseed are 11.8% below market wages. If farmers want to attract enough adult labourers to their fields, then, farmers need to raise wages to the higher market wage level.

Our Summary Table 4 (above) indicates that in 2004 children account for 50.6% of the total workforce and remaining 49.4% are adults. The total average cost of cross-pollination per acre in 2004 is Rs. 29,239, out of which 50.5% was paid to children (Rs. 14,766) and 49.5% to adults (Rs. 14,473). A 22.6% increase on child wage payment (Rs. 14766) equals Rs. 3334; an 11.8% increase on the adult wage payment (Rs. 14473) equals Rs. 1703. Thus the total increase in cost is (Rs. 3334 + Rs. 1702) = Rs. 5036.

The substitution of children with adults would also involve in additional labour. Analysis of labour data on farms using completely child labour and farms using completely adult labour indicates that farms using completely adult labour are using 20% additional labour. In farms using completely child labour the daily cross-pollination work is managed by 10 children whereas in farms using completely adult labour this work is managed by 12 persons (note that this 20% figure is very close to the figure obtained in Table 4, 17.5% additional labour than in 2002).
  • Additional labour requirement to replace 50.5% child labour results in 10% increase in labour requirement.
  • 10% additional labour costs = Rs. 2924.
Thus the total substitution costs = Rs. 5046 + Rs. 2924 = Rs. 7970.

To sum up, using retrospective data we estimated the amount of substitution costs as Rs. 7723. Using wage and work output data we estimated this figure as Rs. 7970. Though both the methods are useful for estimating the costs the method of using wage and work output variations data is more valid because retrospective data underestimate the true cost of the substitution to some extent. For the purpose of analysis in the present study we use the estimation figure of Rs. 7970 derived through wage and work out variations data.

Estimation of the Necessary Rise in Procurement Price
The additional amount of Rs. 7970 raises the total cost of production by 12% and cost of production of per Kg seed by Rs. 3713. In order to cover this additional amount Rs. 7970, a 12% increase over present procurement price is required. During 2004-05 seed companies paid Rs. 305 (Rs. 229 per 750 gram packet) on each kg of seed and this would increase to Rs. 342 (Rs. 256.5 per 750 gram packet) if adult market wages are applied.

Additional Costs if Official Minimum Wages are Applied
The above estimates are calculated on the basis of prevailing market wages. As we already reported in section-II the wages paid to labourers in cottonseed as well as local market wages in outside cottonseed farms are far below the official minimum wages specified by the government. Under The Minimum Wages Act 1948 the Andhra Pradesh Government in 2002 fixed the daily minimum wages to be paid for unskilled wage labour in agricultural sector at Rs. 52. If farmers have to comply with the official Minimum Wages Act the cost production will increase significantly. Currently the average daily wage rate in cottonseed farms is only Rs. 28. If minimum wages are applied the labour costs for cross-pollination will increase by 85.7% (from Rs. 29,239 to Rs. 54,300).

The additional amount needed to cover minimum wages for all labour needed for one acre per season is Rs. 25,061.

The additional amount of Rs. 25,060 raises the total cost of production by 38.9 % and cost of production of per Kg seed by Rs. 115.5. In order to cover this additional amount of Rs. 25,060, a 37.7 % increase over present procurement price seed is required. During 2004-05 seed companies paid Rs. 305 (Rs. 229 per 750 gram packet) on each kg of seed and this would increase to Rs. 420.5 (Rs. 315 per 750 gram packet) if minimum wages are applied.

Difference between Procurement and Market Prices

The difference between the procurement prices of the companies and the price at which they sell in the open market is significant. Table 18 indicates that what companies pay to the farmer for producing the seed is several times less than what they receive by selling the same seed in the market. The table also presents the difference between cost of production, procurement and market prices. Cottonseed trading is clearly highly lucrative: depending upon the type of hybrid seed the difference between procurement prices and market prices of seed varied between 3.6 to 12 times. Currently three types of cotton hybrids are produced and sold in the market i.e non-BT hybrids, official BT hybrids and unofficial BT hybrids. The government of India so far gave legal permission for market BT cotton hybrids to only few companies. These companies are Mahyco–Monsanto, Raasi Seeds, Nuziveedu Seeds and Ankur Seeds. Monsanto has patent rights over BT gene and it has sublicensed its gene to other companies. Monsanto collects huge amounts of money as a royalty from these companies. Official BT cotton hybrids are those approved by the government. In addition to officially approved BT cotton hybrids there are several BT cotton hybrids which are illegally produced and sold in the market. Unofficial BT cotton hybrids are those which do not have official permission for production and marketing. There are several unorganized sector players who are involved in production and marketing of these illegal BT cotton hybrids. Companies involved in production and marketing of non-BT hybrids sell the seed at 3.5 times higher amount than what they pay to farmers (procurement price is Rs. 293 whereas marketing price is Rs. 1055). Compared to non-BT hybrids, the gap between procurement price and marketing prices of BT hybrids and unofficial BT hybrids is huge. Marketing prices are 12.1 times more in case of official BT (procurement price is Rs. 293 whereas marketing price is Rs. 3555) and 4.5 times more in case of unofficial BT hybrids.

Though companies obtain huge earnings from selling seed, they do not seem to be making any rational calculation about the cost of cultivation when fixing the procurement price to be paid to their seed farmers. With the current procurement prices of the companies, seed farmers are forced to minimize wages to the labourers. Unless better wages are paid, farmers cannot attract adult labourers to work in their fields.

Table 18: Per Kg Average Cost of Production, Procurement and Marketing Prices Of Different Proprietary Cotton Hybrid Seeds Over 2002-03 to 2004-05 (amount in Rs.)

Type of Seed
Cost of the Production for Farmers
Procurement Price
Paid by the Companies
to the Farmers
Seed Organizers Commission Charges
Market Price *
Multiple of Procurement Price
Non-BT hybrids
236
293
20
1055
3.6 times
Official BT hybrids
236
293
20
3555
12.1 times
Unofficial BT hybrids
236
293
-
1333
4.5 times
* Actual price at which company dealers sold seed to consumers in the open market.

Note: While calculating per Kg cost of cultivation of cottonseed the additional output (cotton lint and cotton from male parent) value of Rs. 11,056 is deducted from total cultivation costs. After deducting the income from additional output the total cost of cultivation per acre is Rs. 51,388. Total yield of hybrid seed is 217.5 Kgs.
The government so far gave legal permission to market BT cotton hybrids to only few companies. These companies are Mahyco–Monsanto, Raasi Seeds, Nuziveedu Seeds and Ankur Seeds. Monsanto has patent rights over BT gene and it has sublicensed its gene to other companies. Monsanto collects huge amount of money as a royalty from these companies. Nuziveedu Seeds which has used Monsanto BT gene in its hybrids pays Rs. 2500 for each Kg of seed it sells in the market as a royalty to Monsanto. The market price of Nuziveedu company BT seeds in 2005-06 is Rs. 3890 per Kg.


Effects of the Passing Replacement Costs of Child Labour onto Consumers, Seed Companies and Seed Farmers

The table below presents the rough estimates of the additional costs involved if children are to be replaced with adult labourers. If children are replaced with adult women the total cost of cultivation increases by 12% (Rs. 7970 per acre). A 12% increase in the cost of cultivation means incurring an additional amount of Rs. 37 for production of one Kg seed. The current market price of one Kg seed varied between Rs. 1000 to Rs. 3700 depending upon type of hybrids.

  • If the entire burden is shifted on to the consumer, the price of per Kg seed in the open market will increase - in the case of non-BT hybrids, by 3.5%; official BT by 1% and unofficial BT by 2.8%.
  • If the entire additional burden is shifted on to the seed companies, their current profit margins will decline by 1.3% to 6.8% depending upon type of hybrids14.
  • However, if the total additional burden is shifted on to the seed farmers, there would be a decline of their profit margin by a massive 64.9%.
Even if the burden was distributed equally between farmers and seed companies, then farmers would suffer disproportionately – a 32.4% fall in farmers’ profits, versus merely a 0.6%, 3.4% or 1.9% fall for seed companies.

If minimum wages are paid to all the labourers, then the total cost of production would increase by 37.7% and the cost of production of per kilogram of seed would need to increase by Rs. 115.5.
  • If the entire burden is shifted to the consumer, the rise in the present market price of one Kg cottonseed is 10.9% in case of non-BT hybrids, 3.2% and 8.6% in case of official BT and unofficial BT respectively.
  • If the entire additional burden is shifted on to the seed companies, their current profit margins will decline by 4.2% to 21.3% depending upon type of hybrids.
  • Yet if the total additional burden is shifted on to the seed farmers, their profit margin will disappear and they will have a net loss of 102.6%.
Even if the burden was distributed equally between farmers and companies, farmers would suffer disproportionately, a 32.4% fall in profits versus a 2.1%, 6.1% or 10.6% fall in profits for seed companies.

Table 19: Impact of the Additional Costs Due To Replacement of Child Labour - Effect on the Profit Margins of Seed Farmers and Seed Companies

Name of the player
Present profit margins on per Kg cottonseed
Effect on profit margins if entire burden is shifted
Effect on profit margins if entire burden is equally distributed between companies and farmers
Seed farmer
Rs. 57
64.9%
32.4%
Seed company:
Non-BT hybrids
Rs. 542
6.8%
3.4%
Official BT hybrids
Rs. 2742
1.3%
0.6%
Unofficial BT hybrids
Rs. 940
3.9%
1.9%
If the entire burden is shifted to the consumer, the rise in the present market price of one Kg cottonseed is 3.5% in case of non-BT hybrids, 1% and 2.8% in case of official BT and unofficial BT respectively.

Note: The difference between companies’ procurement price and market prices of the seed is Rs. 762 per Kg seed in case of non-BT hybrids, Rs. 3262 in case of official BT hybrids and Rs. 1040 in case of unofficial BT hybrids.
While estimating the net profit margin of companies Rs. 200 per Kg of the seed in case of non-BT hybrids, Rs. 500 in case official BT hybrids and Rs. 100 in case of unofficial BT hybrids is deducted towards all the expenses incurred by the company - administrative charges, commission given to dealers and research costs incurred for developing seeds etc.

Table 20: Impact of the Additional Costs to Cover Official Minimum Wages for All Labourers - Effect on the Profit Margins of Seed Farmers and Seed Companies

Name of the player
Present profit margins on per Kg cottonseed
Effect on profit margins if entire burden is shifted
Effect on profit margins if entire burden is equally distributed between companies and farmers
Seed farmer
Rs. 57
Loss 102.6%
Loss 51.3%
Seed company:
Non-BT hybrids
Rs. 542
21.3%
10.6%
Official BT hybrids
Rs. 2742
4.2%
2.1%
Unofficial BT hybrids
Rs. 940
12.3%
6.1%
If the entire burden is shifted to the consumer, the rise in the present market price of one Kg cottonseed is 10.9% in case of non-BT hybrids, 3.2% and 8.6 % in case of official BT and unofficial BT respectively.

Thus, farmers would suffer substantially and disproportionately to both consumers and to companies, whether they assumed all or only ½ of the costs of replacing child labour with adult labour. These findings contradict the seed industry argument that seed farmers won’t suffer badly from the increased cost of replacing child with adult labour. Moreover, these findings contradict the seed industry argument that the replacement of child labourers with adult labourers would necessarily escalate the prices of seed substantially thereby hurting less well off consumers. Even if the entire additional cost burden were to be shifted entirely onto consumers, a mere 1% to 3.5% hike in the market prices of seed should not affect them in a significant way.

Summary

In this section we estimated the cost of substituting child for adult labour. Using Method 1 - a retrospective estimation - we arrived at a figure of an additional Rs. 7723 needed to cover the additional costs of adult labour. This figure might underestimate the real cost of replacing child labour because wages are stickier within the cottonseed sector. As more and more adults are taken in from outside this sector, wages within the sector are likely to rise much more rapidly.
Using Method 2 - wage and workout variation data - we arrived at a slightly higher figure of Rs. 7970. Note that these figures are for 2004-05, and that for 2005-06 we would need to add an additional 8% for expected wage inflation (based on an average for previous years).

If minimum wages have to be paid to all the workers the additional amount needed is Rs. 25,060 This will raise the total cost of production by 38.9% and cost of production of per Kg seed by Rs. 115.5. In order to cover this additional amount of Rs. 25060, a 37.7% increase over present procurement price is required.

In sum, we estimated that these additional costs would require a 12% to 37.7% (12% if market wages are paid and 37.7% if official minimum wages are paid) increase in procurement price in 2004-05. Seed companies argue that if they pass this rise onto consumers, that it might hurt poorer consumers, like small farmers. Yet we identified a vast difference between procurement price and market prices (with market prices varying between 3.6 and 12.1 times the procurement price). Furthermore, looking at the effects of shifting the burden of these replacement costs onto consumers vis-à-vis seed farmers vis-à-vis seed companies, we concluded that the rise to consumers would be minimal (1%-3.5%) and the impact on seed companies would be small (profit margins will decline by a mere 1.3% to 3.9% to 6.8% or for minimum wages by a mere 4.2% to 12.3% to 21.3% depending upon type of hybrids). By contrast, the impact of additional costs laid on farmers would vastly reduce their profits 64.9% or even lead to a loss of 102%, if minimum wages are applied.

  SECTION-IV:
Summary and conclusions

India Committee of the Netherlands / Landelijke India Werkgroep - October 25, 2005