This paper attempts to estimate the future supply and demand for cereals in Nepal. While there has been considerable research in the past examining the agricultural sector in Nepal, to the best of our knowledge there has been no analysis of the supply-demand scenario for food grains in the country. The analysis undertaken in this paper attempts to bridge this gap in the literature by estimating supply and demand models for the three most important cereals in Nepal's food basket: rice, wheat, and maize. The supply projections have been carried out on the basis of a single-crop production function model using data for the period 1995-2008. For estimating the demand function and projecting future demand, data from the Nepal Living Standards Survey II (NLSS II), undertaken in the year 2003/04, are used. The forecasting exercise undertaken here provides a possible picture of rice, wheat, and maize production and demand under business-as-usual, optimistic, and pessimistic scenarios for the years 2010, 2015, 2020, 2025, and 2030. These future projections show a persistent shortfall in the domestic production of rice in Nepal to meet the total demand. Under the pessimistic set of conditions the rice demand in Nepal is projected to be more than double the domestic production in the year 2030. Under the optimistic scenario, production deficit is about 41 percent. In the case of wheat and maize, however, our model estimates a persistent surplus in the domestic production over total domestic demand, going up to as high as 75 percent for wheat and 64 percent for maize under optimistic conditions for the year 2030. Overall, the prime concern for Nepal in ensuring sufficient food supply for the future appears to be with regard to rice, as evidenced by the substantial deficit between the projected supply and demand for rice. Our estimates show that the gap between the domestic production and direct demand by households for rice is likely to vary between 19 percent and 80 percent. It appears that even with accelerated irrigation and increasing fertilizer supply, this deficit in rice would remain. However, technological inputs such as improved seeds, which are not adequately captured in our model, could help increase the yield frontier and help meet a part of this deficit in the future.
