Freeing farmers from intermediaries

One way of reducing the intermediary chain and generating competition among intermediaries is through better road and rail connectivity and improved storage infrastructure such as well-maintained warehouses and modern cold storages.

Pradeep S. Mehta
V. V. Singh

The Indian farmer is trapped in poverty for various reasons, and an important one is that he gets only a fraction of what the consumer spends on the farm product as he is not linked to the consumer directly.

Perpetuation of poverty

Given the large number of farmers and the even larger number of final consumers, there is no dearth of competition among sellers at the farm gate and buyers at the retail outlets. Alas, between the farm gate and the final buyer there are intermediaries at different stages.

By virtue of their monopsonistic/monopolistic position in the intermediary chain, they are able to earn more than what they would in a competitive market. Retail prices are often significantly higher than the farm gate prices. Thus, the farmers earn low incomes and, therefore, have insufficient resources for investment. This leads to perpetuation of poverty.

Mechanics of exploitation

Why is there a lack of competition at the farm gate and at the other intermediary stages before the purchase by the final consumer?

The large size of the market and poor transport, infrastructural and marketing facilities ensure that many isolated regional markets exist for farm produce. The wholesalers and processors in these markets enjoy significant clout and are therefore able to buy farm produce at a low price.

Such wholesalers/processors then converge on to the next level where the markets are again isolated because of poor infrastructure and are characterised by fewer sellers relative to buyers. This enables the intermediary at each stage to earn a sizeable margin over his buying price.

Effect of globalisation

With globalisation the problem of lower earnings over subsistence might worsen if the current situation of a long chain of intermediaries characterised by absence of competition persists.

This is not a drawback of globalisation per se. In fact, when import tariffs for products are reduced, prices in the domestic wholesale markets become closely tied to the corresponding global prices which are lower than the domestic prices under autarky (closed economy case).

As prices dip in the domestic consumer markets there will also be a downward impact on the prices that farmers obtain. This is precisely the case of cotton in the country.

Preventing the slump

How do we prevent the downward slump in the revenues of certain farmers following globalisation? Globalisation will have some beneficial effects as the lower prices will benefit consumers, including large segments of the farmer population who are net buyers of farm produce.

However, farmers who are net sellers might see their incomes shrink in certain cases. This would imply lower surpluses, lesser reinvestment and stagnation in yields. As other countries improve their yields, global prices (in constant rupees) might fall further and lead to a tightening of the noose around the Indian farmer’s neck.

This can be prevented by diluting the market power of buyers at the farm gate and by introducing competition. This would imply that a large portion of the current mark-up of the retail price over the wholesale price could be recovered by farmers. Thus, even during falling global prices, generation of competitive forces in domestic markets for farm produce can bring about an increase in the income that farmers receive. Thus, it might be possible for both consumers and producers to benefit.

The intermediary chain

One way of reducing the length of intermediary chain and generating competition among intermediaries is through better physical connectivity (roads, railway connections, lorry facilities, etc), which removes geographical isolation of markets and brings the farmer closer to the consumer, and infrastructure for storage (warehouses, cold storages, etc). Second, easy and swift credit (microfinance facilities, traditional banking, etc) will help improve the bargaining power of the farmer and invite competition for his produce.

In the Indian context, this is largely the responsibility of the Government. However, there are other measures too.

Currently, three measures are being undertaken, though not on a very large scale, to shorten the intermediary chain and promote competition:

E-commerce initiatives that ease the information constraint of the farmers relating to prevailing prices and other variables;

Contract farming which entitles the farmer to sell a fixed quantity of a product at a stipulated time and price to a buyer; and

Direct farming or the direct interaction between farmers and final buyers at the retail or wholesale level.

The first method enables the farmer to have information about several markets, thus giving him the freedom to make a choice from various sales alternatives.

The second method not only alleviates price risk for the farmer but also brings the urban wholesaler or large retail chain into direct contact with the farmer, thereby removing a large section of the traditional chain of intermediaries.

If there is more than one contract buyer vying for the farmer’s produce then contract farming can be a means of enhancement of competition in agricultural markets.

Direct farming by definition involves the almost complete elimination of intermediary chains. When direct farming is undertaken on the basis of choice facilitated by the provision of information to the farmer on prices in different markets, then it also results in a greater competition for the farmer’s produce.

Regulated markets

The Agricultural Produce Market Regulation Act (APMRA) has introduced regulated agricultural markets in the country so that producers get higher prices for their product.

But due to inadequate infrastructure such markets have not been successful in ensuring effective competition and guarding the producer’s interest. These markets succeeded partially in regulating the conduct of intermediaries but have not paid any attention to breaking the long chain of intermediaries stretching from the farmer to the consumer at the retail level.

The farmer still cannot reach out to large wholesalers from urban areas directly. By introducing requirements of licensing for traders, regulated markets restrict the entry for many traders. Such entry restrictions could have increased competition for farm produce and resulted in farmers getting a better price.

(The authors are with CUTS International, Jaipur.)

Agricultural marketing through the ages

Early man sustained himself by gathering food or hunting. Historical records do not show if there was ever any surplus left after meeting the needs of the gatherer and his tribe. The surplus, if any, was, at best, reserved for future consumption. The parties primarily interested in this primitive food processing and storing were probably women, who found themselves at the short end of the stick where the gathering of food was concerned.

It was the women who discovered that the grains on some of the vegetation growing around them had good “belly-filling” properties. They also noticed that the uncollected grain that fell on the ground germinated and produced more food-grains, in turn. The women thus became the first cultivators who used a part of the grains they collected for sowing the next crop.

The new surplus must have proved adequate for long periods for the entire tribe/village, including those who did not take direct part in agriculture. Then, man looked to agricultural marketing, the need for which arose from the adversarial situation caused by a new community that appeared on the scene as plunderers of surplus produce.

Food surplus

Had the plunderers not been a threat, it could be argued that the food surplus would have been used for diversification into secondary and tertiary activities within the food producers’ community itself, creating self-sufficient centres without the need for the development of separate townships as the centres of political and, eventually, commercial and industrial power. The freedom movement in India was inspired by the Gandhian ideal of a self-sufficient village and nation. Gandhiji was not an obscurantist protectionist. His economic programme could have been only a clever ploy for cutting off the supply lines of the Imperial structure.

His candid statement that “the British and the townspeople in India will have to answer before God one day for their inhuman exploitation of the peasantry” could not have interested his colleagues who came, pre-eminently, from the towns and West-influenced communities.

Soon after Independence, the reins of power were taken over by men who had little sympathy for the food-producer communities. They had a predominant interest in rapid industrialisation that was urban-centred and run, not by the local practising artisans, but by the pen-pusher babus of the government services and public sector. Most people in the ruling classes were familiar with the colonial tools of keeping raw materials cheap and selling finished products dear.

The Gandhian qualms about the plight of the peasantry were drowned in the Nehruvian clarion call of “socialism”. The situation of the agricultural markets in India today is only the result of a long tradition of plunder by feudal kings and a variety of successive invaders with a similar mindset.

Superficial measures

The Government of newly independent India tried to appease the food producers by taking measures of a superficial character that would not change the hard core of the terms of trade between the farm and industrial sectors. The zamindar and the local sahukar were abolished by legislative fiats. Thus, the already enfeebled village communities were rendered leaderless and fundless.

Sir Chhoturam of the United Punjab had already installed the agricultural mandis as an improvement over the age-old system under which the traders and the procurers moved from village to village and determined the terms of exchange separately for each producer.

The agricultural produce marketing committees (APMCs) were expected to provide a common meeting ground for producers and traders, where the weights and measures used were genuine, costs of porterage and “commission agents” minimal and where the farmers received prices determined at open auctions, in the minimum possible time.

To the farmers, the APMCs looked like the realisation of a dream. The illusion was not to last long. Very soon, the farmers realised the advantages of the old system of negotiating with the itinerant traders making rounds of the villages, where their produce remained sheltered and protected. Now in the APMC yard, they found themselves far from home, with no lodging/food arrangements or any protection for their produce.

On the other hand, the traders were in their own territory, in close proximity to their residential/business premises; they arrived at the market yard at time as convenient to them and were in no hurry to fulfil their plans of purchase. The farmer got into trouble if the bargain was not struck within a day of his arrival at the market, as he had no possibility of transporting his perishable produce back home.

Shortchanged on prices

There was little chance that the price offered was enough to cover even the cost of cultivation. The traders and the commission agents had a certain advantage in being able to decide among themselves the price range that should prevail on a given day.

Nominally, there was supposed to be a regime of minimum support prices (MSP), fixed by the Central Government on the basis of recommendations of the Commission for Agricultural Costs and Prices (CACP). This Commission appears to have turned in a reasonably creditable performance between 1965 and 1970.

Strangely, after that, successive Chairmen made little attempt to conceal their anti-farmer leanings, and tried to use every possible argument and trick in the trade to deny farmers the credit for expenses on account of domiciliary wages, risk of crop loss, informal processing and insurance for domestic contingencies. Very soon, the minimum support prices became indications, not of the minimum level to which the prices should be allowed to fall, but of the highest prices the farmers need to be paid in the market.

According to a study, the minimum support prices recommended by the CACP, year by year, have been equal to the moving average of the last three years’ market prices. So much for the masquerade of ensuring fair prices for farmers.

The PDS hobby-horse

Apart from the MSP operations, the Central Government fixes a procurement price, at which it is prepared to purchase any quantity of agricultural produce offered in the market, subject to the requirements of the Public Distribution System (PDS).

The PDS is the successor to the wartime rationing system, under which the government claims to ensure supply of essential commodities to indigent people at subsidised prices. The PDS has been revised from time to time to make it better targeted towards the “below poverty line” families. The purpose of the PDS is undoubtedly laudable. The question remains: is it fair to impose the burden of such a noble mission on the admittedly impoverished, indebted agricultural community, which has been on the brink of suicide for decades?

The PDS is a favourite hobby-horse of the politicians as it permits them to put on airs of unbounded generosity at the cost of the farmers. Further, it offers vast possibilities of making money by patronising favoured applicants for PDS-outlets as also from purchasers of supplies diverted from the PDS. According to a recent study by the Planning Commission, on an average, 36 per cent of the PDS supplies get diverted. In States such as West Bengal, the proportion is as high as 90 per cent.

Starting from outright plunder, agricultural marketing has evolved into a scenario where the farmer finds himself surrounded by marauders on four sides: APMC, CACP, FCI and PDS. All this can be changed by a simple economic reform, if only the latest incarnations of the horse-riding plunderers of old are prepared to clear their consciences.

click: Agricultural marketing through the ages
Hindu Business Line, India