This article was written for CII Economy Matters. Reposted here.
Since the time Prime Minister Shri Narendra Modi gave a clarion call to double farmers’ incomes by 2022, much has been written on the subject, and many ideas have been floated. This is a complex challenge, and many paths need to be pursued simultaneously.
Broadly there are three paths:
First is raising farm productivity. This will cover productivity per unit of land, water, labour, other farm inputs, and cost of cultivation in general, besides increasing the cropping intensity, by leveraging the large investments being made in irrigation – both macro and micro. Since there is enough headroom to do this, one can see a sizeable portion of the “doubling” coming from this route.
Second is diversification into high value crops and expand the various on & off-farm activities related to agriculture. This will cover growing vegetables & fruits, agro-forestry, increased livestock activity, setting up solar farms, as well as adding value to the products on the farm through grading & sorting, and adopting organic and safe-food practices. Since a substantial segment of consumers is seeking variety and quality of the food on the plate, is concerned about the safety of food being consumed, and is willing to pay a premium for convenience, one can see a sizeable portion of the “doubling” coming from this route as well.
Third is through linking farmers to the markets smartly. This will include lowering the transaction costs along the value chain to plough back a larger share of consumer price to the producer, as also to reach the safe & quality food to the target group of consumers thereby raising the value delivered and capturing a fair share of that value as well. It is this third route I want to write about in this piece, because without the requisite action on this front, the efforts put in the first two will only result in further distress to the farmer.
Higher production (route 1), especially of perishables (route 2) has ironically resulted in lower prices for the farmer often, only because the market linkages are poor! Instead of doubling, we may be halving farmer incomes if we simply accelerate on route 1 and 2 without clearing the roadblocks that are existing on the marketing front!
Actually, what I am calling roadblocks have all been excellent policy measures and institutions when they were first conceived several decades ago, and have contributed to doubling farmers’ incomes a few times since then. It’s just that the context is different now and those very instruments have become road blocks!
Agricultural Produce Marketing Committees (APMC) governed by the different State APMC Acts (of 1960s and 70s vintage) were major saviours of farmers, who till then were at the mercy of the village traders to sell their produce. In the absence of channels for market price information, farmers had to rely on the same traders for price discovery. Under the APMC regime, well laid-out market-yards and sub-yards were constructed around the country to display individual farmers’ produce for quality assessment by the participating buyers. An auction system was put in place for competitive price discovery.
Over time, however, since this was a monopoly system, transaction costs rose for the farmers in terms of commissions charged by the Agents licensed by the APMCs, not to mention malpractices in some mandis in terms of quality assessment, weighment and even cartelisation during price discovery. Also, since the farmer had to transport his produce even before price discovery, the sunk costs put pressure on him to sell at whatever price offered. Withdrawing the produce from auction means more costs with no guarantee of price some other day. More importantly, an unintended consequence of the auction-based price discovery mechanism is the nature of relationship between the farmer and the other players in the downstream value chain. The transactional nature of this relationship didn't lend itself to the possibilities of agribusinesses or food processors helping farmer with production technologies or post-harvest practices, barring a few exceptions.
Appreciating these gaps, the APMC Act was remodelled in 2003, allowing farmers to directly market to consumers / businesses, or contract-farm, as also letting private sector to set up marketplaces. Not all states have adopted that Model Act, and among those adopted, many have prescribed Rules that are not in the spirit of the Act. Although some progress has been made, this reform remained largely on paper. Meanwhile, an electronic National Agriculture Market (e-NAM) was launched last year. While this has removed the physical boundaries of a mandi in a farmer’s neighbourhood and he can theoretically sell to an Agent in any other mandi, the real benefits will accrue only after assaying and logistics systems get integrated. In any case, this doesn't solve the relationship issue. More recently, the central government has released an improved model APMC Act for stakeholder consultation. Hopefully, this time around, the adoption by the states is quicker and more widespread.
Another important instrument used by the Government to aid green revolution, half a century ago, was the Minimum Support Price (MSP) mechanism. This removed the market price risk for the farmer and gave him confidence to invest in high-yielding varieties of wheat & paddy and fertilisers. The Government’s need to buy these food grains for public distribution (PDS) to the low-income consumers complemented the MSP system, and gave muscle to the Food Corporation of India (and some state government agencies) to be able to stabilise the price volatility. With the number of crops multiplying, and many of them being perishables, implementing such an MSP + PDS system in so many crops across India is next to impossible. Consequently, the farmer has no clue about the post-harvest price he would realise while he decides on the specific crop to plant from among several crops. Often, he decides based on the previous season’s prices. Many a time, this results in excess production of a crop that was in short supply in the previous season. It is also likely that imported stocks of the same product that were brought in to make up the previous year’s deficit. That’s a double whammy for the farmer. How often we have seen a farmer smiling at his bountiful crop that’s ready for harvest, but crying just a few weeks later, because the new market price won’t even fetch the cost of harvesting and transporting to the mandi.
A practical alternative to government declaring MSPs to a large number of crops – and undertaking buying operations, not knowing how to deal with the challenges of storage and marketing of fast-perishing products – is the commodity derivative markets. Both futures and options. Indeed this is how the world has been managing the risks arising out of uncertainty of prices for a long time. When we were a shortages economy, the government had banned trading in commodity derivatives, with the belief that financialisation of physical markets fuels inflation through excessive speculation. With the change in the context of food & agriculture sectors, futures were allowed to be traded in 2003 by reforming the Forward Contracts Regulation Act (FCRA). Options were also to be introduced soon after. However, this optimism was short lived when the food prices went through the roof in 2007, due to the shortfall in global food production. Futures trading in some commodities was promptly prohibited. A case of shooting the messenger for carrying the bad news! Since then, the futures were slowly opened up.
More recently, options have also been permitted. Next steps can surely be calibrated, taking market evolution and the related risks into account, but those steps must surely be taken. There’s often a criticism that small farmers cannot directly participate in the derivative markets, so what good these institutions are for them. This is where aggregators come in, whether they are producers’ collective enterprises themselves, or agribusinesses / food processors who can price their physical transactions with the farmers by linking to the futures or embedding options into their pricing formulae. By adopting these instruments, farm production responds to the market signals continuously and creates equilibrium on a dynamic basis.
While a reform in FCRA enables timely price discovery & risk minimisation through vibrant derivative markets, the reform in APMC Act enables real-time demand discovery & value maximisation through seamless physical markets. A surer way to double farmers’ incomes than merely raising the agricultural GDP…