The 101 of Agricultural Marketing in India

This article was originally published by QuintBloomberg at: 
https://www.bloombergquint.com/opinion/2017/07/11/farmer-crisis-the-101-of-agricultural-marketing-in-india-s-sivakumar-itc

Scene 1: Attracted by the market price of Rs 50 per kilogram, farmers plant onions only to stare at a price of Rs 5 per kilogram by the time they are harvested. Often it's not even worth taking those onions to the market, as the cost of transporting and selling are also not recovered!

Scene 2: You go to buy groceries or vegetables and fruits. Unless you dig to the bottom of the heap and select each piece yourself, you won’t get the quality stuff. With things like pesticide residues, you may not even be able to make that pick well, holding the produce in your hand.

Scene 3: You pay a price of Rs 40 for a kilogram of tomatoes and complain about the high prices; at the same time, the farmer who produced them, and sold at Rs 12 per kilogram, laments about unremunerative farming!

These are the all-too-familiar symptoms of the out-of-date agricultural marketing system in India. In a way, these pains are inevitable as our food and agricultural economy transitions from what was a ‘production driven supply chain' to a ‘demand driven value chain’ system. Although both the central government and several state governments have taken steps to facilitate the transition, the institutions built more than five decades ago still dominate the market, extending the pain for the farmers, consumers and businesses alike.

The mechanism of Minimum Support Price assured farmers to step up wheat and paddy production, without the fear of a post-harvest price fall, and brought about a green revolution. That was then. Today’s consumer is not living in an economy with shortages anymore. She is looking for variety, quality, safety and convenience in the food basket. It is well-nigh impossible for any government to manage support price operations in grains, oilseeds, pulses, milk, eggs, vegetables, fruits, sugarcane and twenty other such commodities. The world over, such price uncertainties are managed through derivative markets.

De-risking Volatility in Perishables

Large farmers and farmer collectives hedge their risks by selling futures or buying options before planting. Much larger volumes are sold by farmers to the businesses operating in the agriculture space, and food processing companies, through options-embedded forward contracts. These companies, in turn, hedge their risks on the derivative markets. Only recently has the Securities and Exchange Board of India (SEBI) allowed options in commodities. One earnestly hopes that these markets start soon and mature without taking too long.

Another way the world has dealt with the falling prices of perishables soon after harvest is through processing – freezing, pulping, dehydrating, milling, curing, crushing, and so on – for consumption through the year. Food processing in India is still very nascent compared even to many emerging economies. Given the apprehension of consumers that processing basically means adding unsafe preservatives, it is quite an effort for the authentic manufacturers and brand owners to convince the consumers that processed food is safe and hygienic. Recent efforts by the Food Safety Standards Authority of India (FSSAI) will go a long way in raising consumer awareness.

Another challenge in making processed food popular is the price barrier. A large part of the incremental price is made up of taxes. Historically, processed and branded food has been considered a rich man’s purchase and is taxed heavily. Although the tax rates have been brought down for some products in the new Goods and Services Tax regime, there is a need for further reduction, considering this is an important vector available to raise farmers’ income.

Bringing In Quality Checks

Let’s look at the challenge in the second scene now. The reason why ungraded produce travels all the way and comes to the consumer is that the conventional mandi system has incentivised the same. Starting with the visual inspection based pricing done by the adatiyas (traders representing sellers) at the mandis, the produce moves along the chain, and everyone gains by passing off a bad apple or two in the average quality heap. Those of you who studied economics know the problem of information asymmetry from Nobel laureate George Akerlof's paper on “The Market for Lemons” and how the average quality deteriorates with time.

Because of the APMC Act framework of the 1960s vintage, the buyer-seller relationships in the mandi have been purely price-based and transactional. Consequently, most agriculture businesses did not engage with the farmers directly which could have ensured product integrity, built traceability or facilitated grading at the farmers end. In the states where the APMC Act was amended in the 2000s, such direct engagement became possible. The pioneering work done by ITC e-Choupal in this space is well known.

Intermediaries and Commissions

As far as the difference between the consumer and the farmer prices is concerned, some mark-up is natural. After all, the produce has to move across distances, incur handling costs, bear losses on account of perishability, buffer the margins for quality variations due to visual inspection and the costs of aggregating produce from small farmers, and then disaggregation to reach out to the retail points.

The very high markup is because the old APMC Act gave monopoly power to the mandis, which led to higher transaction costs and commissions structure.

Because the Essential Commodities Act could be invoked at any time in any commodity, rendering the large scale investments in storage and handling infrastructure unviable, the value chains remained fragmented. This resulted in a series of intermediaries needed to connect the farmer with the consumer.

The 2017 Model APMC Act recognises the role of legitimate players along the supply chain and expects that the provisions of Essential Commodities Act would be used only against the unscrupulous hoarders. Hopefully, this Act will be adopted by the states without wasting much time, which would then usher the necessary investment.

Farm productivity may be raised by the different initiatives of the government, but the same will translate into higher farmer incomes only when these agricultural marketing reforms are carried out.